With relaxed conversion regulations in 2010, more taxpayers are considering the advantages of Roth Individual Retirement Accounts (IRAs) over traditional IRAs. Thanks to changes in tax laws, investors can now convert traditional retirement accounts to Roth accounts without fear of income or filing status prohibitions. Before converting or opening a brand new Roth IRA, however, carefully consider how you would like your retirement money invested.
CDs
A safe investment choice for Roth IRAs, certificates of deposit (CDs), offer relatively short terms, guaranteed interest rates and little to no risk. Bank CDs, usually covered by Federal Deposit Insurance Corporation (FDIC) insurance, allow investors to earn modest rates while protecting their nest eggs. CDs normally have fixed interest rates for terms ranging anywhere from one week to five years. Those who benefit from investing their Roth IRAs in CDs are normally at or near retirement age. Because there is little risk involved, CDs are ideal options for people who may need access to their retirement funds in the short-term future, but still want to earn interest in the meantime.
Fixed Annuities
Posing a moderate level of risk, fixed annuities are insurance products that normally pay moderate rates of return. Similar to CDs, fixed annuities pay a guaranteed rate of interest for a specific period of time. The available terms are normally longer, however, ranging around five years or more. Unlike CDs, fixed annuities pose a bit more risk and are not insured by the FDIC.
Variable Annuities
Variable annuities are good options for investors who are many years away from retirement. Roth IRA funds in variable annuities are invested in several vehicles, such as mutual funds, stocks, bonds or money market instruments, for a specific length of time. The rate of return and level risk are based on the performance of the investments within the annuity.
Mutual Funds
Roth IRAs can also be invested in mutual funds to earn competitive rates of return. The funds are invested in various stocks, bonds and money market instruments to create diversity and reduce risk. As with variable annuities, a mutual fund's earnings are based on the performance of its holdings. Mutual funds are appropriate for investors who are comfortable with risk, have several years to go before retiring and want to achieve higher earnings.
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