Saving for retirement is one of the many financial obligations people have to ensure financial stability in their future.
Americans save money for retirement in different ways and one of them is through IRAs, also known as individual retirement accounts.
According to the Investment Company Institute research, about one-third of IRA investors utilize Roth IRA for their retirement savings.
What makes a Roth IRA different from a traditional IRA? And why is it a more adequate option for retirement savings?
We’re here to explain to you the concept of a Roth IRA and help you gain insight into how you can earn assets through investing in it. In this article, we’ll explain:
- How does exactly a Roth IRA function?
- What are the interest rates and returns on Roth IRA?
- How can you earn more through your Roth IRA?
- How can you gain financial freedom through the concept of Infinite Banking?
We hope that this article will support you in gaining insight into retirement savings and investing in your future financial independence.
How Roth IRA functions
To put it simply, a Roth IRA is a tax-advantaged retirement account, which is one of its many pros.
For example, in comparison to a traditional IRA, a Roth IRA is funded with after-tax dollars, which means that you don’t have to pay taxes for withdrawals you make. On the other hand, a traditional IRA is funded by pre-taxed contributions, but any withdrawals are taxed just like ordinary income.
However, even this tax advantage has its limits. You can’t make early withdrawals without paying income tax if you had the account for less than five years or if you’re younger than 59½.
Another advantage of a Roth IRA is that it has no RMDs, also known as required minimum distributions. This means that you can put any amount of money into your Roth IRA account, regardless of how small it is.
On the other hand, a Roth IRA account does have a maximum contribution limit. As of 2021, you’re allowed to contribute up to $6,000 per year or $7,000 if you’re over 50 years old. In addition to that, there are also income limits set in place by the IRS to ensure no one’s taking advantage of the tax-free system.
You’re allowed to contribute to a Roth IRA based on your modified adjusted gross income, also known as MAGI. Your income is required to be lower than the amount stated if you want to contribute.
Also, these are based on your filing status. Single people and married couples that contribute either jointly or separately have different MAGI limits.
As of 2021, IRA income limits for a single head of the household range from $125,000 to $140,000, while married couples filing jointly or qualifying widows have an income limit of $198,000 to $208,000. Additionally, married people filing separately have a MAGI limit of just $10,000.
Of course, you need to make sure you fit these requirements before opening a Roth IRA account if you want it to function correctly.
Saving for retirement is a serious long-term commitment and utilizing a Roth IRA isn’t the only way to make it. Besides the traditional IRA, you can also use other retirement accounts, such as a 401k with matching contributions from your employer.
However, you can’t just deposit money into this account and expect it to grow by itself without putting in any work. The key to earning money with your Roth IRA is through investing.
This is why knowing how a Roth IRA grows is a crucial aspect of deciding whether this retirement account fits your requirements.
As you’ll see later in the article, you can choose how you invest the money in your Roth IRA, and your investments will make the funds in the account grow over time.
This is done with the help of compound interest. Compound interest accrues on your contributions and the accumulated interest of that principal. It’s essentially interest on the interest you already earned. This way, your account grows faster than with any other type of interest.
Now that we covered the basics, it’s time to explain Roth IRA interest rates and returns in more detail.
Roth IRA interest rates and returns
Unlike other traditional accounts, like a savings account, certificate of deposit (CD) or a money market account, Roth IRA doesn’t have set interest rates. Instead, the interest rates will depend solely on your investments.
This means that you won’t earn money until your investments earn dividends or interest. If you choose a suitable investment, your account can grow even when you aren’t contributing.
When it comes to picking your investments, you should watch out for a couple of factors. Some elements can immensely impact your account’s growth, such as possessing a diversified investment portfolio, your retirement timeline, and your risk tolerance.
On the other hand, according to data, Roth IRA accounts have an average of 7% to 10% average annual returns. This may not seem like much, but don’t forget how impactful compound interest can be for your Roth IRA.
For example, if you put in $6,000 per year in a Roth IRA with a 7% interest rate in only ten years, you’ll gain $83,095. This amount will just keep amplifying as the years pass.
There are plenty of investment options for a Roth IRA, but the prevailing ones are investing in stocks, exchange-traded funds (ETFs), certificates of deposit (CDs), mutual funds and bonds. However, investing in anything else, like real estate, can only be done through specialized firms where you can open a self-directed IRA (SDIRA) account.
Considering that different investment options are FDIC insured and hold various risk levels, the safest bet is to diversify your investment portfolio as much as possible. Stocks and bonds are proved as the most secure options, but ETFs and mutual funds can be just as effective.
If you take the adequate steps and opt for proper investments, an excellent annual percentage yield (APY) and rate of return will give your account significant growth.
There are different ways to take advantage of these interest rates and returns, which we’ll cover in more detail in the next section of this article.
How to earn more on your Roth IRA
Knowing the basics is enough to inform you about how a Roth IRA functions. We also need to give you the proper tips for investing that will make your RothIRA contributions significantly effective.
As we mentioned before, just contributing to your account isn’t enough to gain funds. If you want your retirement plan to work genuinely, you must invest your funds to earn money through interest rates and compounding.
Here are some of the elements that can support you in earning more on your Roth IRA.
Roth IRA calculators
First off, we suggest utilizing one of the plenty Roth IRA calculators available online. These calculators are there to help you determine how much you can save for retirement through your Roth IRA.
We suggest using them because the first step to saving money in any way is establishing a goal you want to reach. Utilize a Roth IRA calculator to determine how much money you’ll earn by putting in information such as your account balance, annual contributions, current age and age of retirement, expected rate of return and other information they’ll require.
Choose the right investments
Considering that the interest rate and rate of return for your Roth IRA are solely based on your investment options, always verify that you’re opting for the best investment options possible.
As you’ll see in one of the following sections, you don’t have to know everything about investing to understand how to make this work. There are people whose job it is to give you financial advice on this. However, education about investing could never hurt.
Another tip regarding this is to maximize your annual contributions as much as possible because of compound interest. The more money you have, the faster it’ll grow.
Diversifying your portfolio as much as possible is crucial and you can do this with the help of broad-market index funds.
Fees
Just like everything else, investments hold fees. Always choose ones with minimal possible costs to ensure financial growth.
One of the fees you can easily avoid or minimize is account maintenance fees. Some firms will charge you an annual fee for this, but some won’t charge you at all or they’ll have much lower fees.
You can also minimize your trading fees, commissions and mutual funds loads and expense ratios.
Brokers
It’s better to open a Roth IRA account with a brokerage than with a bank. Brokers can help you choose suitable investments and they have better investment options than banks.
Robo-advisors
Robo-advisors are like technological, financial advisors that utilize artificial intelligence to manage your investments. They’re as safe as any other option, but they give you more of a hands-off approach to investing if that’s what suits you.
Gain financial independence with Infinite Banking
Handling your Roth IRA and the fees and investments that come with it can become a complex task, but saving for retirement and ensuring financial stability through the years is crucial.
We could even say that investing your money the right way is the key to financial independence, especially in the case of Roth IRA, where compound interest truly makes your account grow.
But what if we told you that there are other ways to ensure your financial freedom while utilizing the advantages of specific life insurance policies?
We’re here to teach you about the concept of Infinite Banking.
This concept can be used to help you secure your financial future and bring you additional benefits. If you want to try Infinite Banking, you first need to own a Whole Life insurance policy. Here are some of the crucial aspects of this concept you should know about.
Infinite Banking is a strategic method for utilizing your Whole Life insurance policy to create an endless banking system. To put it in other words, Infinite Banking means being your own banker.
Owning an overfunded Whole Life insurance policy has many benefits, one of them being that you can borrow money from it using your policy’s cash value and repay it later. This way, you borrow money from yourself instead of a bank, and you pay it back to yourself with the rate of return, thus becoming your own bank.
With the Infinite Banking method, you can access your financial goals and gain complete control of your finances without dealing with banks and fees.
Infinite Banking involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company.
- Accumulation of Cash Value (tax-free) throughout the years you are a policyholder of your Whole Life insurance policy.
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
All of these aspects culminate in creating your own bank. You borrow from yourself while your Whole Life insurance policy still earns dividends even though you’re using those funds elsewhere.
No matter what your financial objectives are, Infinite Banking can help you reach them. Entering the Banking Business gives you better control over your finances and helps you build wealth using the life insurance policy.
Final thoughts
Possessing an individual retirement account, also known as an IRA, is one of the most significant steps of saving for retirement. But just owning this account and funding it isn’t enough. You’re also required to take proper steps and cautions to invest this money if you want to gain more assets with compound interest.
Hopefully, this article answered all of your questions about Roth IRA and how its growth works. Also, we hope that it made you interested in the concept of Infinite Banking with Whole Life insurance.
If you want to learn more about Whole Life Insurance and improve your personal finances, you can sign up for our premium membership to join our masterclass! We are looking forward to seeing you at the Wealth Nation community!