Top Investment Options for Your Roth IRA: Invest Like a Pro!

A Roth IRA is just an account where you stash your money, but you still need to decide how to invest it. You can pick from stuff like stocks, bonds, mutual funds, ETFs, money market accounts, and CDs. Some places give you lots of options, others not so much. If you go with a self-directed Roth IRA, you get the most choices, but there are still some rules. 

Setting up a Roth IRA

When you first set up your Roth IRA, you choose how to split your investments. For example, you might put 60% into bond index funds and 40% into equity index funds, and that equity portion might be split between small growth stocks and big companies that pay dividends. You can change this mix later, like rebalancing your portfolio each year or adjusting your investments as you get closer to retirement. Many plans let you do this online. A Roth IRA is funded with after-tax money, and the earnings grow tax-free. Once you hit 59 and the account's been open for at least five years, you can withdraw money tax-free. You usually open a Roth IRA with a brokerage or bank, and they decide what investment options are available. Some accounts are pretty limited, but others might let you pick individual stocks and bonds or work with an advisor.

Self-directed Roth IRAs let you invest in a wider range of things like real estate, business partnerships, precious metals, and even cryptocurrency. But with more freedom comes more responsibility and risk. The sponsor has to inform you about the risks, but they might not be responsible for making sure your investments suit your goals. There are some no-go's for Roth IRAs, like collectibles (antiques, art, stamps, jewelry) and certain transactions (like lending money to disqualified people, which includes you and your close family). You can invest in some gold coins, but not as collectibles.

Things to think about

When checking out your Roth IRA options, keep these points in mind.

Use your retirement timeline

Look at how often you trade and how long you plan to invest. With a Roth IRA, active traders don't have to worry about capital gains taxes each year, and you get tax-free distributions when you retire. Plus, the longer you invest, the better your returns could be, which helps save on taxes when you take money out. Balancing these points can make your retirement more secure.

Think about tax impacts

Knowing the tax impacts of your investments is super important. Some, like municipal bonds, are usually free from federal taxes, so they don't add much value to a Roth IRA. But stuff like REITs, which give out big dividends that aren't tax-protected, can really benefit from a Roth IRA's tax-free growth.

Balance both returns and risks

For your retirement fund, stability might seem like the main goal, but you also want your investments to grow. If you're 20, buying bonds in an IRA isn't the best move. Bonds are safe, but young adults have time to take risks for higher returns. Some investments are better to skip. Cryptos like Bitcoin can have high returns but are too volatile for retirement accounts. Stick with proven methods like diversified stock or mutual fund portfolios for steady growth.

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Top Roth IRA Investments

Image Souce: Rose Han

Looking for the best investments for a Roth IRA? There's no one-size-fits-all list, but index funds and ETFs are often good picks since they have low fees, diversify your portfolio, and have a solid track record.

Target-Date Funds Self-Adjust Their Asset Mix

Target-date funds are a hit for retirement accounts because they adjust their asset mix as you get closer to retirement. They offer a diversified portfolio in one go and change over time, so you don't have to. Some folks aren't big fans of target-date funds, though. They think these funds are too hands-off. A custom portfolio that evolves with your needs might do better.

REIT Funds are Related to Real Estate

You cant usually invest directly in real estate with a Roth IRA unless you have a self-directed one, which is riskier and pricier. But REIT funds let you get a slice of the real estate pie without the hassle of managing properties. REITs are companies owning and running real estate investments. A REIT fund holds various REITs, giving you broad exposure with one investment.

Dividend Stock Funds are Tax-Free

Roth IRA investments grow tax-free, making them great for income-generating assets like dividend stock funds. These funds invest in dividend stocks, paying out regular distributions that you can reinvest to grow your portfolio.

Global Stock Index Funds Give Vast Exposure

Most investors stick to U.S. stocks and bonds, but global stock index funds can diversify your portfolio further. These funds include international stocks, giving you exposure to different markets and companies.

U.S. Bond Index Funds are Less Volatile

U.S. bond index funds can lower your investment risk. They generally have lower returns than stocks but are less volatile, often performing better during economic downturns. Bonds generate fixed income through interest payments, which you can reinvest.

U.S. Stock Index Funds Track a Segment

U.S. stock index funds are top-notch for a Roth IRA. S&P 500 index funds are especially popular. By investing in the S&P 500, you're getting a slice of 500 different companies, balancing out the bad years for some with the good years for others. Stock index funds give you a diversified portfolio that tracks a segment of the stock market and usually come with low fees. There are various U.S. stock indexes, each tracking different companies. For example, the S&P 500 covers large companies, while the Russell 2000 focuses on small ones. Total stock market index funds offer exposure to large-cap, mid-cap, and small-cap stocks.

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Having Multiple Roth IRAs

Image Souce: Good Financial Cents

Sure, you can have two or even more Roth IRAs. There's no cap on the number of accounts you can hold. But keep in mind, having multiple Roth IRAs doesn't bump up your annual contribution limit. Whether you have one or several, the total you can contribute each year stays the same. For 2024, that limit is $7,000 if you're under 50, and $8,000 if you're 50 or older, thanks to an extra $1,000 allowed for catch-up contributions.

Conclusion

If you've got a Roth IRA, you get to pick how your money's invested. The plan you're on will show you the options, and some might only give you a few fund choices. Others might let you pick from a bigger range, including individual stocks, bonds, and other stuff. Some plans even offer self-directed Roth IRAs, which give you the most options, like real estate and business shares. You choose your investments when you start the plan and can change them later, usually online.

Frequently Asked Questions

What's the drawback of a Roth IRA?

The main downside is you can't deduct your contributions like you can with a traditional IRA or 401(k). So, it won't lower your taxes now.

What are the age requirements to open a Roth IRA?

Usually, you need to be 18 to open a Roth IRA. But if you're younger, an adult can open a custodial Roth IRA for you, and you'll take over when you turn 18.

Can you pick your own choice of investments in a Roth IRA?

Yep, you can pick your own investments, and most brokers give you lots of options. If you're using a robo-advisor, though, it might pick for you.

How to increase Roth IRA funds?

The best way is to invest in things that go up in value and make money, like bonds and dividend stocks.

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