About Roth IRA Rates of Return

By Kevin Freeman

  • Overview

    Considering a Roth IRA instead of a traditional IRA? There are some significant differences between the two that must be considered, each of which will affect the IRA's bottom line over the short term and the long term. Read on to learn about the Roth IRA rates of return in comparison to the many other options available.
  • Features

    The main difference between a Roth IRA and a standard IRA is that the Roth requires contributions to be made after taxes instead of before. This poses a few difficulties in the minds of many investors, the most significant of which is what the benefit might be in making post tax contributions. Roth IRA's offer the benefit of growing without being taxed yearly, just as standard IRA's do, but their benefit is in the withdrawal when retirement age has been reached. Roth IRAs are not taxed on withdrawal, making them a fantastic investment over long periods of time as compound interest significantly increases growth.
  • Time Frame

    When investing in a Roth IRA, one major compounding difference is that contributions will be smaller, since taxes have already been taken out. Although this downside more than makes up for the difference over time, the amount of time before retirement will play a large factor in choosing a Roth. When considering whether or not to switch to a Roth IRA from a traditional version, it is advisable to speak with a financial expert on the subject to perform a cost benefit analysis. Investors who are nearing retirement may not want to switch to a Roth because of the tax payments that need to be made, but might still wish to open a Roth account separately from their traditional one.

  • Considerations

    One of the most important considerations for choosing a Roth IRA may be the rate of return that can be applied to the account. The good news here is that Roth IRA's can be invested into the same funds or fund direction methods as the standard IRA. This includes using investment firms to direct the funds, or self directing into single stocks, mutual funds, real estate, certificates of deposit, or even market derivatives. In essence, there is no difference in rate of return between the two kinds of accounts, but there will be significant tax differences upon withdrawal.
  • Benefits

    A very popular benefit to rolling over IRA accounts into a Roth is the ability to withdraw funds at any time without incurring tax penalties. Because the money has already been taxed in a Roth, it can be withdrawn at any time and used as needed. In the case of rollovers from a traditional IRA, a five-year "seasoning" period is required before the rollover funds can be withdrawn without incurring any penalties.
  • Drawbacks

    The drawbacks to using a Roth IRA are mainly that contributions are not tax deductible and that the Roth is not available to earners of a certain income level. This means that investors who are solely using a Roth IRA will not reduce their adjusted gross income (AGI) with their contributions, and may be held at a higher tax rate as a result. To compensate for this, many investors choose to utilize a combination of a Roth IRA with a traditional IRA to effectively lower the reportable AGI.
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