A Roth IRA is an account and not an investment. So if you have deposited money into the account, it still needs to be invested. Common investment options for Roth IRA accounts include stocks, bonds, mutual funds, exchange-traded funds, money market accounts, and certificates of deposit. Some sponsors offer many options while others only have a few. Self-directed Roth IRAs offer the most freedom of investment choice, although some limitations remain. You can choose how you want to invest funds in your Roth IRA when you first open your account. If you want to change how your money is allocated, many Roth IRA custodians allow you to do so online. As you consider how to invest funds in your Roth IRA, a financial advisor can help you identify and select options that fit your individual situation.
Roth IRA Investment Basics
A Roth IRA is a tax-advantaged retirement account that is funded with after-tax contributions. Income from investments made with funds in the account grows tax-free. From the age of 59, you can withdraw money from the account tax-free, provided at least five years have passed since the account was opened.
You open a Roth IRA with a sponsor, usually a brokerage firm or bank, who decides how you can invest funds in the account. Investment options in many Roth IRAs are limited and consist of a limited number of specific money market accounts, mutual funds, exchange-traded funds, index funds, and target-date funds. With a smaller number of accounts, account holders may be able to select individual stocks and bonds. Some plans allow you to choose to work with a robo-advisor or human investment manager to help you make your selection.
Self-directed Roth IRAs allow account holders to select investments from a much larger selection of options. Depending on the specifics of the self-managed account, this could include real estate, business partnerships, gold and other precious metals, and even cryptocurrencies and derivatives such as options.
While self-managed accounts offer more freedom, they also come with additional responsibilities and risks. A sponsor offering a fully self-directed account is required to inform you of the risk, return and other characteristics of the investment options available, but may require that you release the sponsor from any fiduciary duties in order to provide you with investments only that match your goals and capacities.
Some investments, as well as certain types of financial transactions, are not permitted for Roth IRAs. Prohibited investments include collectibles such as antiques, art, stamps and jewelry. You can invest in some gold and other precious metal coins, but not as collectibles. Prohibited transactions include lending money to disqualified persons, which includes you, the account holder, your spouse, children and grandchildren.
Choose your investments
When you set up your Roth IRA account, you will be asked to select investments that you would like to purchase with your contributions. This selection is typically in the form of a percentage. For example, you may choose to put 60% of your contributions into one or more bond index funds and the remaining 40% into stock index funds, with that 40% split equally between small growth stocks and large dividend-paying companies. Future contributions will be allocated to these investments according to the percentages you choose.
Later, you may want to change your investment decisions. For example, you can rebalance your portfolio on an annual or other basis by selling some investments and purchasing others to maintain your desired asset allocation. You can also change your investments as your goals change, such as moving to a more conservative risk profile as your planned retirement date approaches.
Many plans allow you to change your investment decisions online. For example, Roth IRA account holders can log in to their company’s website and select the “Investments” tab. This leads to a screen where you can buy or sell investments or rebalance your existing portfolio.
Bottom line
As a Roth IRA owner, you can decide how the money in your account is invested. The plan determines how many choices are available to you, and many limit the options to a relatively small number of different fund types. Others allow for a broader investment selection, sometimes including individual stocks, bonds and other securities. Some plans offer self-directed Roth IRAs. These allow for the most choices and, depending on the plan, can allow investments in real estate, company shares and other assets. You select investments when you open your plan and can also change your mind later, often using online tools to decide how to invest your Roth IRA funds.
Tips for retirement planning
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Whether you have a self-directed Roth IRA or a more conventional one with limited investment options, a financial advisor can help you determine the investment options that meet your needs and tolerances. SmartAsset’s free tool connects you with up to three verified financial advisors working in your region, and you can have a free discovery call with your matching advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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After entering a few details, including your birth year, income, location, and planned retirement age, SmartAsset’s retirement calculator provides an instant estimate of how much you may need to save to retire comfortably.
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