Few investment vehicles are as versatile as IRAs. There are many options available for investors to customize accounts and help them achieve their financial goals, and thanks to compound interest, IRAs will continue to grow even if you can't fund them every year. Historically, IRAs have achieved an average annual return of 7 to 10%. Your profits increase when you invest your IRA contributions and investment earnings in opportunities to generate interest and dividends, such as stocks, mutual funds, bonds, exchange-traded funds and certificates of deposit.
IRAs grow through capitalization, which helps your money grow regardless of whether you contribute or not. Roth IRAs make a profit through capitalization, which helps your money grow more quickly. Whenever your investments generate dividends or increase in size, that amount goes toward your account balance. Then you make a profit with those returns, and so on.
That means that your money will continue to grow regardless of whether you contribute extra money or not. While a Roth Individual Retirement Account (IRA) is an excellent tax-advantaged tool, most people should also invest in other vehicles, such as a 401 (k), a simplified employee pension IRA (SEP), or other employer-sponsored plans. Roth IRAs also don't have mandatory withdrawal requirements, so you can leave the money in the account for as long as you want. An IRA has a larger investment portfolio than workplace retirement plans, such as a 401 (k), and you can choose investments with the highest potential and lower fees.
In this way, Roth IRAs are the opposite of traditional tax-deferred or 401 (k) IRAs; with those accounts, you'll have to pay taxes when you withdraw the funds. In addition, there is no minimum distribution required for Roth IRAs, so you can leave the money in your account to grow even more if you want. Either way, an IRA can help you save for retirement by providing you with a tax-advantaged way to increase your money. IRA contributions and investment benefits reinvested in the account yield an annual return of between 7% and 10% each year the money remains in the account, regardless of whether you contribute or not.
If you think you'll be in a lower tax bracket when you retire than you are now, a traditional IRA may be the best option for you. For example, if you invest your retirement contributions in stocks in an index fund comprised of shares of several companies, your IRA earnings will reflect market performance. Whether you choose a traditional IRA or a Roth IRA, tax benefits allow your savings to grow or accumulate more quickly than in a taxable account. Of course, any return you get in a Roth IRA depends on the investments you make in it, but historically these accounts have achieved, on average, a return of between 7 and 10%.
The best part is that you can transfer your current IRA to an annuity, so you don't have to worry about losing any of your hard-earned savings. Basically, a Roth IRA starts out as an empty investment basket, meaning you won't make any profit until you choose investments to house in your own account. Just because a Roth IRA helps you save for retirement doesn't mean that all accounts are on an equal footing.