What can you invest in your Roth IRA?

By Sunwook Jin, CFP®, CRPC®, CMFC®

A common phrase heard in the financial industry that clients ask is “What rate is your IRA?”  When we hear that, we know there is some explaining to be done.

A Roth IRA isn’t an investment in itself.  It is a tax advantaged account that can hold several different investments inside of it.  The title of “Roth IRA” allows your money to go in already taxed, grow tax deferred, and come out tax free, provided certain stipulations are met.  Curious if you qualify for a Roth IRA or what investments you should have inside of your Roth IRA?  As always, you should consult a financial professional, but we will list some investments that people typically hold in their Roth IRA.

Savings, Money Markets, and CDs – You tend to see a lot of these investments inside of Roth IRAs held at banks.  They are conservative by nature and most times are held for a short period of time while assets are being transferred to and from accounts.  They typically have lower rates but are less volatile than other options.

Mutual Funds and ETFs – These are a mix of stocks and bonds that are commonly found in Roth IRAs. Based on the objective of the fund you will have a specific mix of stocks, bonds, and cash.  Mutual funds and Exchange Traded Funds are held to give the Roth IRA holder more growth opportunity than the conservative options.  When starting a Roth IRA early, most people will choose either mutual funds or ETFs because of the longer time horizon.

Individual Stocks – Most Roth IRAs also allow the holding of individual stocks, or ownership of a publicly traded company.  Since a stock is just one company, it tends to be a riskier option than a diversified mutual fund or ETF. 

Real Estate or alternative investments – Some investors choose to hold real estate or alternative investments like precious metals, but to do so you will need a Self-Directed Roth IRA.  Not all custodians allow for these to be held so make sure to do your research. 

Regardless of which investment you choose, a Roth IRA can be a great way to put away money with some key tax advantages.  To pick which investment you decide to hold in your Roth IRA, consult a financial professional and discuss what you hope to accomplish.

Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.  Other advisory services offered through Redwood Financial Network, a separate entity.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The Roth IRA offers tax deferral on any earnings in the account.  Withdrawals from the account may be tax free, as long as they are considered qualified.  Limitations and restrictions may apply.  Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.  Future tax laws can change at any time and may impact the benefits of Roth IRAs.  Their tax treatment may change.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

CDs are FDIC Insured to specific limits and offer a fixed rate or return if held to maturity.

Investing in mutual funds involves risk, including possible loss of principal.

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program.  An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.