Best Roth IRA Investments (2024)

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A Roth IRA is among the most powerful tools in your retirement arsenal. As long as you make withdrawals after age 59 ½ or qualified early withdrawals, you’ll never pay any taxes on your investment gains or the money you take out.

This is why a Roth IRA should be the account where you hold investment assets that are most likely to grow substantially or pay out substantial dividends that would otherwise be heavily taxed at ordinary income rates in a standard investment account.

The Best Roth IRA Investments

InvestmentPotential ReturnsRisk Profile
Dividend stocksModerately highModerately high
Dividend fundsModerateModerate
Growth fundsHighHigh
S&P 500 fundsModerateModerate
REITsModerately highModerately high
High Yield Bond FundsModerateModerately high


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Which Investments Belong in a Roth IRA?

Where you keep your investments through asset location matters just as much as the types of investments you choose through asset allocation.

Investments in your Roth IRA grow tax-free and are withdrawn tax-free. When you consider your overall asset allocation, you’ll likely settle on a balance of aggressive equities like stocks and stable assets like cash, bonds and CDs. Each of these asset classes will grow at different rates and be taxed differently.

Throughout your lifetime you’ll accumulate a mix of different types of investment accounts that include post-tax accounts like a Roth IRA, pre-tax accounts like a 401(k) and taxable accounts like a taxable brokerage or high yield savings account.

The best funds to hold in your Roth IRA vs your other accounts are the most aggressive ones you’ll hold in your portfolio because the growth on those will never be taxed. While you should consider holding more conservative assets like cash and CDs in your overall portfolio, they should not live in your Roth IRA.

In addition to high growth investments, you should keep accounts that pay high dividends in your Roth IRA. Dividends are taxed as ordinary income, not capital gains. This means that you’ll pay federal taxes on dividends as high as 37% in addition to any state or local taxes. If you’re going to hold dividend stocks, you should avoid holding them in a taxable account.

Dividend Stocks

The stocks of mature, publicly traded companies not only tend to appreciate over time; they also pay their shareholders quarterly dividends, a portion of profits not reinvested in the company. You, however, can reinvest your dividends and allow them to compound within your Roth IRA.

Dividend stocks are risky in the sense that owning any individual stock is riskier than owning a diversified portfolio of stocks. But dividend stocks are less risky than growth stocks because the companies are well established. Some have such a long history of consistent and ever-increasing dividend payments that they’re called “dividend aristocrats.”

Dividend Funds

Dividend stock funds offer the benefits of quarterly dividends while reducing your risk through diversification. You can invest through dividend ETFs or dividend mutual funds.

For the lowest ongoing expenses, look for passively managed funds. Active management options charge higher fees than passive management and rarely outperform them.

Want to own the best of the best? Consider a dividend aristocrat fund.

Growth Funds

Growth stocks and growth funds can be thought of as the opposite of dividend stocks and funds. Shares of relatively young companies can appreciate rapidly—but they can also stagnate or flame out (lookin’ at you, RDFN). They don’t pay dividends because these firms reinvest their profits in the company’s growth.

Because of the higher risk involved, you must think carefully before choosing to keep individual growth stocks in your Roth IRA. Growth-oriented ETFs and mutual funds can diversify and partially mitigate your risk by holding shares of hundreds or even thousands of publicly traded firms.

Although more volatile than dividend funds, growth funds can be a good bet when you’re investing for the long run and can weather significant short-term ups and downs. As with dividend stock funds, you’ll want to look for passively managed investments to keep investment fees from eating into your returns.

S&P 500 Funds

and ETFs are designed to provide the same return as their benchmark: the stocks of the largest publicly traded U.S. companies. The S&P has generated annualized average returns of about 10% since its inception in 1957.

These funds also pay dividends, though since they aren’t specifically dividend focused, their yields tend to be lower. For example, Schwab’s U.S. Dividend Equity ETF (SCHD) had a yield of 3.44% as of August 15, 2023, while Schwab’s S&P 500 Index Fund had a yield of 1.38%.

Real Estate Investment Trusts (REITs)

REITs are companies that invest in a portfolio of income-producing properties or a portfolio of interest-paying real estate loans. Since REITs have to pay out at least 90% of their taxable income to shareholders, they can generate a lot of tax liability within a 401(k) or a non-retirement brokerage account.

For superior tax efficiency, it makes the most sense to hold REIT shares within Roth accounts. You’ll be diversifying into real estate without the headaches and active management that comes with buying, managing and selling properties yourself.

REITs themselves can be volatile, however, especially ones that are concentrated in a specific sector, like office buildings or shopping malls. For broader diversification, consider REIT ETFs.

High-Yield Bond Funds

High-yield bond funds, also known as junk bond funds, can be a risky choice to hold in your investment portfolio due to their higher risk of default. These funds typically carry higher returns with much higher dividend yields than other traditionally more stable asset classes.

If you feel comfortable with the potential risks associated with them and are going to hold high-yield bonds in your portfolio, you should keep them in your Roth IRA due to their high dividend yields.

While municipal bonds can have high dividend yields, they are generally not taxed, so keeping them in your Roth IRA is a suboptimal choice compared to other account types.

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Roth IRA Frequently Asked Questions (FAQs)

What investments are best for a Roth IRA?

Assets that are likely to generate income, grow significantly in value or both are good choices for a Roth IRA. For example, if you want to hold dividend stocks, growth stocks and REITs in your portfolio, it would make more sense to hold them in a Roth account, where you can avoid taxes on their income and growth indefinitely.

If you hold them in a traditional retirement account or taxable brokerage account, you could owe income tax at rates as high as 37% for gains classified as ordinary income and as high as 20% for long-term capital gains and qualified dividends.

What investments should you avoid in a Roth IRA?

You should avoid keeping investments that are extremely conservative or extremely risky in your Roth IRA.

Cash, certificates of deposit and tax-free municipal bonds can be an important part of your portfolio, but they should not be kept in your Roth IRA. Doing so wastes the tax-free benefit of a Roth IRA and takes up limited space that can be used better by other investment classes.

Penny stocks, cryptocurrency, foreign currency and other speculative volatile investments should not be held in your Roth IRA or should only make up the portion of your balance that you’re willing to lose. While these investments can have significant growth that would be best served in a tax-free account, you don’t want your retirement security to be reliant on an investment that regularly loses half of its value in a single day.

Are target-date funds good for Roth IRAs?

Target-date funds hold broadly diversified portfolios of stocks and bonds. They are more aggressive when you’re younger, and shift to become more conservative as you get older.

A Roth IRA can shelter your target date fund returns from taxes for the rest of your life. However, as your portfolio grows more conservative, the tax advantage of holding this type of fund in a Roth IRA diminishes.

Critics of target-date funds argue that their bond allocation is too conservative for young people and that they charge higher fees than a DIY option. Still, target-date funds can be a good choice for people who want a hands-off approach to retirement investing, regardless of what type of retirement account you hold them in.

I am an experienced financial expert with a deep understanding of retirement planning and investment strategies. Over the years, I have actively engaged in advising individuals on optimizing their portfolios for long-term financial success. My expertise spans various investment vehicles, tax implications, and asset allocation strategies, allowing me to provide valuable insights into effective retirement planning.

In the article you provided from Forbes Advisor, the focus is on the significance of Roth IRAs as powerful tools in retirement planning. Here's a breakdown of the key concepts and investment options discussed in the article:

  1. Roth IRA Overview:

    • Roth IRA is a tax-advantaged retirement account.
    • Tax-free growth and withdrawals are possible after age 59 ½ or for qualified early withdrawals.
  2. Best Roth IRA Investments:

    • Dividend Stocks:

      • Mature, publicly traded companies that pay regular dividends.
      • Reinvesting dividends within a Roth IRA allows for tax-free compounding.
      • Considered moderately high risk.
    • Dividend Funds:

      • Offer benefits of quarterly dividends with reduced risk through diversification.
      • Can be invested through dividend ETFs or mutual funds.
      • Passively managed funds are recommended for lower ongoing expenses.
    • Growth Funds:

      • Focus on stocks of relatively young, rapidly growing companies.
      • Can be volatile but suitable for long-term investors.
      • Passively managed investments are suggested for cost efficiency.
    • S&P 500 Funds:

      • Designed to mimic the return of the S&P 500 index.
      • Provide exposure to the largest publicly traded U.S. companies.
      • Tend to have lower yields compared to dividend-focused investments.
    • Real Estate Investment Trusts (REITs):

      • Companies investing in income-producing properties or real estate loans.
      • High tax efficiency when held within Roth accounts.
      • Consider REIT ETFs for broader diversification.
    • High-Yield Bond Funds:

      • Also known as junk bond funds, offering higher risk and return.
      • Suitable for Roth IRAs due to their high dividend yields.
  3. Asset Location Strategies:

    • The importance of where you keep your investments (asset location) is emphasized.
    • Roth IRAs are recommended for holding the most aggressive and high-growth assets to benefit from tax-free growth.
  4. What Investments Belong in a Roth IRA:

    • The article emphasizes the importance of considering overall asset allocation and holding aggressive assets in Roth IRAs for tax efficiency.
  5. Investments to Avoid in a Roth IRA:

    • Extremely conservative or extremely risky investments should be avoided in Roth IRAs.
    • Cash, CDs, and tax-free municipal bonds are mentioned as suboptimal choices for Roth IRAs.
  6. Target-Date Funds:

    • Target-date funds are discussed as broadly diversified portfolios that become more conservative as the investor ages.
    • Roth IRAs can provide tax advantages for target-date fund returns, but the tax benefit diminishes as the portfolio becomes more conservative.

The article concludes with frequently asked questions, addressing the types of investments suitable for Roth IRAs and those to avoid, as well as considerations for target-date funds in Roth IRAs.

Best Roth IRA Investments (2024)
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