How To Find the Best Roth IRA Rates

Of course, you want to make the most money possible on what you invest. So how do you find the Roth individual retirement account (Roth IRA) that offers the best rates?

Roth IRAs are a popular way to save for retirement, and with good reason. They offer many benefits, including tax-free growth on your contributions and earnings. While you can’t deduct your contributions (as you can with a traditional IRA), the money that you withdraw someday will be tax-free, as long as you meet certain rules.

Investing Your Roth IRA

To begin with, a Roth IRA isn’t an investment in and of itself and doesn’t pay a particular interest rate. It’s simply a vehicle that you can use to invest in other things. What you choose to invest in will determine your rate of return.

Some common investments for Roth IRAs include:

• Stocks
• Bonds
• Mutual funds
• Exchange-traded funds (ETFs)
• Certificates of deposit (CDs)

If you have a self-directed IRA (SDIRA), you can choose from even more kinds of investments, including real estate. Most financial institutions, such as banks, mutual fund companies, and brokerage firms, offer only traditional and Roth IRAs. If you want to invest in something besides the usual suspects (stocks, bonds, etc.), you will need to open a self-directed IRA with a firm that specializes in that type of account.

Predicting Your Rate of Return

It’s easy to estimate the interest rates that you might expect from fixed-rate investments, such as a CD from a bank or brokerage firm, or a corporate or government bond. With other types of investments, it can be much harder, if not impossible.

In the case of stocks, companies that have paid dividends at a consistent rate over the years are relatively predictable, at least as far as dividends go. But their share prices will still fluctuate, depending on the overall direction of the market and that company’s particular fundamentals.

With mutual funds and ETFs, your return will depend on what those funds invest in. An index mutual fund or ETF, for example, invests in a specific stock or bond index, such as the S&P 500, and its fortunes are tied to the performance of that index. With actively managed mutual funds, on the other hand, performance will depend on how well the manager did in choosing investments for the fund’s portfolio. Both indexes and fund managers can have good years and bad—for example, up 15% one year, down 15% the next.

You can consult a mutual fund’s prospectus to see how it performed over various periods, such as the past 10 years. But as the fund companies are quick to note, “Past performance is no guarantee of future results.”

Over time, however, stocks have outperformed bonds and other fixed-income investments. Therefore, if you are in it for the long haul, stocks or stock funds could be a good choice. Just don’t expect a high rate of return in any given year.

Diversify Your Holdings for Safety

As with investing outside of retirement accounts, the safest way to build a Roth IRA portfolio is to diversify among several different types of investments, such as a variety of stock and bond funds. A simple way to do that is to buy a target-date fund (TDF) that invests in a diverse portfolio based on how many years you have to go before retirement or some other important milestone.

Most investment professionals agree that, although it doesn't guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. 

The Bottom Line

A Roth IRA isn’t an investment in and of itself. It doesn’t pay a particular interest rate, it’s just a vehicle you can use to invest in other things.

The rate that you can earn on a Roth IRA depends on the investments chosen for it. Some investments that can comprise a Roth IRA, like bonds and CDs, have predictable interest rates, but stocks and stock funds that are frequently in these accounts are much less predictable—although they might provide a better return over the long term.