Roth individual retirement accounts (IRAs) are an excellent way to supplement and diversify your total investment portfolio. Because they’re funded with after-tax dollars, Roth IRA withdrawals made during retirement years are tax-free. By contrast, traditional IRAs are tax-deferred accounts, meaning they are funded with pre-tax money and you only pay taxes when you withdraw it. The earnings in either type of IRA grow tax-free.
Most investments are allowed in a Roth IRA, but the ideal allocation may depend on the investor’s age, financial goals and level of risk tolerance. For example, the best Roth IRA investments for young adults may look very different from the choices of investors near retirement age. Younger investors have more time to take risks and ride out market volatility, whereas older savers typically lean toward more conservative investments to preserve their capital.
Read on to get five Roth IRA investment ideas that can help bolster your retirement portfolio.
The best long-term investments for a Roth IRA can vary depending on the individual investor. For instance, specific financial goals and risk tolerance impact which investments make sense for you. However, your age is also important as you research different investment strategies. And remember, you’re investing for the future, not for short-term wins.
“If you are a young individual, you have plenty of time in the market to withstand volatility,” explains Anthony DeLuca, a CFP, CDFA and senior financial advisor at Delta Advisory Group. “Your mindset should be more growth-oriented, and therefore, your best investments should be tailored toward equity. On the contrary, someone a few years out from retirement needs to reduce their market risk, and a more conservative portfolio is a better investment choice. A fair mixture of bonds and large-cap funds would be more appropriate.”
Index funds are mutual funds or exchange-traded funds (ETFs) that track a specific index, such as the S&P 500, Nasdaq Composite, Russell 2000 and others. The fund invests in many of the same constituent stocks to emulate the performance of that index. Because index funds invest in a broad mix of securities, you get broad market exposure, which can help minimize risk. Investing in index funds is widely believed to be among the safest and best investment strategies for most investors.
Index funds simplify investing
I always recommend using low-cost, broad-based index funds when building investment portfolios. Funds offered by Vanguard or Blackrock are a good place to start your research. There is no need to make investing unnecessarily complex or expensive.
— Chris Urban, CFP, RICP and founder at Discovery Wealth Planning
Bond funds are similar to index funds in that they hold a wide mix of securities, which can be less risky than buying individual bonds.
Some bond funds attempt to mimic the broader market by holding bonds from multiple issuers with varying maturity dates. In contrast, others may focus on a smaller bond market sector. Buying bond funds is generally a safer and more efficient way to benefit from bond yields.
One of the easiest ways to invest your Roth IRA funds is in a target-date mutual fund. A target date fund (TDF) is a single portfolio that includes a mix of asset classes that becomes more conservative as your target date approaches. A TDF typically holds various stocks, bonds and other investments and is managed with a particular date in mind.
The goal is to maximize returns with potentially higher-growth investments like stocks long before your retirement age. Then, as the years go by, those assets will gradually transition — known as the glide path — to more conservative investments like certificates of deposit (CDs), bonds and money market funds to protect your capital. Target-date funds aren’t ideal for everyone but can be a good starting point for beginning investors.
Dividend stocks are stocks of established companies that regularly share their profits with investors through dividends. This can provide a nice income stream in a brokerage account, but Roth IRA dividends are better off reinvested and allowed to compound within your account.
Some examples of well-known dividend stocks are:
Real estate investment trusts (REITs) own, operate or finance income-producing real estate. And they’re required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends to avoid paying corporate income tax.
Many REITs are publicly traded, like stocks or ETFs, making them extremely liquid. While they are similar to mutual funds in that they hold multiple assets, they can be more volatile, particularly if you invest in ones that are more concentrated in particular sectors.
You can choose almost any type of investment for your Roth IRA except for life insurance and collectibles, as those are prohibited by law.(1) Collectibles include certain types of tangible personal property, such as art, antiques, gems, stamps and alcoholic beverages.
Ultimately, the IRA provider decides which assets to make available to investors. So, choose an IRA provider that aligns with your investment goals. For example, if you’re interested in alternative investments like cryptocurrency or gold, you may need to open a self-directed IRA.
Staying on top of your holdings and adjusting as needed are critical to maximizing your Roth IRA investments. Here are some other tips for maximizing your Roth IRA investments.
Reserve tax-efficient investments for your brokerage account
Any contributions into the Roth IRA grow tax-free, so investing into tax-efficient investments won't capture as much benefit as doing so in a taxable account.
— Stephen Kates, CFP and principal financial analyst at Annuity.org
There are a few things you should be aware of and consider before investing in a Roth IRA.
Contribute up to $7,000 in 2024 across all your Roth and traditional IRAs.(2) If you’re over age 50, contribute up to $8,000 total.
Your income determines your eligibility to contribute to a Roth IRA and how much. For 2024, single filers with income less than $146,000 may contribute the maximum amount. But if you make more than $161,000 as a single filer, you’re ineligible to contribute any amount. If you’re somewhere in the middle, you’re eligible for partial contributions.
Married filers can earn up to $230,000 and still make the maximum contribution but are ineligible after $240,000. And, like single filers, if their earnings are somewhere in the middle, they are eligible for partial contributions only.
Before you choose your Roth IRA investments, consider how long you want the money to grow before you need it. For example, if you open a Roth when you’re 22, you have at least 40 years until you’ll start taking withdrawals. Withdrawals before age 59.5 are subject to a 10% early-withdrawal penalty.
So, the best long-term investments for a Roth IRA at that point may look very different than if you’re opening your first Roth IRA when you’re 50. It can be complicated, so consider seeking advice from a financial advisor if you’re unsure.
A Roth IRA can be an important addition to your overall investment portfolio. And choosing the best long-term investments for your Roth IRA — and the right mix — may look different depending on your age, risk tolerance and financial goals. Some options to consider include index funds, dividend stocks, bond funds, REITS and target-date mutual funds. To start investing, check out our picks of the best Roth IRA providers of 2024.
A mixture of stocks, bonds and mutual funds is a fairly standard portfolio mix, but you can customize your portfolio in any way you like. You should also consider any other investment accounts you have before deciding how to allocate your IRA funds, advises Kates.
“Balance the investments in your IRA with all the other investments in your portfolio. Your IRA investments should be complementary, not entirely separate in strategy or allocation. Consider the role your investments will play within your overall portfolio and seek to create the right asset allocation and investment mix that capitalizes on the tax benefits of the account.”
You can have as many traditional or Roth IRAs as you want, and it’s not a bad idea to have at least one of each. However, in 2024, you can only contribute up to $7,000 per year (or $8,000 if you’re over 50) to all your IRAs combined.
Choose and avoid Roth IRA investments depending on your individual goals, timeline and risk tolerance. However, the law doesn’t allow you to invest IRA funds into life insurance or collectibles.
The balancing act: Assessing your retirement investments against your short-term finances.
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