Don’t tell my wife. But me and Roth IRA Investments — we got a thing going on. After all, it’s the greatest wealth-building tool.
Roth IRAs offer one of the best ways to invest for retirement, and many experts even consider them the best retirement account. This is because you can grow your Roth IRA money tax-free for decades and then withdraw it tax-free in retirement. In other words, the government will never touch your nest egg.
However, a Roth IRA is not an investment in itself. Why? You’re not buying a Roth IRA. Instead, you’re opening a Roth IRA account. Then you choose which investments you will make.
That might sound confusing. That’s why I refer to Roth IRAs as an investment vehicle. You can think of a Roth IRA as a car. It will take you into tax-free land, and you can choose who you will put in that vehicle. Investments are the passengers here.
In any case, making the maximum contribution to this account makes sense. But which passengers are the best for your Roth IRA? Well, the ideal investment is one that can grow substantially over the long term. However, it is unlikely to go down. As such, you should steer clear of highly speculative investments.
So with that in mind, here are six of the best Roth IRA investments.
Looking for long-term growth? If that’s the case, stocks are the most essential asset to hold in a Roth IRA. The reason is that Roth IRAs are typically kept for a long time. I’m talking over a decade here.
Additionally, if your bank assets yield less than 1%, you won’t have a robust retirement fund. With stocks, however, you can get a seven-figure portfolio with regular contributions.
The first step is to learn how to start investing in stocks, which involves learning about stocks, trading, platforms, and other things. I’d also suggest that for individual stocks, you’ll also need a brokerage account.
Brokerage accounts are where you trade stocks and other securities. You can trade stocks online with the most reliable online stockbrokers, and they offer commission-free trading. A couple of examples are E*TRADE and TD Ameritrade.
You could also look into the most popular investment apps if you’re an advanced investor. They offer streamlined, high-speed trading, but with virtually no support or knowledge required.
For investors who aren’t comfortable choosing or managing their own investments, I recommend the leading robo-advisors out there. Generally, the best platforms should include these features;
- Simple setup of your account
- Fees and account minimums are low
- Planned integration of goals
- Investment vehicles with a wide range of options
- Resources and tools for education
- Customer support
Some examples are Betterment, M1 Finance, and Wealthfront.
Bonds and Fixed Income
Bonds refer to a wide variety of financial instruments. Rather than a single bond, there are a variety of interest-bearing securities. Bonds can be classified into five types: Treasury, savings, agency, municipal, and corporate. A bond has its own seller, purpose, buyer, and level of return vs. risk.
In contrast to stocks, which are shares of ownership in a company, bonds are debt securities, so their growth potential is limited. The loan is issued for a fixed amount with a fixed interest rate and is fully repaid upon maturity.
In theory, bonds maintain the same value over time. As a result, they protect the principal and reduce overall portfolio risk.
An investment portfolio composed of 80% or 90% stocks and 20% or 10% bonds, for example, is less volatile than one composed entirely of stocks.
Investing in short-term bonds is one of the most effective ways to keep your money safe. A money market account, a certificate of deposit, and a bond fund are all examples of this type of investment.
Generally, your retirement portfolio shouldn’t be dominated by them. However, a relatively small allocation can help minimize losses during a bear market,
A longer-term investment may provide you with a higher yield than shorter-term bonds. For example, a bond’s interest rate typically increases with the bond’s term.
If you prefer a peer-to-peer lending platform, consider investing part of your Roth IRA in one, such as LendingTree or Peerform. The direct loans you make to consumers will allow you to choose the risk level for each loan. However, you’ll still get better returns than most income investments.
Stocks and bonds aren’t your thing? You can invest in exchange-traded funds. By investing in an underlying index, you’ll find hundreds of securities.
“The creator of an ETF will select several securities to include in the fund. They might center around a particular industry or region or sector, which can appeal to certain investors,” explains Kate Underwoods in a previous Due article.
ETFs can be stocks, bonds, commodities, and currencies. But, unfortunately, the shares of these companies aren’t as widely available as the ones on indexes.
The most common types of ETFs are:
- Market ETFs (these track an index like Nasdaq or S&P 500)
- Bond ETFs
- Commodity ETFs (think gold, corn, oil)
- Style ETFs (tracking an investment style like large-cap value; or small-cap growth)
- Foreign market ETFs
- Inverse ETFs
- Alternative Investment ETFs
As a result of the large number of indexes ETFs can track, they’ve become highly specialized. One of the most common indexes is the S&P 500. Since the 1920s, that fund’s averaged 10% a year. You can also track specific industries, like healthcare tech, or countries, like the European Union, China, or Japan.
Because ETFs are linked to index funds, they’re considered passive. Stocks and bonds don’t have to be chosen by the fund manager. As a result, portfolio turnover and fees are very low.
In recent years, ETFs have become so popular because they’re one of the easiest ways to invest. It’s just a matter of picking the indexes you want to invest in, then selecting the ETFs that represent those indexes.
The difference between ETFs and mutual funds is another key thing to consider. While similar, unlike ETFs, mutual funds are actively managed. Each fund charges an expense ratio, which is a percentage of your investment.
ETFs and mutual funds have much in common, and some are even index-based. But mutual funds are typically actively managed, which makes them stand out from ETFs.
By buying and selling individual securities at opportune times, the fund manager aims to outperform an index.
Similar to ETFs, mutual funds let you invest in stocks and bonds. However, investment funds typically participate in different types of securities. For example, an investment fund might invest in tech stocks, energy companies, emerging growth companies, or big companies. The fund will always choose the best-performing stocks in the sector to beat the market.
Investing in mutual funds means purchasing “units” of the fund. It’s equivalent to buying shares of a business. In exchange for a fee, the fund invests your and other investors’ money based on your risk tolerance. The portfolio grows over time thanks to the company’s investments. Payments called distributions are then received as compensation.
Again, mutual funds are actively traded, so they have fees. Among them are load fees or sales charges incurred when you buy or sell a mutual fund position. Most mutual funds charge 1% to 3% of the amount invested, but there are more and more that don’t.
Although they strive to outperform the market, mutual funds are not necessarily a way to make money quickly. There are lots of them, even most of them, that underperform. At the same time, this investment vehicle is best for active diversification of stocks and bonds,
Real Estate Crowdfunding
As long-term investments, real estate has many benefits. First, since it often moves in a different direction from stocks, it’s an excellent diversification vehicle. Occasionally, stocks decline, and real estate prices rise.
Practically, brick-and-mortar real estate cannot be held in retirement plans. However, there are alternatives available. In recent years, real estate crowdfunding has become increasingly popular.
With real estate crowdfunding, you can choose the specific types of real estate you wish to invest in, unlike with real estate investment trusts. Investing in real estate can take many forms, including shares in an individual property, owning an outright property, or investing in a non-publicly traded real estate investment trust.
Crowdfunding platforms for real estate offer you the chance to invest in commercial real estate, which is one of their most significant advantages. In addition, you can make a lot of money with that real estate investment. Among these are offices, retail spaces, apartment complexes, and more.
It’s becoming increasingly easy to use real estate crowdfunding. It is possible to invest in online real estate crowdfunding platforms for just a few dollars. Your investments will be listed there, and you can select them.
In addition to accredited investor status, Fundrise is one of the most popular real estate crowdfunding platforms.
The downside? Crowdfunding investments in real estate cannot usually be held in IRAs or Roth IRAs. You can, however, use a self-directed IRA (SDIRA) to keep most real estate crowdfunding investments.
Y’all know how much I dig crypto. So, you know that I had to include this investment vehicle.
In an ideal world, cryptocurrency would be ready for Roth IRA accounts by now. But unfortunately, the reality is that it’s becoming increasingly difficult to ignore, especially regarding retirement planning.
Cryptocurrency investing only began in 2009, so it is relatively new. Cryptocurrency returns can be spectacular, but high-risk tolerance is required. Nevertheless, the asset class’s rapid growth and maturity over the past few years are astonishing.
As a result, crypto should be considered one of the riskiest investments. There are wild swings in price, both upwards and downwards, that are characteristic of this relatively new asset class.
Since thousands of different kinds of cryptos are available today, the field is even riskier. Bitcoin, however, stands out in this space without a doubt. So, consider Bitcoin as your first crypto investment. Among all the types of crypto, it’s the most common.
At least for now, investing in crypto for retirement purposes has its limitations. First, few retirement accounts allow you to invest in crypto due to the lack of Roth IRAs.
When it comes to investing in crypto for retirement, you have two basic options. Firstly, you can open a non-retirement account on the best cryptocurrency exchanges for holding crypto. The other option is to use one of the few retirement platforms that actually offer crypto.
Roth IRA accounts with crypto investing are currently offered by only a few mainstream brokerage firms, such as TradeStation. However, it is also possible to open a self-directed IRA (SDIRA) with a trustee, like Bitcoin IRA, which offers a Roth IRA account specializing in crypto and the option to hold gold bullion within it.
Frequently Asked Questions About Roth IRAs
1. What is a Roth IRA?
You can build tax-deferred – and ultimately tax-free – retirement savings through a Roth IRA, one of many retirement savings plans permitted by the IRS.
Even if you have a retirement plan through your employer, you can contribute to a Roth IRA. However, contributions aren’t allowed if you exceed certain income limits. Due to this, Roth IRAs aren’t available to high-income earners. A Roth IRA cannot be contributed to by anyone making more than $140,000 per year or $208,000 for a couple.
There is a trade-off with Roth IRAs, though: contributions are not deductible. These contributions will, however, earn investment income tax-deferred. In addition, withdrawals are tax-free if held until age 59 ½ and you have been in a Roth plan for at least five years.
You can use this strategy to ensure that at least some of your retirement earnings will be tax-free. That strategy will be especially important if you anticipate a high retirement income.
2. What’s the difference between a Roth IRA and a traditional IRA?
There are many similarities between a Roth IRA and a traditional IRA. Contribution limits are identical, and both allow your account to grow tax-deferred. A Roth or traditional IRA can also be opened as a self-directed account and managed by you. By periodically rebalancing your individual retirement account, you can also manage your risks and financial goals.
However, that’s about as similar as they get.
Roth IRA contributions are not tax deductible during the accumulation phase, unlike traditional IRA contributions. In retirement, Roth IRA distributions can be tax-free, whereas traditional IRA withdrawals are taxable.
The Roth IRA differs from the traditional IRA in another critical way. Traditional IRAs’ required minimum distributions (RMDs) are similar to those of virtually every other retirement plan.
A formula based on your age and remaining life expectancy determines when you should start taking distributions at 72. After that, a more significant percentage of your plan must be distributed each year.
Roth IRAs, however, are not subject to RMDs. So, you can literally plan your entire life. This makes Roth IRAs a wise investment choice for those concerned with outliving their money.
3. Can you choose your own investments in a Roth IRA?
Using an online broker, investors can open a Roth IRA and select the investments they want to include.
4. Can you have two Roth IRAs?
Short answer. Yes.
You can have as many Roth IRAs as you like. HOWEVER, Roth IRA contributions are not increased when the number of Roth IRAs increases. Investors with one or more IRAs have the same contribution limit across their IRAs, regardless of how many they have.
5. What investments should you avoid for Roth IRAs?
An IRA CD or putting CDs into an IRA might be a good choice if you want to invest money for retirement in a safe, secure way. You’re also protected up to the coverage limit if you hold FDIC-insured CDs. In addition, CDs are some of the safest investments because they’re predictable.
An IRA CD may offer higher rates than other options regarding what you could earn. However, stocks, exchange-traded funds (ETFs), and other higher-risk investments might provide higher returns. In other words, it’s essential to consider what kind of risk/reward balance you seek.
It is also essential to consider your investment time frame and how comfortable you are with maintaining a portion of your portfolio in CDs for an extended period of time. Take, for instance, a 10-year IRA CD earning a 1.5% annual percentage yield (APY). It doesn’t take long for rates to rise, and new 10-year IRA CDs now offer 2%.
Corporate bonds — even high-yield municipal bonds — are another investment you should avoid when you’re young. Suppose you put that inside a Roth IRA, which already offers tax-free growth. So, you don’t need two vehicles. In short, there’s no point in buying municipal bonds and putting them inside a Roth.
Another investment to avoid is a fixed annuity. Yes. A Roth IRA can contain a fixed annuity. However, here is what I know from personal experience.
Besides opening up a Roth IRA, my mom also purchased a fixed annuity. What made her do that? That’s because her financial advisor was technically an insurance agent. Since they only had their insurance license, they could only sell insurance products. This is why they recommended a fixed annuity to go inside the Roth.
Despite being a sound retirement strategy, fixed annuities only pay about two percent inside Roth IRAs.
Let’s be honest. Variable annuities are too dang expensive. These do, however, provide text protection. Once again, with the Roth, you only need one vehicle.
You should run if someone is trying to sell you a variable annuity. Anyone trying to sell you a variable annuity should not advise people on money or investments, as that’s highway robbery.
There is, of course, the possibility of making money investing in penny stocks. Investing in penny stocks, however, results in greater risk and volatility; you may lose part or all of your investment if you invest in penny stocks.
Generally, investing in penny stocks involves a significantly higher risk than investing in established companies.