5 Tips to Get the Best Results from Your Roth IRA

A Roth IRA allows you to invest money for your retirement at your current tax rate, then grow that money tax free. A traditional IRA provides the tax incentive in the current economic conditions, giving you the option to deduct the contributions you make right now and pay taxes on them in the future. With the Roth option, you are waiting to get the biggest tax benefits. To get those big benefits, consider these tips.

#1 Know the Rules

Understand the benefits of your Roth IRA by knowing the exact contribution rules and how they benefit you. For example, make sure to track the contribution limit, which is set annually and is much lower than with a traditional IRA. Use your Roth IRA until your tax bracket is high enough to justify a traditional IRA, and then stop contributions to the Roth fund.

#2 Select the Right Fund Manager

The point of using an IRA, aside from tax advantages, is to grow funds for the future. If you are not putting the money to work in the right investments, this will not happen. Select investments with a fund manager whose style works for a retirement fund. Look for a manager who focuses on capital appreciation instead of income and who is fairly low risk.

#3 Use the Comparative Advantages of an IRA

Using an IRA instead of other accounts, like a 401(k), offers some comparative advantages. Namely, you have a wider array of investments to allocate your funds to. 401(k) accounts are much more limited than IRA accounts. Take advantage of this flexibility by spreading out over the various investments available to you, including commodity markets and other alternative options. You are allowed to transfer your funds to new investments more often than with a 401(k), so do not be afraid to be active with your IRA investment.

#4 Think Long-Term

When you are investing for your retirement, you have to focus on that ultimate goal. A Roth IRA only makes sense in the long-run; in the short-run, it offers no immediate benefits, tax or otherwise. To stay disciplined with your contributions, you must always be thinking about the long-term growth of your account and your retirement goals. Contact a retirement adviser to learn how much you must reasonably set aside each month in order to provide for the retirement you are envisioning. You may be surprised to find out it is a much higher figure than you originally expected. 

#5 Avoid Withdrawing

Withdrawing is the pitfall of any retirement account. It is short-term thinking. You will have to pay taxes on the funds plus a 10 percent fee for the early withdrawal, and you will not have the funds for retirement. The only justification for an IRA withdrawal is an absolute desperate situation where you are facing bankruptcy without access to your IRA funds. In this case, depleting your account may be better than losing the entirety of your other assets in a bankruptcy proceeding. Otherwise, it is much smarter to consider loans against your investment or alternative financing arrangements for your short-term financial goals. 

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