Best Investments for a Roth IRA

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Roth IRA investment accounts are an excellent way to plan for retirement. They bring together different investments while allowing you to apply tax-sheltering properties to your account contributions. Roth IRA is a type of savings option that earned its name after the late former Sen. William Roth (R-Delaware). It’s been around for less than 30 years, so it’s considered a relatively new way to grow your investment. When considering what to invest in a Roth IRA, there are multiple options from mutual funds, stocks, bonds, exchange-traded funds (ETFs) and real estate investment trusts (REITs). A Roth IRA can create a diversified portfolio and help you prepare for retirement. 

Best Investments for a Roth IRA

Unlike a traditional individual retirement account (IRA), where withdrawals can be taxed using your present tax rate, a Roth IRA provides future tax freedom because withdrawals are tax-free. Roth IRA investments are made after taxes while traditional IRA investments are made before taxes, meaning the investments within a Roth IRA are free to compound and grow over time without additional taxes. 

Because Roth IRAs require taxes to be paid first, the account allows investments such as mutual funds, stocks, bonds, ETFs, index funds, and REITs, to grow and compound over time without additional taxes. In addition, a Roth IRA works with your level of risk tolerance because you can choose what investments you would like in your investment account. Roth IRAs are best used for income that’s heavily taxed and for investments that offer exponential growth and a tax advantage. Before you begin, research if you qualify to open a Roth IRA account.

Mutual Funds

A mutual fund is typically professionally managed and combines different investments that offer portfolio diversification. Mutual funds help lessen the risk because the portfolio contains a range of companies.

In addition, actively managed mutual funds tend to gain more as they trade so keeping them in a Roth IRA helps keep them sheltered from additional taxes. Properly researched mutual funds offer more risk protection than an individual stock. 

Stocks

Stocks are commonly included in Roth IRAs because they can offer growth, but it is important to consider that stocks function at a higher risk level than alternative options such as mutual funds. However, holding stocks in an account intended to grow over time lessens the risk because the stocks have the opportunity to withstand several market cycles. Holding stocks over an extended period of time allows the investment to grow and lessens your risk exposure in the long run.

Roth IRAs offer tax benefits — the growth a stock experiences within a Roth IRA will remain free from additional heavy taxes. 

When considering what stocks to place into a Roth IRA, some investors look into mid-cap and small-cap stocks because they have the potential for extended growth over time. Some investors view stocks that offer high dividends as beneficial because, when done properly, the dividends will not be taxed when the stocks are placed in a Roth IRA. Dividends are a part of a company’s profit-sharing with its stockholders. As corporations grow, the dividends stockholders receive can also grow over time. When correctly placed in a Roth IRA, stocks that offer dividends cannot be taxed. 

Bonds

Bonds appeal to the risk averse because of the level of predictability that they offer. People who hold a bond to maturity receive their principal plus the interest earned over time. Although yields are low, the predictable and largely protected capital offers a certain level of appeal to risk-averse investors. 

Bonds are a type of mutual fund where people can loan money to organizations such as a government or a corporation. In return, bondholders receive timely and predictable payments that can span several years. Bonds can be considered a form of high-yield debt, depending on the type of bonds purchased. Placing bonds into a Roth IRA helps shelter the steady cash flows.  

ETFs

An exchange-traded fund can be made from a group of securities that are pulled together in baskets. ETFs can be purchased in a way similar to how stocks are traded in the market. The groupings offer a low level of risk because of the more diversified options included in each ETF. Different sectors of ETFs have different levels of risk so it’s important to know what fits your personal needs before purchasing.

Although typically passively managed, ETFs are an attractive investment option for a Roth IRA because they offer a respectable level of yield with a low amount of annual fees.

REITs

A real estate investment trust offers strong portfolio diversification when combined with other investment options such as bonds or stocks. REITs are generally companies that own large amounts of income-producing real estate ranging from office buildings and hotels to warehouses and malls. 

REITs are beneficial stems because of their ability to pay annual dividends to their shareholders. When REITs are ins a Roth IRA, they are sheltered from taxes.

Roth IRA Investments to Avoid

When creating your Roth IRA, it’s best to avoid certain investments such as money market funds and annuities. It is also important to have diverse investments. As the saying goes, never put all your eggs in one basket. 

Money Market Funds

A money market fund is a specific type of mutual fund that focuses on short-term debt and is considered a more liquid type of asset. This liquidity is often helpful but not beneficial in a Roth IRA investment account that best serves long-term growth and income that can be heavily taxed. 

Annuities

In simple terms, annuities are an agreement between a person and an insurance company where the insurance company provides consistent payouts. These payouts are most often used as a type of income by retirees. Annuities don’t make sense in a Roth IRA because annuities grow tax-deferred. However, placing annuities in a Roth IRA ensures that they are tax-free and can make sense for people closer to retirement. 

Over Allocation in Just One Asset

Over allocation of one asset increases the amount of risk your total investment is exposed to. Diversifying your investments helps lessen risk by offering different areas that can grow or lose money independent from others. Consider that people in different parts of their lives will likely invest differently. For example, younger people can focus more on growth and appreciation because they have more time to acquire these items and weather bumps in the market. Older investors will likely benefit from more consistent and dependable investments in their Roth IRA such as bonds. 

How Much Should Investors Adjust Their IRAs?

While adjusting a Roth IRA brokerage account is not necessary, it can help increase the strength of your assets. If unsure, ask your adviser, who can likely guide you through the process.

Compare Roth IRA Brokerage Accounts

Benzinga offers reviews and insights for a Roth IRA brokerage account and describes how to invest for retirement. When investing for retirement, it’s important to think about your personal level of risk tolerance and intended retirement timeline. Before investing, research the Roth IRA rules and speak with a financial adviser. Given the unpredictable nature of investing, there is no guarantee of how investments will perform.

Creating Your Retirement Plan

When it comes to deciding on the best investments for a Roth IRA, there is no one-size-fits-all solution. Each individual's financial situation and goals will be different, so it is important to consider your own needs carefully before making any decisions. Generally speaking, the best investments for a Roth IRA are those that offer growth potential over time, as well as tax advantages.

Frequently Asked Questions