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How Do Roth IRAs Make Money?
By Adam D. King Platinum Quality Author
 

How do Roth IRAs make money? What are the best Roth IRA investments? Those are just a few of the questions that people have about the Roth IRA. Let's start with the basics.

A Roth is an individual retirement account named for Delaware's Senator William V. Roth, Jr., the chief sponsor of the legislation that created this unique account. Many felt that there were disadvantages to the traditional IRA and that an alternative was needed.

How do Roth IRAs make money? In the same way that traditional IRAs do. You deposit a portion of your income into this account, up to a maximum amount that varies from year to year and according to your age.

The account trustee, acting on your behalf, may use the money to buy stock, certificates of deposit, mutual funds, real estate, bonds or other options allowed by law. The way that the IRA makes money depends on the investment type.

For example, company stock holders receive a share of the company's profits. Those who hold certificates of deposit accumulate interest, typically at a higher rate than the interest paid on a standard savings account.

Opinions vary about which options are the best Roth IRA investments. Typically, higher yield investments (those that make the most money) are also the highest risk. In other words, it is possible that the account will not make money and can even lose money, if you choose the wrong investments.

The best Roth IRA investments for people who want to "play it safe" are CDs and US savings bonds, because both are insured by the federal government. Short of a revolution, there is no way to lose money.

The drawback is that the safest investments have the lowest returns. In other words, your IRA could make more money if you choose other investment options.

When it comes to real estate, there are a couple of different ways that the IRA could make money. Real estate can be purchased, held in the account and rented out. The rental income returns to the account, increasing the balance in the account.

Property can be held strictly for investment purposes to be sold at a later date. Some investors have used this option to purchase what is currently unimproved, low cost property in areas that they expect will eventually become popular. It takes a little research to find that kind of property and it may be many years before the value increases significantly, but it is possible to end up with big profits.

A popular choice for some real estate investors is to purchase a "fixer-upper", use IRA funds to make repairs or upgrades and resale the property quickly, at a profit. The profits are returned to the account, allowing the IRA to make money.

Some people think that real estate trading is one of the best Roth IRA investments, because with the right deal, the initial investment may be doubled or tripled in a very short period of time. In addition, real estate is considered one of the safest investments, because, even though the value of a property may fluctuate over time, it generally increases.

But, the best Roth IRA investments for you are those that you feel comfortable making. Whether you are interested in the stock market, the real estate market or another type of investment, you would be wise to consult someone that is experienced with that specific investment type.

A brokerage experienced with all types of IRA investments can answer more questions like "how do Roth IRAs make money". There are only a few that offer their clients all of the options mentioned here. Equity Trust Company is one that does. They may be the right choice for you.

 
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