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How Do Roth IRAs Grow?

Hey everybody, O’Grady here.  Here’s a question I get a lot.  What’s a Roth IRA paying right now? Or, something like, “I hear Roth IRAs aren’t very good…they’re not paying much right now.”  Let’s take a look and break it down.    

Well, the Roth IRA is not an investment, it’s an account type.  Think…Individual, Joint, IRA, 401k, 403b, 529…and on and on.  Those are all account types.  And the account type determines how an investment is treated for tax purposes, not how much it earns or returns.  Let’s take a look and break it down.

Think of the Roth IRA as the wrapper around an investment.  The investment in a Roth IRA could be almost anything, from stocks, bonds, mutual funds, and ETFs to CDs and even real estate.  You could own any of those on their own…or inside of a Roth IRA.

The performance of what you choose to hold inside your Roth IRA will determine the rate of return of your Roth IRA.  If you have a Roth IRA at a bank, it might earn a nominal interest rate.  If you hold mutual funds inside your Roth, you might earn stock market returns.

You could own a CD or a mutual fund in your individual account or a joint account with your spouse.  But if you own it inside of your Roth IRA, you get special tax treatment.  If you meet the Roth holding requirements, all the growth will be yours tax free.

So you can see, the growth…or lack of growth of your Roth IRA could be almost anything.  It all depends on the investment you use inside the Roth IRA.