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One Major Mistake to Avoid with Your Roth IRA

This article takes a look at the one major mistake to avoid with your Roth IRA. Check out all the Major Mistakes to Avoid with your Roth IRA.

Building a Million-Dollar Roth IRA

According to a survey by The Charles Schwab Corporation (NYSE:SCHW), individuals think they need at least $1.8 million to live a comfortable retirement. Based on the figure, it is safe to say that the average American, who has only $120,300 saved up for their retirement, is in for a bumpy ride if they don’t start saving up. Thankfully, there are quite a few ways through which an individual can stack up a million dollars in retirement. One such example is through a Roth IRA.

A Roth IRA is a special type of Individual Retirement Account (IRA) in which an individual pays taxes on their contributions, and then receives all future withdrawals tax-free. Many individuals believe that contribution limits imposed by the IRS make it difficult to build up a fat nest egg for retirement through such accounts. However, that’s where they are wrong. This is because with consistency, and with the power of compounding, it is quite easy to be a retirement millionaire yourself.

So how is it possible to raise over a million dollars in your Roth IRA? More importantly, why is a million-dollar Roth IRA so attractive to retirees? The answer lies in its tax-free withdrawals. Since a Roth IRA requires after-tax contributions, an individual who has amassed over a million dollars in retirement will be able to enjoy it tax-free in their retirement years.  However, there are many things that can go wrong with a Roth IRA. For this reason, we have compiled a list of all the mistakes to avoid with your Roth IRA. Before we move on to that, let’s get back to the question: how to build a million dollar Roth IRA account?

Which Stocks to Add to Your Retirement Portfolio

We at Insider Monkey recently compiled a list of the Best Growth Stocks to Buy and Hold in 2024. To compile the list of the top 5, we ranked the holdings of Vanguard Growth ETF by the number of hedge funds that had bought the shares in Q4 2023 and chose the top 5. These top stocks were chosen based on hedge fund sentiments, where the top consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Based on our list, the top five growth stocks to buy and hold on to are NVIDIA Corporation (NASDAQ:NVDA), Alphabet Inc. (NASDAQ:GOOGL), Meta Platforms, Inc. (NASDAQ:META), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT). The top growth stock to buy and hold is Microsoft Corporation (NASDAQ:MSFT), the world’s largest personal computing operating system provider. The company boasts strong financials and significant growth potential, with Azure, AI integration, and its diversified business model being the key drivers of the company’s revenues and profitability. Undoubtedly, the stock is a strong buy and hold, with shares having popped up 35% since May 2023. Posting its Q3 2024 earnings, the company’s revenue rose by 17% year-over-year to $62 billion, $1 billion higher than analyst expectations.

One Major Mistake to Avoid with Your Roth IRA
One Major Mistake to Avoid with Your Roth IRA

Methodology

To compile a list of mistakes to avoid with your Roth IRA, we consulted a number of sources such as The Charles Schwab Corporation (NYSE:SCHW), Bankrate, Investopedia, and District Capital Management, to name a few. A consensus approach was adopted to choose the top 11 mistakes to avoid with your Roth IRA, with one point awarded each time it was recommended by a source. Mistakes have been ranked in an ascending order based on the number of times recommended.

At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Here are the 11 Mistakes to Avoid with Your Roth IRA:

1. Failing to Invest Your Roth IRA Funds

Based on our methodology, one major mistake to avoid with your Roth IRA is failing to invest your Roth IRA funds. A Roth IRA is an Individual Retirement Account where an individual contributes their after-tax dollars. However, many individuals believe contributing to a Roth IRA is an investment in itself when it is not. Just because an individual contributes to a Roth IRA doesn’t mean that the money is automatically invested. In fact, an individual must go into the account, select the investments, and then manage them. This is the best advice for a Roth IRA. Some popular investments for Roth IRAs are stocks, bonds, mutual funds, Exchange-traded Funds (ETFs), Target-date Funds (TDFs), and Real estate investment trusts (REITs). However, it is not allowed to invest in collectibles in a Roth IRA. This includes automobiles, artwork, stamps, rugs, and other items.

Check out all the Major Mistakes to Avoid with your Roth IRA.

At Insider Monkey, we delve into a variety of topics, ranging from the best places to retire to the best AI travel apps; however, our expertise lies in identifying the top-performing stocks. Currently, Artificial Intelligence (AI) technology stands out as one of the most promising fields. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally posted on Insider Monkey.