Clearing up Roth IRA confusion
Does my Roth IRA last only 23 months "just like a CD" as I was told? I thought they were decades-long accounts.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK ( - I opened a Roth IRA at my credit union, but now I'm confused. As I understand it, my Roth, which the teller told me is "just like a CD," lasts only 23 months. Based on what I've read about Roth IRAs, however, I thought you could put your money aside for a couple of decades. Does the amount of time the Roth lasts depend on the financial institution you open it with, or do all Roth IRAs expect you to decide periodically whether you want to extend it?

- Kindra, Hammond, Louisiana

Like many people, you are confusing a Roth IRA account with the investments that go into that account. Although the two are related, they are completely different things.

A Roth IRA is nothing more than a type of account that's designed to help people save and invest for retirement. When you invest through a Roth account, you gain certain tax advantages. For the 2006 tax year, you can contribute up to $4,000 in a Roth (plus another $1,000 if you're 50 or older), assuming you meet the qualifying criteria.

Unlike with a traditional IRA, you don't get a tax deduction for the amount you contribute to a Roth. But when you eventually pull money out of the Roth, you won't owe any taxes on it (again, assuming you meet certain criteria.)

Now, within that Roth account, you can hold a variety of different types of investments. In fact, you can think of the Roth as a bucket for holding retirement investments. You can fill that bucket with stocks or bonds or mutual funds or CDs, real estate (although I don't generally recommend it, as you'll see if you click here or any combination of those.

Very often the type of investment people put into their Roth IRA - or any IRA, for that matter - depends on where they open the Roth. You opened yours at a credit union and it sounds as if you put your Roth money into a 23-month CD. People who open their Roth at a mutual fund firm will probably end up investing in mutual funds. But aside from a few prohibited transactions and investments which are detailed in IRS Publication 590: Individual Retirement Arrangements, you can pretty much invest in whatever you want.

Investing in mutual funds - in a Roth IRA

So if you invest your Roth money in mutual funds - which I think makes sense for most individual investors saving for retirement - you don't have to worry about "renewing" your investment. That's because mutual funds don't have a specific term or maturity date like a CD. You invest your money, stipulate that all income and capital gains get reinvested in the fund, then sit back and let your account value's build.

Actually, what you really want to do is spread your money among a few different types of stock and bond mutual funds so that your retirement savings isn't riding on one particular type of security. You can learn more about how to build a diversified portfolio for retirement by clicking here. And if you'd like some funds that we at MONEY believe are good building blocks for a diversified portfolio, check out our MONEY 65 list of recommended funds.

Or, if you want to take an even easier approach, you can buy a type of mutual fund known as a target retirement fund, which gives you an instantly diversified portfolio appropriate for your age. The MONEY 65 also includes target funds, by the way.

In short, you're not tied to one type of investment in your Roth. Nor, for that matter, are you tied to one type of financial firm. If your credit union doesn't offer mutual funds - or doesn't have ones with solid records and competitive fees - you can always do an IRA rollover and move your account to a brokerage firm or mutual fund company that does.

Wherever firm you end up working with and however you invest your Roth, remember to fund the account every single year. Because it's that combination of new money flowing in plus the return on what you've previously invested that has the best shot of leading to a nice big account balance come retirement time.


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