Do you depend on a Roth IRA to help fund your retirement?

If so, you should know that even something as reliable as a Roth IRA isn’t impervious to market factors. One of the most important to know about is inflation.

How Inflation Affects Your Roth IRA

A Roth IRA is a type of individual retirement account. It’s different than a traditional IRA. A traditional IRA allows you to contribute pre-tax dollars toward your retirement fund. A Roth is different, you fund it with money that you’ve already paid taxes on.

The IRS can increase retirement contribution limits based on inflation. The government agency will do this for 401Ks, IRAs and other retirement accounts so that people can put more money away so that their nest eggs have a better chance of keeping up with inflation.

How Inflation Affects Common Investments

If you’re worried about inflation, you’ll want to understand how inflation impacts different types of the four most common investments.

  • Stocks: When inflation goes up, the price of stocks may go down. However, over the long-term, stocks may rebound after a period of adjustment.
  • Bonds: Bonds are usually impacted more by inflation. While they offer fixed-price interest payments, the value of that interest is influenced by inflation. For example, a five-year bond may pay $300 every six months, but that $300 buys less as inflation goes up. This is why demand for bonds also drops when inflation goes up.
  • ETFs: The same is true for ETFs, but ETFs often offer investors easy access to positions in commodities like gold, oil, and agricultural products. This could be considered an advantage as commodities tend to do well when inflation is up.

Combined with the unique advantages of a Roth IRA, ETFs may be part of an effective retirement planning strategy.

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