Maximizing Your Roth IRA's Growth: Strategies and Tips
When you find that your Roth IRA hasn't grown in two years, the first step is to understand the underlying reason. Most likely, the account is either in cash or a money market fund, which won't generate significant growth. This article will explore the reasons behind this situation and provide actionable strategies to help your Roth IRA thrive.
Understanding the Growth Dynamics of a Roth IRA
A Roth IRA is a powerful tool for retirement savings but it doesn't grow on its own. Growth is only possible through successful investments. It is crucial to differentiate between a Roth IRA account itself and the investments within it. If your Roth IRA isn't growing, it could be because the funds are not allocated into the right financial vehicles. Here are the two most common scenarios:
Your Roth IRA is in Cash or a Money Market Fund
Many individuals find themselves stockpiling cash in their Roth IRA, waiting for the perfect opportunity to invest. However, this approach can be suboptimal. Money market funds typically offer low returns, which might not keep pace with inflation. This is why many account holders see no growth in their Roth IRA over extended periods.
Your Roth IRA is an Extremely Low-Interest Account
Some employers offer low-interest savings accounts as part of their Roth IRA options. These accounts may offer a minimal return. If your account falls into this category, it's time to explore more suitable investment opportunities, either through transferring funds or reallocating your existing funds to higher-return assets.
Vetting Your Current Investment Vehicle
A key aspect of managing a Roth IRA is ensuring that your funds are placed in the right type of vehicle. A Roth IRA itself is not an investment; it’s a tax-free retirement account that holds a variety of investment options. Some popular choices include stocks, bonds, and mutual funds. Common mistakes include keeping funds in money market mutual funds or low-interest savings accounts, which will not generate significant growth.
Transferring to a More Suitable Vehicle
If you're in a low-interest account, you can transfer your funds to a more suitable investment vehicle. This can be done tax-free as long as the new investment is also in a Roth IRA. For example, if your current funds are in a money market mutual fund, you can move them into an SP 500 index fund, which historically has generated much better returns over the long term.
Investment Portfolio and Risk Profile
To ensure the best growth for your Roth IRA, it's essential to create a diversified investment portfolio that aligns with your risk profile. A combination of stock and bond ETFs is a common approach, especially for retail investors. If you had a balanced portfolio over the last two years, you likely would have seen a reasonable return.
Stock Market Performance Over the Last Two Years
The stock market performed quite well over the last few years. For instance, the SP 500 index fund saw an approximate 30% increase in 2019. Even the previous year, 2018, saw decent growth. Given this performance, it's quite unlikely that your Roth IRA would remain stagnant unless it was primarily in cash or ultra-low-interest accounts.
Take Action
The next step is to take proactive measures to ensure your Roth IRA grows. Here are some essential steps:
Consult with a Financial Advisor
If you're unsure about how to proceed, consider consulting with a financial advisor. They can offer personalized advice based on your unique financial situation and goals. Many employers offer resources and access to advisors, which is a valuable starting point.
Review and Diversify Your Portfolio
Take the time to review your current investment portfolio. Ensure that it is diversified and aligns with your risk tolerance. If necessary, adjust your investments to include a mix of stocks and bonds, or consider mutual funds like the SP 500 index fund.
Stay Informed and Knowledgeable
Understanding the basics of investing and staying informed about market trends can help you make more informed decisions. Regularly reviewing your investments and adjusting them as needed is a key part of growing your Roth IRA.
By taking these steps, you can set your Roth IRA on a path to significant growth, ensuring a more secure financial future.