How to Invest in Roth IRA

Take It to the Limit: How to Maximize Your Roth IRA

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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. Here's our how-to-invest in Roth IRA guide.

Investment Practices to Maximize Your Annual Roth IRA Returns

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.

1. 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 $6,000 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 $6,000 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 $500.00 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 $6,000 a year for 30 years, you’ll have put in $180,000 just in your retirement account. Say you make a 6% annual return rate. Now you’re earning $360 a year on each of your yearly deposits. So your initial $6,000 becomes $6,360 in one year.

Thanks to compound interest, that $6,360 earns over $380 the second year. Add $360 for the $6,000 you put in the next year. In two years you’ve got more than $12,740. In 30 years? You’re at $537,000.

2. 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.

3. 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.)

4. 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.

Where to Open a Roth IRA

You can open a Roth IRA at many brokerage firms and banks. When choosing, consider fees, available investments, available investment research materials and other features that may be important to you, like physical branch locations. We've reviewed the best account for Roth IRA here.

The Nitty-Gritty of Roth IRAs

A Roth IRA is available to those making under $139,000 (for single filers) and $196,000 (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 $6,000 a year in a Roth IRA. Those who started saving and investing later in their career might need to play a little catch-up, which Roth allows. Starting at age 50, you can put in up to $7,000 a year. Here is the complete list of contribution limits & rules for Roth IRA.

Investment Options for a Roth IRA

Depending upon the IRA custodian, there is usually a broad range of investment options available to Roth IRA account holders. These include:

Mutual Funds

Mutual funds are a solid investment option for many investors. These represent professionally managed accounts. Mutual funds come in a wide range of asset classes. Many mutual funds allow relatively small initial and subsequent investments within an IRA account. Mutual funds offer the opportunity to build a diversified portfolio.

ETFs

Like mutual funds, Exchange-traded funds (ETFs) come in a wide range of asset classes and investment styles and are professionally managed. But ETFs trade just like individual stocks while the stock exchange is open. This means that investors can use stop orders, limit orders, and similar tools. And this helps ensure they buy or sell the ETF within a certain price range.

Managed funds like ETFs and mutual funds lend themselves very well to a Roth IRA. Capital gains and any distributions stay inside the account and can be reinvested for tax-free growth until the money is withdrawn from the account.

Individual Stocks

Individual stocks offer another investment option for your Roth IRA account. Stocks provide the growth potential, and the immediate impact of any gains can be sheltered inside of the Roth IRA until funds are withdrawn tax-free in retirement.

  • Growth stocks can be an excellent fit for investing inside of a Roth IRA. These are stocks of small or mid-sized companies that seem likely to grow later on. The price appreciation and any resulting capital gains can be sheltered inside of the Roth IRA. The money can be withdrawn tax-free in retirement. You don't have to pay capital gains tax like when you withdraw money from a traditional IRA account or taxable brokerage account.
  • Another option is income-oriented stocks. These shares pay high dividends. Generally, these dividends stay in the Roth IRA with the ability to reinvest them for tax-free growth. So you don't need to pay the usual tax rate on these dividends.

Bonds

Bonds offer another great source of potential income for investors. Normally this income is taxed if held in a taxable account. But in a Roth IRA, the interest payments stay in the account and can be used for additional investments free of tax.

The best bonds for a Roth IRA include corporate bonds and other taxable bonds. Municipal bonds, whose income is tax-free, are better held inside of a taxable brokerage account.

Real Estate and Alternative Assets

Real estate provides another investing option for Roth IRAs, and you can invest in real estate either directly or indirectly:

Direct investment

Direct investment in real estate is when the property is directly owned, such as a rental property. This type of investment makes a lot of sense inside of a Roth IRA because real estate is relatively illiquid, which may dovetail with your time horizon until retirement. Also, any income from rental payments and any capital gains generated by the sale of the property remains in the plan to grow tax-free.

But you probably need to find a self-directed IRA provider to have real estate inside of your Roth IRA. That's because most IRA custodians don't offer alternative assets like real estate, commodities, or futures.

Indirect investments

Real estate investment trusts (REITs) offer indirect investments in real estate. REITs are securities backed by commercial property, residential property, mortgages, or other types of real estate-related investments. An excellent way to invest in a REIT is via a mutual fund or ETF that invests in them. You can manage REITs via services like Streitwise, which offers commercial real estate with low minimum investment requirements.

Why is Roth IRA so Popular?

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?

Pros and Cons of Roth IRA Investing

Pros

  • You can withdraw the amount you contributed tax and penalty-free at any time.
  • If the rules are followed, distributions can be taken on a tax-free basis. This helps with retirement planning.
  • No minimum distributions are required from a Roth IRA.

Cons

  • There are no up-front tax benefits for making a Roth IRA contribution.
  • There are income limits connected with the ability to make a Roth IRA contribution.
  • Distributions can be subject to income tax and, in some cases, a 10% penalty if they do not meet the criteria for a qualified distribution.

Bottom Line- Start Now!

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.

Kara Perez

Kara Perez is a freelance personal finance writer. She is the founder of bravelygo.co, a company that connects women and money. Kara lives in Austin, TX and believes in the power of budgeting and peanut butter.

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One Comment

  1. Kara,
    That is a well done article! As a 59 year old, I only wish I had started investing earlier. As an older man, my best advice to the younger generation is to invest as much as you can, as early as you can. You can’t go back in time to put money into your Roth IRA.
    Best wishes!

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