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5 best Roth IRA investments

Consider these diverse, long-term investment ideas to grow your Roth IRA.

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.

5 best Roth IRA investments

  1. Index funds
  2. Bond funds
  3. Target-date mutual funds
  4. Dividend stocks
  5. Real estate investment trusts

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.”

1. Index funds

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.

A photo of Chris Urban

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

Pros
  • Diversification. Index funds spread their investments across many different companies and sectors, providing instant diversification to your portfolio.
  • Low maintenance. Owning passively managed index funds means you don’t have to do the time-consuming and tricky work of buying and selling individual assets to maximize your returns.
  • Lower cost. Index funds typically have lower management costs than actively managed funds.
  • Require less market knowledge. Compared to picking individual stocks, it’s relatively easy to pick index funds as opposed to picking individual stocks.
Cons
  • No downside protection. Index funds are less risky than individual stocks, but you can still lose money in a market downturn.
  • Lower earning potential. Index funds are designed to match the index’s performance, not beat it.
  • No control over holdings. You have no say over which assets an index fund holds, so you can’t sell off underperforming stocks or leave out companies that don’t align with your financial goals or social beliefs.

2. Bond funds

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.

Pros
  • Diversification. Bond funds expose investors to a broad array of securities, thereby lessening the impact of lesser-performing individual bonds.
  • Professionally managed. It’s difficult for the average investor to pick and choose the “best” bonds. However, investment professionals manage bond funds with the technology and skills to combine the ideal mix of securities, reducing your risk and optimizing your returns.
  • Regular returns. Most bond funds produce a regular monthly income stream. With a Roth IRA, you can opt to have that income automatically reinvested to benefit from compounding.
Cons
  • Management fees. Fees from bond funds that are actively traded can cut into your gains.
  • Interest rate uncertainty. Bond prices typically rise as interest rates decline, and vice versa. When planning to buy or rebalance your portfolio, consider that bond funds are usually less profitable when interest rates are high.
  • Less customization. Like index funds, you don’t have control over the individual securities included in the bond fund.

3. Target-date mutual funds

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.

Pros
  • Diversification. Target-date mutual funds hold a mix of stocks, bonds and other investments, so your risk is spread out over diverse assets.
  • Simplicity. TDFs are essentially designed for hands-off investors who don’t have the expertise or desire to manage an elaborate portfolio.
  • Little need for rebalancing. Target-date funds adjust automatically as your target date nears, so you don’t need to rebalance your portfolio manually.
Cons
  • Potentially higher fees. Depending on the fund you choose, you could pay higher management fees than if you put the portfolio together.
  • May be too conservative. Some critics of TDFs believe that, while they may do well in the early years, they might grow too conservative too soon.
  • No customization. The asset mix is pre-chosen, which may not be ideal for investors who would like at least some control over their investment portfolio.

4. Dividend stocks

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:

Pros
  • Potentially higher earnings. Stocks that pay dividends have some of the highest earning potential.
  • Regular income stream. Dividend-paying stocks often pay dividends on a quarterly or annual basis.
  • More stable companies. In general, companies that pay dividends to shareholders tend to be more stable and well-established than firms that don’t share profits with their investors.
Cons
  • Lower growth potential. Because dividend stocks don’t reinvest as much of their earnings, this can potentially lower capital appreciation compared to high-growth, non-dividend-paying stocks.
  • Tax implications. Dividends are typically taxed as income, which can reduce the overall return for investors, especially those in higher tax brackets.
  • Market risk. Like all stocks, dividend stocks are still subject to market volatility and economic downturns, which can affect both the stock price and the company’s ability to maintain dividend payments.

5. Real estate investment trusts

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.

Pros
  • Diversification. REITs are a separate asset class that offer exposure to real estate, which can add diversity to a Roth IRA.
  • Tax implications make it ideal for Roth IRA. Dividends from REITs are taxed as regular income, but when you have a Roth IRA, those earnings can be reinvested and grow tax-free.
  • Highly liquid. Public REITs are bought and sold just like stocks.
Cons
  • Market volatility. Interest rate fluctuations, demand and real estate trends can negatively impact the value of REITs, making them somewhat volatile investments at times.
  • Little control. You can’t customize the assets a REIT holds.
  • Potentially high fees. Private REITs may charge front-end loads or sales commissions, management fees, performance fees and sales redemption fees.

Most investments are allowed in a Roth IRA

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.

Tips for maximizing your Roth IRA investments

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.

  • Diversify your portfolio. Consider a mix of assets within your Roth IRA to spread risk. Exact allocation will vary based on your situation, but this may mean holding both lower- and higher-risk investments.
  • Reinvest dividends and capital gains. Opt to have Roth IRA dividends and capital gains reinvested automatically.
  • Regularly review and rebalance your portfolio. A balanced portfolio is meant to minimize volatility and maximize returns. Regularly assess your asset mix and readjust your portfolio to ensure it’s aligned with your financial goals and risk tolerance.
  • Consider tax implications when choosing investments. Because your Roth IRA investments grow tax-free and you don’t pay taxes on withdrawals, “tax-efficient” investments might not be a good idea for an IRA. For example, tax-managed funds, which may sacrifice performance to reduce taxable gains, don’t make sense in an IRA since an IRA is already tax-efficient.
A photo of Stephen Kates

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

Considerations before investing in a Roth IRA

There are a few things you should be aware of and consider before investing in a Roth IRA.

Contribution limits

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.

Income limits

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.

Investment time horizon

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.

Bottom line

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.

Frequently asked questions

What should I invest in with my Roth IRA?

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.”

Can you have multiple IRAs?

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.

What investments should you avoid in a Roth IRA?

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.

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