Maintaining the most efficient and profitable Roth IRA begins with one simple step: understanding the investment guidelines. Roth IRAs are easy enough to maintain. However, there are rules and limits that determine just how much money you can yield from this form of investing. Knowing them is crucial to understanding how to grow the best Roth IRA account possible.
In this article:
The Best Roth IRA Accounts
Learning The Basics Of Roth IRA Accounts
Whether you’ve already set up a Roth IRA account or not, it’s important you know the basics of what they can do. Most of all, you need to know the key terminology. For more information on the various levels of understanding a Roth IRA, read our series of guideline explanations: Roth IRA Conversions, Withdraw Rules, Miscellaneous Rules, Roth IRA Advantages.
Six Variables To Consider With The Best Roth IRA Accounts
Once you understand how a Roth IRA works – how much you can invest, when to withdraw, and the rules you must follow – you can begin considering how to best manage your account. This is when you figure out how to make the most off of your investment. Here are six variables to consider that define the best Roth IRA accounts:
1. Contribute the Maximum Amount Annually
There is only a certain amount of money you can contribute to your Roth IRA each year. For 2018, the standard maximum amount is $5,500. This amount goes up by $1,000 if you are over the age of 50. The more money you put into your account, the more money it subsequently yields. This may seem like common sense to you.
With retirement investing, it’s easy to assume it’s simply there and will grow enough over time. The compounding interest of your account provides you with consistent growth over a long period of time. However, contributing money exponentially increases your returns later down the road.
2. Track Your Contributions
Once you turn 59 1/2, you can withdraw any amount of money from your Roth IRA. Before this age, you can withdraw any money that you’ve already contributed to the account. There is a penalty of 10% if you withdraw more than this. Because you can withdraw at any point, Roth IRAs are often seen as emergency funds.
However, you need to make sure you know just how much you can withdraw. Try not to go over your contributed amount because that triggers those penalty fees. Make a habit of tracking just how much money you’ve contributed. Overdrawing from your Roth IRA before the required age could set you back years in fees. This is something you want to avoid.
3. Consider Converting Traditional IRAs and 401(k)s
This is not always the most viable option. Depending on your situation, it may make sense to consider converting your other retirement accounts into your Roth account. For Traditional IRA conversions, you will have to pay income taxes on the conversion amount. But then, like the rest of the money in your Roth IRA, it will grow tax-free for later withdraw.
Roth 401(k) accounts can be rolled over into your Roth IRA without many fees. If you want to roll over your non-Roth 401(k) into your Roth IRA, the process will be much like the conversion of a Traditional IRA. Once the non-Roth 401(k) is rolled over, you pay income taxes on the amount rolled over. Then, the money grows tax-free for the remainder of its time in the account.
If you plan on converting other retirement plans into your Roth IRA, make sure you understand the protocol before doing so. Often, it will be more worthwhile to conduct the transfer through a custodian. They will know how to avoid increased taxes and even possible loss of your Roth IRA.
4. Know Your Tax Bracket
Roth IRAs are a great option for individuals within a certain income range. Depending on which tax bracket you are in, the effectiveness of your Roth IRA will vary. For individuals or married couples filing separately, you can contribute up to the maximum amount if you make less than $120,000 annually. However, you cannot contribute anything if you make over $135,000 annually. For married couples filing jointly or qualifying widowers, you can contribute up to the maximum amount if you make less than $189,000 annually. You may not contribute anything if you make more than $199,000 annually.
Depending on how much you make and where you are on the tax bracket, it may be a good idea to either roll over money into a Roth IRA account or to instead not consider a Roth IRA at all.
5. Make Sure to Have Beneficiary Designations
Roth IRAs, if planned correctly, can be passed through several generations without being taxed. This can only happen if you have specific, designated beneficiaries beyond your primary beneficiary on the account. Make sure to have this established – if life happens and something unforeseen happens to you, your Roth IRA will not have been worth the money and effort if your account is not correctly attached to a beneficiary.
6. Invest Wisely
The money inside your Roth IRA isn’t simply sitting there doing nothing. It is being invested in various assets, and you can control what those investments are. While no investment strategy or portfolio is a money-making guarantee, there are certain things to consider when deciding where your money should go.
Consider the length in which you plan on keeping your Roth IRA active. The distance you are from retirement will play a big role in where you invest your money. If you are younger and further away from retirement, you have time to take risks and wait for the market to rebound if it dips. If you are closer to retirement age, the amount of time you have until you begin using the retirement fund is shorter. So the time you have to wait for the market to correct on high-risk investing is concurrently less.
7. Diversity Is Key
The general rule of thumb is lower risk investing the closer to retirement you are. Either way, it is generally a good rule of thumb to hold a diverse portfolio of investments.
Diversity is a good thing – holding all your eggs in one basket, low risk or not, is generally not considered the way to go. Assets to consider are stocks, REITs, precious metals, cryptocurrencies, and commodities, among other things.
Regardless of where it is you invest your money, the primary quality of a high-performing Roth IRA is that you put in some time up front to think about your strategy. There are a lot of things to consider, one just as important as the other. Each one needs to be well thought out and planned if you are going to keep the best Roth IRA account you can manage.
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Editor’s Note: This post was originally published on April 16, 2018, and has been updated for quality and relevancy.