Depending upon the IRA custodian, there is usually a broad range of investment options available to Roth IRA account holders. These include:
Mutual funds are a solid investment option for many investors. These represent professionally managed accounts. Mutual funds come in a wide range of asset classes. Many mutual funds allow relatively small initial and subsequent investments within an IRA account. Mutual funds offer the opportunity to build a diversified portfolio.
Like mutual funds, Exchange-traded funds (ETFs) come in a wide range of asset classes and investment styles and are professionally managed. But ETFs trade just like individual stocks while the stock exchange is open. This means that investors can use stop orders, limit orders, and similar tools. And this helps ensure they buy or sell the ETF within a certain price range.
Managed funds like ETFs and mutual funds lend themselves very well to a Roth IRA. Capital gains and any distributions stay inside the account and can be reinvested for tax-free growth until the money is withdrawn from the account.
Individual stocks offer another investment option for your Roth IRA account. Stocks provide the growth potential, and the immediate impact of any gains can be sheltered inside of the Roth IRA until funds are withdrawn tax-free in retirement.
- Growth stocks can be an excellent fit for investing inside of a Roth IRA. These are stocks of small or mid-sized companies that seem likely to grow later on. The price appreciation and any resulting capital gains can be sheltered inside of the Roth IRA. The money can be withdrawn tax-free in retirement. You don’t have to pay capital gains tax like when you withdraw money from a traditional IRA account or taxable brokerage account.
- Another option is income-oriented stocks. These shares pay high dividends. Generally, these dividends stay in the Roth IRA with the ability to reinvest them for tax-free growth. So you don’t need to pay the usual tax rate on these dividends.
Bonds offer another great source of potential income for investors. Normally this income is taxed if held in a taxable account. But in a Roth IRA, the interest payments stay in the account and can be used for additional investments free of tax.
The best bonds for a Roth IRA include corporate bonds and other taxable bonds. Municipal bonds, whose income is tax-free, are better held inside of a taxable brokerage account.
Real Estate and Alternative Assets
Real estate provides another investing option for Roth IRAs, and you can invest in real estate either directly or indirectly:
Direct investment in real estate is when the property is directly owned, such as a rental property. This type of investment makes a lot of sense inside of a Roth IRA because real estate is relatively illiquid, which may dovetail with your time horizon until retirement. Also, any income from rental payments and any capital gains generated by the sale of the property remains in the plan to grow tax-free.
But you probably need to find a self-directed IRA provider to have real estate inside of your Roth IRA. That’s because most IRA custodians don’t offer alternative assets like real estate, commodities, or futures.
Real estate investment trusts (REITs) offer indirect investments in real estate. REITs are securities backed by commercial property, residential property, mortgages, or other types of real estate-related investments. An excellent way to invest in a REIT is via a mutual fund or ETF that invests in them. You can manage REITs via services like Streitwise, which offers commercial real estate with low minimum investment requirements.