A Roth IRA is a type of retirement savings plan that is characterized by having the owner pay taxes on the money at the time it is placed into the account. Later, when the funds are withdrawn, no taxes are due no matter how much the amount may have grown. Since there are a tremendous number of variables involved in a Roth IRA, yields can vary greatly, but it is helpful to have an idea of what to expect from different types of investments within the IRA.
Generally speaking, there are two different types of investment plans that one can choose within the context of an IRA. The first type has a fixed return, meaning that the plan will pay the owner a set amount of return on his investments no matter that the market does. This type often does not keep up with inflation. The other type is a variable return, which means that the return on investment is tied directly to market conditions, and will rise or fall accordingly. This type has the potential to outpace inflation but is more of a risk than a fixed-return account.
The main benefit of having a Roth IRA comes almost as much from the tax advantages as it does from any money that the account earns over time. When a Roth is funded, or when money is added to it, that money is after-tax money, meaning that it has already been taxed at the investor’s current tax rate. The benefit to paying taxes on the money prior to funding the Roth IRA is that no more taxes will be owed, ever. So the IRA owner pays taxes on the initial investment up front, but when it comes time to use that money no taxes will be due, no matter how much the money has grown.
The average yield for a Roth IRA with a fixed interest amount will vary according to the current market rates, the amount invested and the types of choices the investor makes for her IRA. Despite the fact that there are so many variables, an investor will know her yield once she has selected a financial institution, an amount to deposit, and the type of program she is interested in. The annual yield can be as low as 1 percent, but for large deposits or those that are committed to the financial institution for a long period of time, the rate is typically much higher, usually around 3 to 4 percent, though they can go even higher than that.
The amount of money a variable Roth IRA can be expected to yield will vary tremendously according to market conditions and investment choices. According to financial expert Dave Ramsey, investors should place their funds into a combination of four different types of mutual funds: international funds, growth and income funds, growth funds, and aggressive growth funds. This combination should provide investors with solid returns no matter what happens to the market, but Ramsey emphasizes that this is a long-term strategy. When followed correctly, investors can expect a 12 percent average yield on their investments.
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