How to Maximize Your Returns Investing in a Roth IRA

An IRA (Individual Retirement Account) is a tax-advantaged retirement savings account that allows you to save and invest to meet your retirement needs. It is one of the more popular retirement accounts in the United States. With a Roth IRA, you can invest in a number of financial products such as stocks, mutual funds, bonds, exchange-traded funds (ETFs), and more. An IRA can be opened with several different financial institutions such as a bank, a life insurance firm, a mutual fund house, a credit union, and even a broker.

A Roth IRA is a retirement account wherein you contribute after-tax dollars and your contributions and earnings on those contributions grow on a tax-deferred basis. The primary benefit of investing in a Roth IRA account is that you can make tax-free withdrawals in retirement provided you meet certain conditions set by the Internal Revenue Service (IRS). A Roth IRA can be a valuable part of your retirement planning; however, to derive the maximum benefit out of it you must know its rules and understand the different ways that can help you maximize your returns. To make tax-free withdrawals in retirement, you must be 59.5 years of age and have held your Roth IRA account for a minimum of five years. Moreover, the IRS revises the Roth IRA contribution limits every year or so, so ensure you keep an eye out for that. To learn more about Roth IRA withdrawal rules, contribution limits, and eligibility criteria for contribution to the account, consult with a professional financial advisor who can advise you on the same.

The IRS has set the following limits for contributing to a Roth IRA in 2023:

 

	Filing status	Modified Adjusted Gross Income (MAGI)	Maximum annual contribution
1	Single, head of household or married taxpayers filing separately	Less than $138,000	$6,500 or $7,500 if 50 or older
		$138,000 up to $153,000	Contribution is reduced
		$153,000 or more	No contribution allowed
2	Married taxpayers filing jointly or qualifying widow(er)	Less than $218,000	$6,500 or $7,500 if 50 or older
		$218,000 up to $228,000	Contribution is reduced
		$228,000 or more	No contribution allowed
3	Married taxpayers filing separately	Less than $10,000	Contribution is reduced
		$10,000 or more	No contribution allowed

 

The contribution limits for a Roth IRA as of 2023 are:

• You can contribute up to $6,500 per annum if you are less than 50 years of age.
• You can contribute up to $7,500 per annum including an additional catch-up contribution of $1,000 if you are 50 years of age or above.

 

7 strategies to make the most of your Roth IRA account:

1. Max out your Roth IRA contributions

$6,500 a year may seem like a small amount, however, if you maximize your Roth contributions, you can not only reach your goals but also save a substantial sum of money for your golden years. Suppose you contribute $6,500 every year for a period of ten years, you can save a sum of $65,000, which after adding the return on your investment coupled with the power of compounding, will help double your account’s value. Staying focused and disciplined will help ensure steady and assured savings for your retirement. If you invest a sum of $6,500 a year for 30 years, you can have $195,000 worth of investments at the end. This sum would increase each year with the help of compound interest ensuring you have a stable and financially secure retirement. Take care to contribute the maximum amount you can. If you cannot contribute the full sum, try to contribute 50% of it. Then, slowly and gradually increase the amount to 75% or 80%, and finally try to invest 100% of the contribution limit.

2. Choose the right investments for your Roth IRA account

You can choose from various investment options such as stocks, bonds, mutual funds, ETFs, certificates of deposits (CDs), and even cryptocurrency. Your investment returns are largely dependent on the investment options picked by you making it critical to exercise caution at the time. Do your due diligence and look at the past returns of all the options. Take care to compare the returns and growth potential of the investments along with their costs before finally selecting one for your investment portfolio. In addition, you also need to ascertain your risk tolerance at the time of choosing an investment. For example, if you have a high-risk tolerance, you can focus on investing the better part of your funds in stocks. However, if you are risk-averse, you can add some bonds and debt mutual funds to your portfolio to balance out the risk. Doing so will help you disperse the risk and create a well-diversified portfolio.

Further, do not invest in the same asset classes in your Roth IRA account as you have invested elsewhere. For example, if you own stocks of ‘Company A’ outside your IRA, you can choose to invest in other sectors and companies for your Roth IRA. Doing so will not only help diversify your portfolio but also boost its potential to earn more money. Building a well-diversified portfolio would allow you to create more wealth, reduce risk, and place you in a better position to exploit different market opportunities.

SPONSORED WISERADVISOR

3. Select the right custodian for your Roth IRA account

You can open your Roth IRA account in several places such as a bank, life insurance company, a mutual fund house, a credit union, or a broker. Do assess your risk appetite, investment budget, and preferences before choosing your custodian. For example, if you select a credit union or life insurance company, you can invest in low-risk investments like CDs, bonds, money market accounts, etc. These investments are ideal for investors nearing retirement and offer low-risk returns. Moreover, if you have recently converted your traditional IRA to a Roth IRA and are going to retire in the near future. On the other hand, if you are years away from retirement, you would be better off picking a mutual fund house or a broker. These custodians can offer investments such as equity that may be more ideal for investors having a long-term investment horizon. Though these investments are deemed high-risk in nature, they can help you reach your long-term financial goals such as retirement as the scope for growth is considerably higher compared to debt instruments like bonds. If you wish to use your Roth IRA funds to pay higher education expenses of your child or grandchild, a Roth IRA would prove to be an ideal investment vehicle for the same.

4. Ensure you comply with the Roth IRA rules

To make the most of your Roth IRA benefits, you must comply with the rules mandated by the IRS. The primary benefit of a Roth IRA account is the ability to make tax-free withdrawals in retirement. To do so, you must be 59.5 years of age. If you fail to comply, you would have to pay a 10% penalty on any withdrawals made by you. Moreover, you need to abide by the five-year rule too. As per this rule, you cannot make withdrawals for a period of at least five years after opening your account. This rule is applicable on Roth conversions as well. For example, if you have held a traditional IRA for 15 years, and then converted it to a Roth IRA, you have to wait for five years from the conversion date before you can make a withdrawal. If you adhere to the rules, you can ensure none of your savings are lost to tax or penalties. That said, there are certain exceptions to the penalty rules. These are:

• Buying a home for the first time
• Paying college tuition of your children
• At the time of the birth or adoption of a child

 

To summarize

There are many benefits of adding a Roth IRA account to your investment portfolio such as the ability to make tax-free withdrawals during retirement, not having to take out required minimum distributions (RMDs) at the age of 73, or pass on your Roth IRA account to your beneficiaries. However, to make the most of its benefits, you must follow its rules, keep track of the contribution limits, and be aware of withdrawal limitations.

To fully maximize the potential of your Roth IRA, it is important select the right investment options and if needed, reach out to a professional financial advisor who can advise you on the same. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool can help connect you with 1-3 advisors that match your financial needs.