Best Roth IRA Investments: A Comprehensive Guide

A Roth IRA is a special type of Individual Retirement Account (IRA) that allows you to contribute post-tax money for retirement, up to an annual limit set by the IRS. Essentially, a Roth IRA allows you to pay income taxes on your contributions now, in exchange for the future benefit of not having to pay income tax on investment gains when you withdraw later (as long as you follow a few rules).

You can contribute up to $6,000 per year into a Roth IRA, with an additional $1,000 catch-up contribution if you’re over age 50, for a total limit of $7,000. Unlike most other types of retirement accounts, Roth IRAs also carry income constraints that may impact how much you can contribute.

Individuals making less than $125,000 and married couples making less than $198,000 combined can make full contributions to a Roth IRA. Once your income exceeds this amount, the allowable contribution limit diminishes, until it’s eliminated altogether once individuals make more than $140,000 and couples make more than $208,000, respectively.

Many people are drawn to a Roth IRA for the tax-free withdrawal benefits the account provides. Often, it can be helpful to contribute to a Roth to supplement other retirement savings accounts like a 401(k) and Traditional IRA, which are taxed when withdrawn.

How you invest in a Roth IRA is just as important as knowing the tax rules and benefits. Here, we explore the best Roth IRA investments so you can optimize this account for your retirement savings.

8 Best Investments For Your Roth IRA

You have many investing options to choose from when opening a Roth IRA. We’ve outlined some of our top choices when it comes to selecting the best investments for a Roth IRA.

Index Funds

One of the most simple ways to invest your Roth IRA is through index funds. These low-cost funds track markets like the S&P 500 (largest US companies) or sectors, such as healthcare to technology.
There are hundreds of different index funds available from many different fund providers, making it easy to assemble a portfolio that matches your risk tolerance and investing preferences.

Exchange-Traded Funds (ETFs)

Similar to index funds, ETFs let you quickly build a portfolio of low-cost and well-diversified funds. While many ETFs are passively managed to track indexes like the Dow Jones, ETFs cover a wide range of investment strategies. These funds continue to grow in popularity, as there are now over 8,000 ETFs to choose from when investing in a Roth IRA.

Mutual Funds

While index funds and ETFs tend to track the market, mutual fund objectives can be built around a range of goals like producing income, attempting to maximize gain, or a number of other purposes.

Professional money managers run mutual funds, aiming to allocate and invest in such a way so that the fund matches an overall investment strategy. There are over 7,000 funds in existence today to choose from, for investing in a Roth IRA. One thing to be aware of is that mutual funds generally have higher expense ratios than ETFs because they are managed by professional money managers.

Dividend Stocks

Using dividend stocks to invest in a Roth IRA portfolio is another option to consider.

Normally, you owe taxes when stocks pay out dividends. However, since a Roth IRA is protected from taxes, you won’t pay taxes on dividends (as long as you follow some rules).

This beneficial tax treatment makes dividend-paying stocks an attractive investment you can make in your Roth IRA portfolio.

Value Stocks

Another Roth IRA investment option is a value stock. These stocks are companies that appear to trade at a lower market price compared to other companies with similar fundamentals. The idea is buying a stock at “bargain prices” with the hope that the price goes up over the long-term.

Crypto

Relatively new to the scene, crypto investing is a quickly growing, yet potentially risky investment option. Due to its nascent status, crypto is best used as a small part of your retirement portfolio, if at all.

There are many different cryptocurrencies you can invest in, but the overall availability greatly depends on which options your Roth IRA provider supports.

REITs

Real Estate Investment Trusts, or REITs, own real estate properties, with a goal of producing income.

Typically, this income would be taxable if paid directly to you. Instead, the tax-free nature of a Roth IRA means you get to enjoy REIT income tax-free. This tax optimization dynamic makes REITs a popular investment for a Roth IRA.

Bonds

Many retirement savers use bonds as part of their Roth IRA investments. A bond issuer makes a commitment to repay principal and interest according to specified terms over time.

Bonds have different risks than stocks, so they’re often paired together in a Roth IRA to provide overall portfolio balance and diversification. Bonds can be purchased individually or, more frequently, through the use of bond ETFs or mutual funds.

Picking Roth IRA Investments

When considering how to invest in a Roth IRA, take time to explore the various investment choices in detail so you can choose an option you’re comfortable with.

Consider your personal goals – for example, how many years you have until retiring and how much risk you’re willing to take when investing. While there are many investment options to choose from, not all of them will align with these factors.

Once you’ve defined your investing objective, you can more easily choose investments that match your preferences. Ultimately, the best Roth IRA investments are ones you are comfortable with and understand.

How to invest in a Roth IRA

First, choose a Roth IRA provider that has your preferred investment choices available and aligns with your overall retirement strategy. You can find many online options that are low cost and easy to set up.
Once you’ve opened and funded a Roth IRA at your chosen provider, you’re ready to choose your investments. Typically, you’ll choose from an investment menu to build your desired portfolio allocation. Then, your portfolio is invested according to your preferences.
Self-directed Roth IRA providers let you adjust your investment strategy at your discretion. Often, it’s best to have long-term Roth IRA investments that match your strategy over time without making too many changes that can pull you off track.
Your Roth IRA account may let you set up recurring contributions so you can make deposits on a monthly basis. Most providers also let you transfer in other retirement accounts that can be combined with your Roth IRA (more on this shortly).
If you’d rather not make the investment choices yourself or value financial advice to go alongside your Roth IRA, consider working with a personal advisor or a digital robo-advisor option.

Roll Your 401(k) Into A Roth IRA

A Roth IRA can be a great tool to help ensure you’re ready for retirement. With a Roth IRA, you have the option to rollover, or transfer, a 401(k) from a previous employer to take advantage of a Roth’s flexibility and tax benefits.

If you’re wondering how to roll over a Roth 401(k) to a Roth IRA, we’ve got you covered. Traditional 401(k)’s are taxed differently than Roth IRAs, so you can learn more about whether you should convert your 401(k) to a Roth IRA and if it makes sense for you.

At Capitalize, we’re on a mission to make the rollover process easier for everyone. We can help manage your rollover from start to finish, giving you peace of mind and providing expert support along the way.