Best Investments For a Roth IRA

When it comes to retirement savings, a Roth IRA is an excellent tool, particularly for the tax advantages it provides. Luckily, you aren’t without a multitude of investment strategies for your Roth IRA, which include stocks, bonds, and real estate investment trusts (REITs).

As a future account holder, it’s best to understand the rules and requirements of a Roth IRA so you can make the most out of this particular investment vehicle.

Here we’ll discuss the Roth IRA, how it works, and the best investments you can make to successfully build an abundant retirement fund by the time you need it.

7 Best Investments for a Roth IRA

Here are six of the best investments for your Roth IRA:

  1. Individual Stocks
  2. Bonds
  3. ETFs
  4. Mutual Funds
  5. REITs
  6. Real Estate Crowdfunding
  7. Alternative Investments

1. Individual Stocks

Since a Roth IRA is a long-term investment, and one that is held for several decades, individual stocks are the most common and reliable option for investment.

Stocks are often considered a high-yield, high-return investment option. When you purchase shares (or small fractions of ownership of a company), there is an expectation that the company will grow and your shares will become increasingly valuable over time. You can choose to invest in stable, reliable companies or take a risk with companies focused on fast growth.

If you chose to stash your money away in a savings account, it would typically return less than 1% every year. In contrast, individual stocks average an annual return of 10%, which, over 30 years, is a substantial gain.

To begin stock investing, do your due diligence to research and understand different stocks, trading platforms, and brokerage accounts.

Online brokerage accounts allow you to conveniently buy and sell stocks through their website or mobile app, and are usually offered by banks, credit unions, and brokerage firms.

You’ll be best served by those that offer commission-free trades, such as:

If you want to invest in stocks but aren’t comfortable choosing or managing your own investments, you may consider using a robo-advisor.

Robo-advisors are automated investment platforms that manage your portfolio based on your personal preferences.

They are helpful for new investors, those with limited time and knowledge about investing, or those looking for a more hands-off approach to investing.

2. Low-Risk Bonds

Unlike stocks, a bond does not give you a piece of ownership of a company; rather it is a loan given to a company or government body (the borrower) by you (the investor).

The borrower uses the money to fund their operations and agrees to pay back the loan, plus interest later.

A bond is a type of debt security purchased at a fixed amount with a fixed interest rate. While it has limited growth potential, it is considered one of the more safe investments as it is fully paid once the bond term is up.

You earn money from a bond by either holding it until the maturity date while collecting interest or selling it at a higher price to another investor before the maturity date.

When looking into a bond investment, you’ll want to consider the various types of bonds, the interest rate, and how long until it reaches maturity. The safest low-risk bonds are usually those issued by financially stable entities.

Bonds Considered to be the Safest Investments Include:

  • Treasury Bonds: These bonds are issued and fully backed by the U.S. government. They are highly liquid, meaning they can easily be bought and sold. You can invest in a treasury bond directly or through a collection of bonds, such as a mutual fund or exchange-traded funds (ETFs).
  • Investment-Grade (IG) Corporate Bonds: These bonds are issued by large, financially stable companies with good credit ratings. While IG corporate bonds are also liquid, they tend to offer higher yields than treasury bonds.
  • Short-Term Bonds: Short-term bonds mature in one to three years. They are considered to be low-risk, as they have a shorter time horizon and are less sensitive to interest rate changes than long-term bonds.

Keep in mind that bonds still carry a degree of risk, particularly in terms of interest rate fluctuation or if the issuer experiences financial difficulties and cannot pay the principal or interest back to the investor.

Investing in bonds and stocks will diversify your portfolio and spread your risk out over multiple assets. Should the stock market take a dive, your bonds will be unaffected.

3. ETFs

Another way to disperse market volatility in your portfolio is to invest in exchange-traded funds or ETFs.

ETFs are a type of investment vehicle in which you can invest in hundreds (sometimes thousands) of assets, including stocks, bonds, or commodities.

ETFs are traded just like individual stocks so that you can buy and sell them through your brokerage account.

In recent years, ETFs have become one of the most popular ways to invest. Choose the type of index you want to invest in, and select the ETFs that correspond with those industries.

The most common index fund is the S&P 500 Index, which is comprised of 500 leading companies in the U.S. The S&P Index has averaged a 10% return for almost 100 years.

Most ETFs are passively managed to track the performance of an underlying index (as opposed to trying to outperform it through active stock selection). Passive investment management is low-cost—it involves minimal research and analysis and therefore requires fewer resources.

Some ETFs are actively managed by professional portfolio managers who choose assets based on their own analysis; however, this comes at the expense of higher fees.

ETFs offer flexibility, as they can be bought and sold easily through your brokerage account. We recommend M1 Finance as you can use it to purchase ETFs or utilize a professional investor to build your account.

4. Mutual Funds

A mutual fund is a type of investment vehicle that pools money from multiple investors and uses it to build a diversified portfolio of stocks, bonds, or other securities.

Like bonds and ETFs, a benefit of investing in mutual funds is the diversification it brings to your portfolio. Your risk is spread across a wide range of assets. With mutual funds, if one of the assets in the fund performs poorly, it will likely be offset by the other assets inside the fund.

ETFs and mutual funds are closely related, so it’s good to know what sets them apart. While ETFs are usually passively managed, mutual funds are actively managed by a fund manager, which can result in higher fees.

However, you stand to benefit from the knowledge and expertise of professional portfolio managers, which could lead to higher returns. Fund managers try to outperform the market by purchasing and selling stocks (as opposed to an ETF which is tied to an index).

They are similar in that they both charge an expense ratio, or a management fee based on a percentage of your overall investment. However, the fees may vary depending on whether you have an active or passively managed account.

5. REITs

Real estate investment trusts (REITs) are companies that own and operate real estate assets to generate income for their shareholders. They allow investors to own a stake in their properties without having to directly own or manage the property themselves.

The IRS requires that REITs pay 90% of their annual income to shareholders as dividends, which are historically higher than average stock returns. In a Roth IRA, the dividends you earn from a REIT are tax-free, so you can easily reinvest them.

6. Real Estate Crowdfunding

Another real estate option becoming widely popular is real estate crowdfunding. With real estate crowdfunding, you choose the properties you want to invest in, including office buildings, retail spaces, apartment complexes, and development projects.

Online real estate crowdfunding platforms make it easy and convenient to invest. With Fundrise, you can start investing via their mobile app for as little as $10 as a non-accredited investor.

It’s important to note that you can only hold your real estate crowdfunding investments in a self-directed IRA account (SDIRA).

When considering real estate for long-term investing, keep in mind that, like bonds, it moves separately from the stock market.

If stocks are down, conversely, real estate value can be up. It’s always ideal to have diversification like this in your portfolio to spread out potential risk.

7. Alternative Investments

If you’re looking to step away from traditional stock and bond investing, you may want to consider alternative investments.

Alternative Assets Include:

  • Cryptocurrency
  • Hedge Funds
  • Real Estate
  • Commodities (such as precious metals and fine art)

Crypto investments have gained popularity over the past 14 years. However, they are considered quite a risky investment as it is a relatively new asset class and highly volatile.

Cryptocurrency prices can fluctuate significantly, both upwards and downwards, making it nearly impossible to predict how they will perform in the future.

While there are currently over 21,000 types of crypto available, the coin that stands out from the rest is Bitcoin.

Because it is so volatile, only a few financial institutions will allow you to invest in crypto directly in your Roth IRA account. This has led to the development of “Bitcoin IRAs,” or SDIRA in which you invest crypto.

Like real estate crowdfunding, any alternative asset class you pursue must be held in an SDIRA. While alternative investments can be worth it for potentially substantial gains, you will need to research to find a firm that accepts alternative investments.

Choosing the Best Roth IRA Investments

Investing in a Roth IRA is a great way to save for retirement. Roth IRAs offer tax-free withdrawals, more flexible investment options, greater diversification, and the potential for long-term growth.

When choosing investments for your Roth IRA, it’s important to consider your personal finances, risk tolerance, savings goals, and current (and possible future) tax situation.

If you’re weighing investment options to determine what will get you the financial outcome you desire, we recommend exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), stocks, and bonds.

You can also consider other investment strategies such as a money market fund, certificate of deposit (CD), or high-yield savings accounts.

You can maximize your retirement savings and secure your financial future with the right investments.

As always, it’s best to consult a financial advisor before making any big financial decisions.

What Is a Roth IRA?

A Roth IRA (or Roth Individual Retirement Account) is an investment account to help you save for retirement.

It’s unique in that you contribute funds to your retirement plan on an after-tax basis (meaning you’ve already paid taxes on what you want to contribute), unlike a traditional IRA where your contributions are tax-deductible.

Another advantage of a Roth IRA is that your contributions and investment earnings (interest, dividends, or capital gains) grow tax-free. During retirement, when you withdraw from your account, you can do so tax-free, as well (after you turn 59½ ).

Roth IRAs are available through major financial institutions, such as Fidelity, Vanguard, and Charles Schwab. You can opt to open a self-directed Roth IRA, with an online broker or a robo-advisor that manages your investments for you.

Roth IRAs were introduced to the U.S. in 1997 as part of the Tax Relief Act, and named for the late Senator William Roth of Delaware, who sponsored the legislation to create this type of investment account. His efforts paid off. According to the Investment Company Institute, 27.3 million households (about 21% of the population) funded a Roth IRA in 2021.

How Does a Roth IRA Work?

Like any other investment account, you contribute to your Roth IRA, so these funds can continue to grow until you need them.

However, you should be aware of certain eligibility standards, income limits, and contribution limits.

Income Limits

To be eligible for a Roth IRA, you must have earned income. This can be money you’ve made as a W-2 or 1099 employee or from self-employment. You cannot contribute money you’ve earned passively, from child support, untaxed alimony, or unemployment benefits.

In addition, eligibility is based on your income. For single tax filers, the modified adjusted gross income (MAGI) limit for Roth IRA contributions in 2022 is $144,000 and in 2023 is $153,000. If you are filing jointly, then your combined MAGI must be under $214,000 in 2022 or $228,000 in 2023.

Contribution Limits

Finally, there are annual contribution limits, which may change from year to year. The annual contribution limit for individuals under 50 years of age is $6,000 for 2022, and $6,500 in 2023. For those 50 and older, the annual contribution limit is $7,000 for 2022 and $7,500 in 2023.

You can fund your Roth IRA in several ways—either by transferring funds from an existing retirement account or investing directly from your bank account. You can also decide when and how much you contribute to your Roth IRA.

Roth IRA Vs. Traditional IRA

Traditional IRAs and Roth IRAs are similar because they have the same contribution limits and withdrawal age (59 ½), and either account grows tax-free.

Both allow you to opt for a self-directed account to manage your investments, or periodically rebalance your portfolio to manage your risk and financial goals.

Paying Taxes on Your Contributions

On the other hand, there are key differences between the traditional IRA and a Roth IRA—the most significant being how and when you pay taxes on your contributions.

  • Traditional IRA: With a traditional IRA, contributions are tax-deductible, but the withdrawals you make in retirement are taxed as income.
  • Roth IRA: With a Roth IRA, contributions are not tax-deductible, but withdrawals made in retirement are tax-free.

So, when you withdraw money from a traditional IRA after age 59 ½, you will pay income taxes on your earnings, but with a Roth IRA, you will not.

Contributions to Roth IRA vs Traditional IRA

Additionally, while contributions to a Roth IRA are made with after-tax money, with a traditional IRA you can contribute with either pre-tax or after-tax dollars.

Required Minimum Distributions

  • Traditional IRA: Lastly, with a traditional IRA, you must take the Required Minimum Distributions (or RMDs) once you turn 72. RMDs refer to the money you must start taking out of your retirement account and is based on how much you have in your IRA, your age, and your life expectancy.
  • Roth IRA: You do not have to worry about RMDs with a Roth IRA.

When deciding between a traditional or Roth IRA, consider your current and future tax situation and your retirement savings goals.

If you think you will be in a higher tax bracket in retirement, then a Roth IRA may be the better choice, as you won’t pay any taxes on your earnings.

However, a traditional IRA may be the better choice if you want a tax break on your contributions now.

Frequently Asked Questions

When should I open a Roth IRA?

Opening a Roth IRA at a younger age is advisable, as you will more likely meet the income eligibility requirements and have more time to benefit from compound interest.

However, it’s never too late to open a Roth IRA. If you fall within the income limits and have no other sources for retirement savings, the best time to open a Roth IRA is today.

Additionally, if you are over 50, you are eligible to make catch-up contributions of $1,000 annually, which can help you boost your retirement savings even further.

How do I open a Roth IRA?

Before you can open a Roth IRA, you need to confirm that you are eligible for an account. Once eligibility has been determined, you’ll need to choose a provider, such as a bank, credit union, brokerage firm, or robo-advisor.

Fill out an application, providing personal details, including your driver’s license number, Social Security number, beneficiaries, and bank routing number. Once your account is open, you can begin funding it with your choice of investments.

When can I withdraw funds from a Roth IRA?

Contributions to your Roth IRA can be withdrawn at any time without incurring penalties.

However, if you make an early withdrawal (meaning before age 59 ½) of investment earnings, or a withdrawal before your account has been open for at least five years, then you may be subject to taxes and a 10% penalty on your earnings.

Exceptions to this rule include first-time home purchases, college expenses, and birth or adoption expenses.

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