Just Because Money's in Your Roth IRA Doesn't Mean You're Investing It

"A Roth IRA is a tax wrapper around the investments you choose inside it. Money that lands in the account and never gets allocated to a fund earns whatever the broker's default cash sweep pays. That's often a money market yield near the 3.8% fed funds rate or the 4.4% available on the 10-year Treasury. That sounds fine until you compare it to what the same dollars would have done in equities."

"The verdict: Larsgaard is right, and the math is brutal. The advice is correct, and the cost of ignoring it is the single largest hidden tax on young retirement savers. Cash drag, the gap between the return on idle cash inside a brokerage account and the return on the assets the account was supposed to hold, is the culprit."

"In fact, consider a 25-year-old who maxes a Roth IRA contribution of $7,000 and forgets to buy anything. Over the last decade, the SPDR S&P 500 ETF ( NYSEARCA: SPY | SPY Price Prediction) returned 249% on a price basis. That took shares from about $206 to about $718. A $7,000 contribution invested in the index roughly a decade ago would be worth about $24,000 today. The same $7,000 sitting in a 4% sweep would be worth roughly $10,400."

"Over five years, SPY is up 73%. Over the past year alone, it returned 27%. A saver who funded the account in May 2025 and never clicked "buy" left a quarter of their potential balance on the table in 12 months."

A Roth IRA holds investments inside a tax wrapper, but money that is not allocated to a fund remains in a broker’s default cash sweep. That cash typically earns a money market yield tied to rates such as fed funds or Treasury yields. The result is cash drag: the difference between returns on idle cash and returns on the assets the account was intended to hold. A 25-year-old who contributes $7,000 and never buys investments could see the same dollars grow far less than if invested in equities like the S&P 500 ETF. The lost compounding is especially damaging over long periods and can be substantial even over a single year.

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