You’re interested in opening a Roth IRA, but you’re still learning more about the process. One critical question you must answer before you pick a firm for your IRA:  Which types of investments do you want for your Roth IRA?

This is a two-sided question. You need to know:

  1. Which investments you want to put your money into
  2. Which investments are available through the company you’re considering

We’ll start with the first issue.

Which Investments Should I Use in My Roth IRA?

It all depends on your financial plans and goals. The most common investments you’ll see are:

  • Stock Mutual Funds. You’ll see index funds and actively managed funds.
  • Bond Mutual Funds. These also come in index and actively managed varieties
  • Mixed-Asset Funds. As you might expect, these funds (also called multi-asset funds) are a mix of stock and bond holdings and may also hold cash. You’ll see some actively managed funds in this category, but you’ll also see some real winners that are target retirement funds. These target retirement funds automatically adjust the balance of stock and bond holdings as you get closer to the date listed on the fund.
  • Certificates of Deposit. Your conservative CDs are also an option to hold in your Roth IRA.
  • Exchange-Traded Fund (ETFs). ETFs are similar to mutual funds in that they usually track an index. They usually cost less on an annual basis. The only catch is they usually carry a charge to buy and sell them on the stock exchange like stocks.
  • Individual Stocks. Most Roth IRA companies will let you buy individual stocks to augment your portfolio’s performance.
  • Real Estate. Investors can also choose to hold real estate investments in their Roth IRA. For this, you may need a self-directed Roth IRA.
  • Exotic Investments. Investors who elect to hold a self-directed Roth IRA may decide to put some of their IRA money into exotic investments.

I’m a fan of most of these investment options. However, I don’t think many people are intelligent enough to pick individual stocks—myself included. For now, I’m personally sticking with target-date retirement funds with a very low annual expenses (these funds are geared to change the investment mix to become more conservative as my retirement date approaches). Once my portfolio gets to be enormous I may look into finer adjustments with specific index funds.

What Are My Roth IRA Investment Choices?

You can want all of the investments listed above—including some exotic investments—but you won’t have access to them unless your Roth IRA holder offers those investments. In fact, what you’ll be offered a lot from the company where you’re opening your Roth are its own investment products. This makes sense—you’ve got an account there. It wants to make sure it is the company benefiting from the annual expense and transaction fees you pay for your investments. However, this isn’t best for you.

If you open up an account at Bank A, and Bank A only offers its own products, you’ll likely end up paying higher fees. If you can only use Bank A products you won’t be able to take advantage of the fact that Mutual Fund Companies A and B offer similar products for a cheaper price. You’ll be stuck with the higher costs. (And those costs will kill your investment return over time.)

Picking the firm that offers the best products for your financial goals is key. Make sure you identify which investments you want before you select a bank or other Roth IRA firm. The company’s available investments should match what you’re targeting. If you’ve already started a Roth IRA, consider switching companies if you can’t get the investments you want there.

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