A frequent question I get asked is where to find the best Roth IRA rates. I applaud anyone seeking to improve his investment returns. Unfortunately, this is a question without a specific answer because a Roth IRA by itself isn’t a fixed rate investment; it is an investment account that can contain multiple types of investments with varying rates of return and amounts of risk.
A Roth IRA is an Investment Vehicle, Not an Investment
The first thing we need to do is understand what an IRA is and is not. According to the IRS, an IRA is an Individual Retirement Arrangement or an Individual Retirement Account, depending on how the term is used. The key word here is “Individual.” The person who owns the IRA determines how the assets are invested.
Roth IRAs are a trust or custodial account designed for special tax benefits. But a Roth IRA by itself is not an investment – it is an account designed to hold investments. The Roth IRA itself is just a piece of paper designating you as the account owner and beneficiary. The trustee or custodian maintains the document and record keeping on your behalf, and works to ensure you maintain certain requirements. From there it is up to you to determine how to allocate your assets as part of your long term retirement plans. If this is not a strong point for you, then consider working with a professional financial advisor to assist you.
Where Do You Get the Best Roth IRAs?
As we mentioned, a Roth IRA is just a vessel for your retirement investments. You can open a Roth IRA with a trustee or custodian at a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
How to open an Roth IRA. Starting a Roth IRA is an easy process. Once you ensure you meet eligibility criteria, you will need to select a custodian, fill out some paperwork, select which funds you wish to invest in, and fund your IRA.
Best Places to Open a Roth IRA
While interest is typically the main way we think of getting good rates in our Roth IRA, not getting hit with lots of fees and taxes on trading can make a huge difference in how quickly your investments grow.
The best place to open an IRA also depends on your investment needs. A professional financial planner may be able to open a Roth IRA in your name. You can also open a Roth IRA with many banks and credit unions, as well as a variety of the top Roth IRA mutual fund houses and brokerage firms. Three of the online brokerages that I see work for the most people are:
Trade King – Best All Around Brokerage for Roth IRAs
Opening up a TradeKing account only takes a few minutes, and you’ll only need basic information like name, financial information and SSN. For a Roth IRA, you’ll enjoy plenty of advantages that other brokerages don’t offer.
- Low trading fees, $4.95 per trade
- No-fees on your IRA
- TradeKing app
- Read TradeKing review
- Open a TradeKing account
Betterment – Best Brokerage for Hands Off Roth IRA Accounts
If you’re looking for a more hands-off approach to your Roth IRA, but you still want excellent rates, look no further than Betterment. They are one of the newest investment brokerages on the market, but they take a unique approach.
Instead of handpicking each of your individual trades, Betterment uses robo-advisors to do the investing for you. All you have to do is create an account, set your goals, and your risk tolerance after that Betterment handles the rest. All you have to do is sit back and watch your money grow.
Some of the advantages to Betterment include:
- Easy investing
- No trade fees (they take a small portion of your total investment amount)
- Useful online tools to maximize your investing
- Read Betterment review
- Open a Betterment account
E*TRADE – Best Tools for Active Trader Roth IRA Accounts
E*TRADE is one of the most popular investing brokerages out there and for good reason. While they don’t have the lowest trade commission ($9.99 a trade), they are still competitive rates compared to other online investment firms.
If you’re new to investing, E*TRADE has customer service available 24/7. You can contact their customer support either through phone or email. For anyone that isn’t an investing expert, their customer service can be a life saver.
What you’ll get with E*TRADE:
- Competitive rates
- Over 7,000 mutual funds with no fees
- No fees or minimums on IRAs
- Read our E*TRADE review
- Open an E*TRADE Roth IRA. No Fees. No minimums.
Where Are the Best Roth IRA Rates?
Because Roth IRAs are individual accounts and you can invest in virtually anything, you will need to search out the best investment that meets your needs and risk tolerance. If you are looking for a guaranteed interest rate, then consider a Certificate of Deposit (CD) or government bonds. If you are willing to assume more risk and potential reward, then you may be better investing in equities, REITs, or other investments. Roth IRAs can hold almost any type of investment, therefore the rate you receive is subject to the type of investments you use in your Roth IRA.
Roth IRA Rules for 2016
Best Roth IRA rates aside, it’s crucial to know whether or not you are legally able to contribute to this retirement plan. That’s why we highlight the Roth IRA rules for 2016 below, including specific income and contribution requirements from the Internal Revenue Service.
- Single, Head of Household, or Married Filing Separately (and you did not live with your spouse the entire year): Phase-outs begin at $117,000 and end at $132,000
- Married Filing Separately (and you lived with your spouse): You can contribute if you earn up to $10,000, but contributions phase out completely at $10,000
- Married Filing Jointly: Phase-outs begin at $184,000 and end at $194,000
If your income leaves you subject to a phase-out, you’ll be able to contribute to a Roth IRA that year, but not up to the maximum. If you must make a reduced contribution, the IRS offers the following formula to figure out how much you can contribute:
- Start with your modified adjusted gross income, or MAGI
- Subtract from the amount in (1):
- $184,000 if filing a joint return or qualifying widow(er),
- $-0- if married filing a separate return, and you lived with your spouse at any time during the year, or
- $117,000 for everyone else.
- Divide the result in figure 2 by $15,000 or $10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year.
- Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in step 3.
- Subtract the result in (4) from the maximum contribution limit before this reduction. The result is the reduced contribution limit each participating party can make.
Here’s an example:
If you and your spouse are filing taxes jointly in 2016 with an adjusted gross income of $190,000, crunching the numbers would leave you with a formula like this:
- Step 1: Start with an adjusted gross income of $190,000 for a married couple filing jointly.
- Step 2. Subtract $184,000 from $190,000. That equals $6,000.
- Step 3: Divide $6,000 by $10,000
- Step 4: Multiply $5,500 (the maximum contribution for 2016) by 0.6. Come up with $3,300.
- Step 5: Subtract $3,300 from $5,500. The final contribution amount each spouse can make in 2016 is $2,200.
That’s enough math to make anyone’s head spin. Fortunately, it gets easier from there. If your income isn’t high enough to be subject to phase-outs, the rules for your contributions to a Roth IRA are extremely straight forward. The Roth IRA contribution limits for 2016 are as follows:
- For 2016, you can contribute up to $5,500 to a Roth IRA provided you have earned income and meet IRS income requirements.
- If you’re ages 55 or older, you can contribute up to $6,500 in what is called a “catch-up contribution.”
Roth IRA Benefits
The Roth IRA is a dynamic investment vehicle that can help you retire earlier, diversify your tax liabilities, and pass tax-free money on to your heirs. Here are a few of the top benefits a Roth IRAs offer, along with an explanation for each:
Pay taxes now, but avoid taxes later.
Since your Roth IRA is funded with after-tax dollars, the distributions you will eventually take will be tax-free. Your money also grows tax-free in the meantime, which could lead to optimal growth and a much smaller tax bill when you’re ready to retire. If you’re worried about high taxes when you retire, a Roth IRA can help you reduce your future liabilities.
You don’t have to take distributions once you reach 70 ½.
Unlike other retirement accounts that force you to take required minimum distributions (RMDs) at age 70 ½ or pay a penalty, the Roth IRA comes with no such rule. Once you contribute funds and start growing your nest egg, you can leave it to flourish for as long as you desire. The fact that you can rely on your Roth IRA as a last resort makes this an extremely flexible retirement planning tool.
You can keep contributing to a Roth IRA as long as you earn an income.
Another benefit offered with the Roth IRA is that you can keep contributing up to the maximum as long as you continue earning an income. If you are planning for a semi-retirement instead of a full-fledged retirement, the Roth IRA will allow you to keep socking money away well past traditional retirement age. All of your contributions must still be made with after-tax dollars, but your money can grow tax-free nonetheless.
You can withdraw contributions from your Roth IRA at any time.
Here’s something few people know about the Roth IRA. Once you start contributing funds, you can withdraw your contributions at any time without paying a penalty. The key word here is “contributions” because you cannot withdraw your earnings before age 59 ½ without paying a penalty unless you meet certain circumstances decided on by the IRS. Learn more about Roth IRA Rules for withdrawal here!
You can pass tax-free money on to your heirs.
If you have accumulated a great deal of cash in your Roth IRA, that’s great news for your heirs. If you manage to keep all or most of your Roth IRA intact at the age of your death, your heirs can inherit your Roth IRA without paying taxes on distributions. They must begin taking distributions immediately, but they can generally stretch those out over their lifetime, allowing your Roth IRA to continue its tax-free growth.
If you’re looking for a way to boost your retirement savings, a Roth IRA might be the perfect investment vehicle for your needs. With a Roth IRA, you can save more money for retirement and potentially save on taxes once you begin taking distributions from your account.
To find the best companies that offer Roth IRAs, look through the brokerage firms listed on this page and compare their offerings. Search for firms that offer a friendly online interface, plenty of investment options to choose from, and top notch customer service. Once you find the right firm for your needs, you’ll be on the fast path towards growing your nest egg and saving up for the lifetime goal of retirement.