Roth individual retirement accounts (IRA) provide a very practical tax shelter for retirement savings, and the best part is that the owner has maximum flexibility on when to withdraw funds or continue saving. However, different financial institutions offer Roth IRAs; some offer potentially better rates of return than others. Much depends on the risk an owner can tolerate.
Congress created the authorization allowing Roth IRAs in 1997, thereby creating, in effect, a tax shelter. While funds deposited into a Roth IRA have to be monies that have already been filtered for income taxes, once the funds are deposited into a Roth, their future growth is not taxed. So, in concept, a savvy saver and investor can build up quite a bit of retirement savings if the Roth deposits are invested wisely. The two limitations are generally on how much can be deposited in a calendar year ($5,000 in 2010, $6,000 per year for those over 50 in age) and income levels (individuals earning over $105,000 and joint filers with over $167,000 in adjusted gross income cannot make full limit deposits into a Roth IRA; it phases out the higher the income earned).
Banks and IRA Savings
Many banks offer Roth IRA accounts which, in essence, provide a master savings account with access to a linked certificate of deposit (CD). The bank Roth IRA savings account acts as the "home" account for initial deposits. From there, the owner can then take funds and deposit them into CDs, laddering the investments so the payouts happen over time. Alternatively, some banks avoid the master account approach and just offer straight IRA CDs. This approach requires the owner to regularly roll over the IRA CD to a new one each time the old CD expires.
Unfortunately, bank Roth IRAs don't allow much flexibility in investment choices, and the interest rates offered are the same as traditional savings and CDs. This range of return fluctuates between 5 percent in good economic times and below 1 percent in bad economic times.
Mutual Fund Brokerages
Many mutual fund family companies offer IRA accounts. The rules for deposit and income are the same as any other Roth administrator program, but the choices for investment offer more variety. Many mutual fund companies have mutual funds that range from very conservative funds based on short-term federal treasury bonds to very risky international funds invested in foreign companies. The rates of return depend on the investor's tolerance for risk. Conservative funds offer something between 3 percent to 7 percent returns while very risky funds can produce returns of 50 percent or more in good years.
However, the more risk, the more chance there is that the deposits will lose value. And, unlike bank deposits, mutual fund deposits are not insured for market loss (fraud loss is insured for like investment value that would have been delivered except for the fraud).
Similar to mutual fund companies, stock brokerages offer just about every market offering available to normal stock accounts. The only difference is the Roth IRA is handled as a separate account and, again, the deposit and income rules remain the same as banks and everyone else under federal Roth IRA rules.
The return on stock brokerage Roth IRA accounts depends very much on the owner's investment strategy and exposure to the stock market. Many brokerages offer access to stocks, mutual funds, commercial bonds and, in some cases, precious metals. Choices by owners can be very advantageous or disastrous to funds deposited. There is no set rate of return on stock brokerage accounts since there are too many investor variations of what can happen to deposits. Also, stock brokerage deposits are not insured against market loss, only fraud loss.
A common approach to investing that applies to Roth IRAs is to invest with more risk when young and, as the investor gets older, to invest more conservatively. With the young, time can offset a mistake with many years to make up the difference. Being older, the investor should focus on holding onto value and developing income with dividend-producing investments. A healthy return from this strategy overall should be 8 percent to 15 percent per year.