It is a new year, but we can’t simply move on from last year just yet. As the clock ticked down on the previous investing year you may have noticed an increase in your Roth IRA account balance. While you would normally see any growth in your account balance to be a positive thing you might also have some concerns about what was causing this growth.

If your account is not growing through after tax investments that you’ve made or by growth in the investments you hold there are still a few other places to look. Account growth can also come from interest (if you are utilizing a Roth IRA Certificate of Deposit), stock dividends (if you are brave enough to invest in individual stocks), and mutual fund dividends and capital gains. Let’s take a closer look at these three categories on how they can impact you.

Roth IRA Interest Income

One of the ways you may see an increase in your account is through being paid interest on an investment. The most common investment that kicks off interest to you is a certificate of deposit. These CDs pay interest to you inside a Roth IRA just like they would if you had opened it up outside of a Roth. You will usually have interest paid out when the certificate of deposit matures. Many Roth IRA providers will allow you to roll over your interest into a new CD at a new rate. Regardless the interest will cause growth in your account.

Roth IRA Stock Dividends

Investing in individual stocks is extremely risky. If you put your entire portfolio into ten stocks then if one stock tanks it takes 10% of your nest egg with it. Yet there are still some individuals that will use individual stocks as part of their portfolio strategy. You might target high dividend paying stocks like utility stocks in hopes of earning a higher return than you would with a certificate of deposit. Dividends are normally paid out quarterly. If you’ve received dividends toward the end of the year that can be a cause of an account increase.

Roth IRA Mutual Fund Dividends and Capital Gains Distributions

A third potential reason for end of the year account growth is dividends or capital gains distributions from your mutual funds. Dividends are treated just like individual stock dividends with the exception that most mutual funds pay out dividends only once per year (usually in December). Capital gains distributions are a different beast. Let’s say you invest in Mutual Fund A on November 1st.

That same mutual fund picked up some shares of Stock B on February 1st. Stock B’s price has skyrocketed and the mutual fund managers are looking to cash out. They sell the shares on December 1st and in doing so incur a capital gain on the difference of the price from when they bought to when they sold the shares. That capital gain can be offset by losses on other stocks, but if there isn’t enough to offset then the capital gains is pushed out to the mutual fund investors. Capital gains distributions are similar to dividends, but most investors look to avoid these due to tax concerns.

Tax Free Retirement with Roth IRA

Your account balance going up is always a good thing. No one will complain about a larger nest egg. However, there are always tax concerns. If you could get the interest, dividends, and even capital gains without having to pay additional tax then you would be much happier than if you had to pay tax. That’s the beauty of the Roth IRA. All Roth IRA investments you make are made with after tax dollars. You’ve already paid income tax on the money you contribute.

Because of this all account growth whether from interest, dividends, or distributions are 100% tax free. Traditional IRA investors typically look for low turnover (and thus low capital gains) mutual funds. Roth IRA investors do not have this worry. A tax free retirement — something we can all agree on is worth investing in.

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