Are you on track to meet your retirement goals?
To plan for your financial future, it’s important to consider ways to lower your tax liability while also maintaining an income. One such option is a Roth IRA, a type of individual retirement account that provides an opportunity for tax-free growth.
Whether you are planning to retire in a few years or are looking ahead by a few decades, consider whether a Roth IRA is a beneficial option for you, your family, your finances, and your future.
5 Types of Roth IRA Investments
To get the most out of your Roth IRA, you should invest your contributions and let the returns grow tax-free. You have several options for investing—here are a few of the most popular ways to invest in your Roth IRA.
1. Stock Index Funds
Stock index funds are portfolios of stocks or bonds that track the performance of part of the stock market. With a stock index fund, you create a diversified portfolio that includes many different companies—reducing your risk overall while allowing for the potential of significant gains.
Commonly selected stock index funds include the Standard & Poor (S&P) 500 index fund, which is based on hundreds of top companies on the United States stock market; the Nasdaq 100 index fund, which is similar to the S&P 500 except focused on technology companies; and the Russell 2000, which is focused on small companies.
2. Dividend Stock Funds
Dividend stock funds are another great option for Roth IRA investments. These funds invest in dividend stocks, which hold dividend-paying stocks. The companies regularly pay dividends to shareholders, so you get consistent profits that you can then reinvest into your portfolio.
Through dividend stock funds, you not only receive quarterly (or annually or bi-monthly) dividends but also reduce your risk through diversification.
3. Real Estate Investment Trust (REIT) Funds
Real estate investment trusts (REITs) are companies that manage real estate investments. A REIT fund holds a variety of REITs, just like other stock funds, giving you access to a portfolio of interest-paying real estate loans or income-producing properties. REITs generally pay out high dividends over time and provide you with an opportunity to invest in real estate without the headache of purchasing, managing, and selling a property yourself.
4. Target-Date Funds
Target-date funds are an extremely popular option for retirement accounts, especially for those who are looking for a more hands-off option and don’t want to worry about managing an investment portfolio.
A target-date fund is a broadly diversified portfolio of stocks and bonds. You choose the year you want to access the money (i.e., retire), and the fund automatically adjusts investments over time. When you’re younger, it focuses on riskier, high-return assets (like stocks), and as you get near retirement, it transitions to safer, low-return assets (like bonds). After you deposit the money, the target-date fund takes care of the rest.
5. Bond Funds
Bonds represent loans that investors give to companies or governmental entities. In return for the loan, the government or company agrees to pay interest for a certain amount of time. By investing in a bond fund, you gain access to a diversified portfolio of bonds that allow you to earn a fixed income via interest payments.
While bonds generally have lower returns than stocks, they also tend to be less risky and volatile.
Roth IRA Investment Strategies: Dos & Don’ts
With so many different ways to invest your Roth IRA, how do you decide which direction to take? Let’s take a bird’s eye view to clarify some of the basic dos and don’ts of Roth IRA investing.
What Investments Are Best for a Roth IRA?
Don’t get caught up in the minutiae of Roth IRA investment strategies—the important thing to understand is that you want to focus on investment assets that are most likely to generate income, have a strong chance of growing significantly in value over the long term, and have little risk of going down.
Additionally, the tax advantages of Roth IRA accounts means they are a good place to hold assets that will likely pay out substantial dividends and otherwise be taxed heavily in other types of accounts. The growth on Roth IRA investments will not be taxed, so ordinary income tax rates won’t affect the account.
At the same time, Roth IRAs are retirement accounts—and you need the money you contribute to the account to grow so you can rely on it after you retire.
The best investment strategy for a Roth IRA depends on your risk tolerance, retirement goals, and financial priorities. Talk through your options with a financial expert to see what makes the most sense for your situation.
What Investments Should You Avoid for a Roth IRA?
When it comes to investing your Roth IRA contributions, you should steer clear of investments that are extremely conservative or extremely risky.
Speculative investments—those involving a high risk of loss—gamble with your retirement funds. Risky, volatile investments like cryptocurrency (i.e., Bitcoin), foreign currency, penny stocks, and other unproven assets have the chance of growing significantly, but you don’t want to put your retirement in the hands of investments that are so risky. These assets could lose half their value in a day, and while all investments involve some level of risk, there’s no reason to throw your retirement account into such uncertainty.
Investments like cash, certificates of deposit (CDs), and tax-free municipal bonds are also poor choices for a Roth IRA. Cash loses its value over time due to inflation, and municipal bonds are already tax advantaged, so there’s no need to waste the tax benefits of a Roth IRA on them. Keep these investment assets in your larger investment portfolio but not in your Roth IRA.
Try to maintain a balance between reasonable risk and long-term returns with tried-and-true methods of retirement wealth accumulation.
6 Best Roth IRA Investment Strategies
Take full advantage of your retirement account by following these tried-and-true Roth IRA investment strategies and tips. However, keep in mind that your situations—and your finances—are unique. For personalized recommendations, schedule a consultation with an expert in financial planning services.
1. Start Early
When you contribute money to a Roth IRA and invest those contributions, the returns are then reinvested into the account—generating more money, which is then reinvested, and so on. This snowball effect means that the longer amount of time contributions spend in your Roth IRA, the larger your balance will get.
That’s why it’s important to start contributing to a Roth IRA account as early as you can. And don’t worry if you can’t hit the annual maximum contribution limit, because even small amounts can make a big difference over time.
2. Max Out Your Roth IRA
If you can, max out your Roth IRA every year. Contributing as much as you can to the account means you will gain the full benefits of the account.
Remember that contributions for the year before can be made up until the tax-filing deadline, which is generally April 15, giving you an extra four-and-a-half months to contribute to your Roth IRA. (Tax extension deadlines do not impact this contribution deadline.)
3. Time Your Contributions
What’s the best time of year to contribute to your Roth IRA?
Some people wait until tax time and pay the prior year’s contributions before the April 15 deadline. Others contribute a little each month. However, to get the full benefits of compounding interest, you could contribute the full amount as early as possible in the calendar year. By making your Roth IRA contribution at the start of the year, your money compounds for a longer period and has more time to grow.
4. Name a Beneficiary
It’s essential to name a beneficiary of your Roth IRA. Otherwise, if you pass away, the proceeds of your account may be vulnerable to creditors or probate fees before being passed to your heirs, who may lose tax benefits—wasting your hard work and investment strategy over the years.
Adding a beneficiary takes care of these problems and protects the inheritors of your estate.
Individuals or non-person entities can be named as a beneficiary of your Roth IRA account. In many cases, people name their spouse, children, grandchildren, or other family members as beneficiaries. Other options include a charity or trust.
5. Diversify Your Investments
When it comes to investing your Roth IRA contributions, one of the best ways to minimize your risk is to invest in a variety of different industries or asset classes (stocks, target-date funds, bonds, etc.). With a range of investments, you avoid the danger of “putting all your eggs in one basket.” In other words, if one investment does poorly, you have others that will ideally pick up the slack.
6. Get Investment Advice from a Financial Services Expert
If you’re new to the world of investing, you may feel overwhelmed or lost. There’s a lot of pressure to make the right choices and follow the best Roth IRA investment strategies, and it’s easy to get nervous.
Fortunately, you don’t have to navigate your Roth IRA alone. Talk to a trusted financial service specialist who can provide specific guidance and recommendations based on your financial situation, retirement goals, and level of risk tolerance. Together, you can design an investment strategy for your Roth IRA that will allow you to explore tax-free growth opportunities and accumulate wealth for retirement.
Get Started with Roth IRA Investment Strategies Today
At Melton McFadden, our financial services can help you develop a retirement plan that protects your finances, family, and peace of mind. We are ready to guide you through the process of choosing a suitable Roth IRA account, tailoring investments to meet your financial goals, and creating a solution that works best for you and your dependents.
With Melton McFadden, you’re not just choosing a Roth IRA—you’re partnering with a team committed to realizing your retirement dreams. We provide the tools, knowledge, and confidence you need to navigate your financial future.
Whether you are looking to sign up for a new Roth IRA or want to discuss the best retirement investment strategies, we’re here for you every step of the way.
Contact us today or request a free quote to get started.