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Research your choices, then make sure your provider offers them

Quick Summary

  • A Roth IRA is not an investment in itself. It’s a tax-advantaged account where you hold investments.
  • You can pick the investments you hold in a Roth IRA.
  • Mutual funds, stocks, and bonds are common investments, but there are other choices.

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

Fast Fact: As of year-end 2018, 17.6% of U.S. households owned a Roth IRA. 

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

  1. What investments you want to put your money into.
  2. What investments a potential Roth IRA provider offers?

We’ll start with the first issue.

What Investments Should I Hold 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. Growth stock mutual funds can be ideal for many investors.
  • 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 they may also hold cash. There are some actively managed funds in this category. But you’ll also see some real winners that are target retirement funds (also known as target-date 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. But keep in mind that cash-equivalents like CDs don’t generate much interest. That means you’re “taking up space” in your Roth with an investment that won’t really benefit from tax-free growth.
  • 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. Of course, a lot of brokers offer commission-free trading on a select universe of ETFs, which means you can trade for free.
  • Individual Stocks. Most Roth IRA companies let you buy individual stocks to augment your portfolio’s performance. Growth stocks and stocks that pay high dividends are especially popular.
  • Real Estate. Investors can also choose to hold real estate investments in their Roth IRA. For this, you’ll 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 like gold and other precious metals. But be aware that you may need a self-directed Roth IRA, and there may be special fees and tax consequences.

Target-Date Funds for Roth IRAs

For many people, target-date funds are the easiest Roth IRA investment choice. As the name suggests, you choose your target retirement year, such as 2050.

After that, the fund is automatically rebalanced as you get older. It moves from high risk, high reward investments to low risk, low reward investments as you approach retirement. As an added bonus, target-date funds usually offer very low annual expenses. And they offer diversification within a single investment.

This can be a set-it-and-forget-it approach to Roth IRA investing. And if you’re the hands-off type, that’s great. But keep in mind, you might be leaving some money on the table if you stick solely with target-date funds. Many investors underestimate how long they’ll live in retirement. That means the fund could switch to low risk, low reward investments too early.

What Investments Does My Roth IRA Provider Offer?

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 provider offers those investments. In fact, the company where you open a Roth IRA will often push its own investment products.

This makes sense—you’ve got an account there. The company wants to make sure it benefits from the annual expense and transaction fees you pay for your investments. However, this isn’t always best for you. It’s critical that you research costs before choosing your investments. Those costs can erode your investment returns over time. And even small differences in costs can lead to big differences in your nest egg years from now.

Picking the firm that offers the best products for your financial goals is key. Make sure you identify the 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 they don’t offer the investments you want.

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