The Roth IRA is my favorite retirement vehicle. And I’m not alone in this sentiment — according to Investment Company Institute data, about one-third of all IRA investors have a Roth. And research from Fidelity Investments suggests Millennials and baby boomers alike are wholeheartedly embracing these savings accounts, contributing more money on an average annual basis into Roths than into traditional IRAs.
There are plenty of reasons why Roth IRAs are so popular. They’re simple to open and easy to max out, and you invest post-tax dollars in them over the course of your career. That means — when you reach 59½ (the age you can start withdrawing from an IRA) — you can withdraw your money without paying taxes on it.
These effective retirement accounts are a great way to start building long-term wealth. And after all, isn’t that what we all really want — to maximize our returns and build our personal wealth?
In order to get the most bang for your buck and maximize your Roth IRA, there are a few simple practices you should adopt as an investor. In this article, we’re going to give you a rundown on ways you can use your account to significantly beef up your retirement savings. But first, let’s just go over the basics of these savings dynamos.
The Nitty-Gritty of Roth IRAs
A Roth IRA is available to those making under $132,000 (for single filers) and $194,000 (for married couples) a year. (Note: There’s a way you can take advantage of a Roth even if you make more than this. Find out how here.)
You can invest only $5,500 a year in a Roth IRA. Those who started saving and investing later in their career might need to play a little catchup, which the Roth allows. Starting at age 50, you can put in up to $6,500 a year.
Why You Should Consider a Roth IRA
Roth IRAs are great for most middle-class earners for a few reasons:
The maximum isn’t crazy high. The annual maximum contribution limit of $5,500 is just large enough to add up quickly over time, but just small enough that — with some adjustments — most people can hit it.
No taxes in retirement. Most people like the Roth because you pay the taxes upfront. So when it comes to your retirement years, you don’t have to worry about any taxes. The money you’ve saved in your account is 100% yours.
This sure makes figuring out your retirement budget easy — you won’t need to worry about accounting for Uncle Sam’s cut. And knowing you can simply withdraw the money without having to fill out any more tax paperwork can be a load off your mind, as well.
Easy to open. A Roth IRA is a basic retirement account you can find practically anywhere. Brokerages, companies, banks and credit unions offer these accounts. They’re very common, which means, for most people, they’re easy to open.
In fact, you can even open up a Roth IRA online. I’ve opened two of these accounts, both entirely over the internet.
How to Maximize Your Annual Returns
Now we’re getting to the good stuff. The investment practices you use matter a lot — especially when it comes to long-term investing, such as retirement accounts. In order to maximize your Roth IRA return rates, you’ll want to build these investments up over the course of several decades.
Maximize Your Contributions
The other key to maximizing your Roth IRA return rate is to maximize your contributions each year. That means routinely hitting that $5,500 investment maximum year after year.
Personally, I started saving the max into my IRA three years ago. In that time, my net worth has increased by more than 100%. Simply by socking away $5,500 a year and letting the markets work for me, I have built a solid investment base for myself.
For the last two years, I’ve been able to save the max by April. I’m in the lower income-level bracket, so finding the money required some sacrifice. In the first four months of the year, I gave up eating out, and I rarely use the heating or air-conditioning in my house. A few short months of dedicated savings gave me the max in the early part of the year, but you could save $458.33 each month to hit the limit over the course of the year. And thanks to the magic of compound interest, that money can grow a lot by the time you’re ready to retire.
If you invest $5,500 a year for 30 years, you’ll have put in $165,000 just in your retirement account. Say you make a 6% annual return rate. Now you’re earning $330 a year on each of your yearly deposits. So your initial $5,500 becomes $5,830 in one year.
Thanks to compound interest, that $5,830 earns nearly $350 the second year. Add $330 for the $5,500 you put in the next year. In two years you’re at $12,010. In 30 years? You’re at nearly $500,000.
Buy and Hold
The very first practice we recommend is to buy and hold. Market downturns happen. You’ll lose some money in the stock market at times. It happens to everyone. The difference between those who end up making good money off the stock market and those who lose money is selling too early.
Build a diversified stock portfolio over the years and hold on to it. If there’s a bad month, or even a bad year, do not sell. The market always ticks upward again. Historically, the stock market has returned 10% per year. You won’t find that rate anywhere else — but the key to scoring it is to play the long game.
Look Out for Fees
Avoiding high fees is critical to maximizing your returns. If you lose a large percentage of your investments to fees each year, you’re losing money. Fees come in many forms. If someone handles your investments, you’re probably paying fees to them. And funds come with fees. So make sure you understand exactly what percentage the fee is and how much it’ll cost you over the course of several decades. In the same way that compound interest works for you, fees work against you.
(Here at Investor Junkie, we’ve found Vanguard to be a great Roth IRA option when it comes to keeping fees under control.)
Keep Tabs on Your Investments… But Not Too Often
You don’t need to check your accounts every day. In fact, you’ll probably drive yourself nuts trying to do that. However, it’s a good practice to look in on your accounts regularly. After all, you’ll want to see how everything is going. About once a month is a good frequency.
Also, don’t try to game the market. No one beats the market in the long run. There are simply too many varying factors that go into it.
Of course the very best way to get the most out of your Roth IRA — or any retirement savings account — is by getting started now, even if you have several decades to go. When time is on your side, that means compound interest is on your team too. No matter where you are in the process, start saving and investing now.
Everyone’s financial situation is different, so this is meant to be just a general guide to understanding what different kinds of investment practices can help you maximize your Roth IRA. Do your research and talk to a professional to find the best ways to get your money working for you.
Have you started investing in a Roth IRA yet?