What's a Lucrative Substitute for a Roth IRA?

Dear Dr. Don,

I have about $12,000 in a Roth individual retirement account. I'd like to invest that money somewhere else. I'm currently receiving returns of $1 or $2 per month. Could you tell me how to better invest my Roth IRA?

Thank you,

-- Adolfo Allocation

Dear Adolfo, It sounds like you have the account invested in a money market mutual fund or a money market account. You can do better, but you should decide how much risk you're willing to take. You could stay low-risk and invest in a four-year IRA certificate of deposit and earn a 1.55 annual percentage yield, or APY. That investment would earn about $16 per month. That's eight times what you're earning now.

A key feature of a Roth IRA is that qualified distributions in retirement are free of federal income taxes. The account is funded with after-tax dollars, so you've already paid the taxes due on the contributions, and the earnings from qualified distributions are tax-free. However, the low returns in your account are limiting the benefit of having a Roth IRA. The yield on a four-year IRA CD wouldn't turn my head, but it may be all the risk you're willing to take in the account.

The longer you have until retirement, the more willing you should be to invest in stocks and bonds versus Federal Deposit Insurance Corp.-insured bank deposits. A couple of no-load, indexed mutual funds that invest in a broad-based index of stocks or bonds could be just the ticket to building wealth in your Roth IRA. Don't know what that means? Then it's time to either learn or work with an investment professional.

The bottom line is that if you don't like your Roth IRA, change how it's invested. If you can't do what you want to do with your current custodian, find one that offers the investment choices you want while keeping an eye on account fees and expenses.

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