Many people turn to Roth IRAs as a way to save for the future. It provides tax-free income that you can access when you retire. Of course, the amount of growth you see in your Roth IRA will vary based on the amount of money you invest. If this is all new to you, here is some basic information about average Roth IRA returns and how you can grow your retirement savings.
What Is a Roth IRA?
The ability to contribute to a Roth IRA using after-tax dollars is what makes it so powerful. You can take tax-free withdrawals from the account after you have had it for five years and are older than 59 and a half.
In 2022, you can contribute a maximum of $6,000 each year to your IRA or $7,000 if you are older than 50. You will need to research income limits before contributing to your Roth IRA.
Earning Interest with a Roth IRA
A Roth IRA doesn’t earn interest just because there is money in the account. You can compare a Roth IRA to an empty drawer where you put money. You don’t make money unless you decide where to invest the money.
Roth IRAs earn compound interest. This allows you to grow money quicker. This means that your money will continue to grow even if you stop making regular contributions to your IRA account.
Imagine that you opened your Roth IRA and contributed the limit of $6,000 until you are 50 years of age. With a seven percent interest rate and after 30 years, you will have more than $500,000. Conversely, if you put $6,000 in a savings account for ten years with no compound interest, you would only have $60,000.
Maximizing Your Roth IRA Returns
All Roth IRAs are not created equal. It matters where you open your IRA. For example, a traditional bank likely only offers Roth IRAs as a certificate of deposit. These have a low rate of return. You can use a Roth growth calculator to help you determine potential returns based on where you open your IRA. According to the experts at SoFi Invest, “Usually, increasing your savings rate and extending the time until you need the money for your goal will have a greater impact on your odds of success than taking more risk.”
The best bet is for you to open your Roth IRA with a broker. This way, you can select investments that align with your financial objectives and risk tolerance. A robot advisor can offer you a hands-off approach. These use software and manage your assets online. Computer algorithms continually adjust your investment based on your age, risk tolerance, and timeline.
Additional Factor to Consider
There is a reason why so many people use Roth IRAs for their retirement. They are easy to open and offer between seven to 10 percent average annual returns. They offer compounding interest, meaning that a small contribution can grow over time. The sooner you open a Roth IRA, the better.
You don’t want to be an American who hasn’t saved enough for retirement. Make wise choices now by seeing for yourself why a Roth IRA may be a suitable option for your retirement needs.