On a similar note...
On a similar note...
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You want to invest for retirement, and you know a Roth IRA is a great way to do that. Your next step is to pick the right investments to make sure your account grows over time.
How to earn a return in a Roth IRA
Put simply, Roth IRAs don't pay an interest rate. A Roth IRA is akin to a shopping cart — it’s basically an empty basket until you fill it. But with a Roth, you’re filling that basket with investments, not Cheerios.
Unlike a savings account, which comes with its own interest rate that adjusts periodically, the returns you earn on a Roth IRA depend on the investments you choose.
To access a broad array of investments, you usually need to open your IRA at an online broker or brokerage firm. While banks offer IRAs, the investment options within bank IRAs are typically limited to savings accounts or certificates of deposit, which have returned historically low yields for nearly a decade now.
» Find out how and where to open a Roth IRA
If you open a Roth IRA and fund it with the maximum annual contribution in 2020 — $6,000 for those under age 50 — each year for 10 years, and your investments earn 6% annually, you’ll end up with about $79,000 by the end of the decade. People who are 50 and over can contribute an additional $1,000.)
Your money starts working for you in the background, growing and compounding while you go about your daily life.”
If, however, you didn't invest your money, you'd have just $60,000, which is simply each year’s contribution multiplied by 10, with no investment return. In fact, the purchasing power of that balance will be dimmed by inflation.
To calculate how your own Roth IRA contributions might grow over time, use our Roth IRA calculator.
Building a diversified investment portfolio within your Roth IRA is what causes the magic to happen: In those investments, your money starts working for you in the background, growing and compounding while you go about your daily life. And the longer you leave that money invested, the more it will grow.
» Check out three low-stress ways to invest for retirement
In addition to the growth differential shown in the chart above — note the Roth IRA invested in a diversified portfolio laps the uninvested cash over four times — you’ll make the most of the Roth IRA’s tax advantages when you choose to invest. Because you’ve already paid taxes on your contributions to the account, all of that growth can be pulled out as a qualified distribution in retirement, completely tax free.
So what is the best Roth IRA?
The idea that a Roth IRA is just a vessel for your investments doesn’t mean that all Roth IRAs are created equal. Where you open your Roth IRA has a big impact on the investments you’re able to access. In addition, the fees you pay for maintaining the account and purchasing those investments may vary widely.
If you want access to the widest range of investments, you’ll want to open your IRA at a broker. There, you can manage your account yourself, picking and choosing investments based on your goals and risk tolerance. Most brokers will offer access to individual stocks, bonds — some of which do pay a fixed interest rate — and mutual funds, including index funds and exchange-traded funds.
If you’d rather be hands-off and don’t mind a more limited investment selection, you can open a Roth IRA at a robo-advisor. These computer-aided investment services will manage your account for you, building a portfolio that aligns with your goals and adjusting it as needed. Most robo-advisors use index funds or ETFs.
» Ready to try a Roth IRA? Here are some of the robo-advisors that made our list of best Roth IRA accounts:
» See all of our top picks for best Roth IRA accounts
Watch out for fees
No matter where you open your Roth IRA, you’ll want to pay attention to costs. At a broker, you might pay transaction fees to buy and sell investments, and there are annual fees — called expense ratios — for the mutual funds you choose. For robo-advisor management, you’ll generally pay an annual fee of around 0.25% to 0.50%, plus the cost of the expense ratios of the funds the advisor chooses for your portfolio.
All of these costs can reduce your overall investment return, because every dollar you pay to fees is a dollar that doesn’t go into your investment.
» Check your potential returns: Investment calculator