Best investments for a Roth IRA (2024)

Key points

• Roth IRAs are funded with after-tax dollars and provide tax-free withdrawals in retirement.
• Stocks, bonds, mutual funds and other securities can be held in a Roth IRA.
• The best investments for a Roth IRA typically have low fees and offer diversification.

If you want to minimize how much you pay Uncle Sam in retirement, a Roth IRA may be the right savings vehicle for you. Contributions to these accounts aren’t tax-deductible, but money grows tax-free and can be withdrawn tax-free after age 59½.

To make the most of these accounts in 2024, you must select the right investments. There is no one-size-fits all option, but look for assets that offer diversification, feature low fees and provide the right level of risk.

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How does a Roth IRA work?

The Roth IRA is a popular retirement account that allows you to enjoy tax-free investment growth and tax-free withdrawals once you reach 59½ and the account has been open for five years.

“Roth simply means that you will pay tax now and receive the … benefit of not paying taxes later,” said Brennen Schlagbaum, a certified public accountant and the founder of Budgetdog, which offers financial courses and advice.

Roth IRAs differ from traditional IRAs and 401(k)s because of the timing of the tax advantage. With a traditional account, you get a tax deduction for your contributions but pay income taxes on your withdrawals during retirement. With a Roth account, you pay taxes when you contribute but not when you take qualified withdrawals.

Deciding whether a Roth IRA is right for you primarily comes down to your tax liability today versus your tax liability during retirement.

“A general rule of thumb is to select Roth if you believe you will have higher taxes in the future and select traditional if you think taxes are higher now,” Schlagbaum said.

One way to determine whether a Roth IRA makes sense for you is based on your current versus future earnings. People early in their careers who expect their income to increase might want to take advantage of the Roth IRA while their income is lower. On the other hand, high earners may decide a Roth IRA isn’t right for them since it doesn’t allow them to save on taxes today.

The other thing to consider is whether tax rates overall will increase.

“One unknown variable is that we do not know future tax rates. However, perspective is key,” Schlagbaum said. “We currently have historically low tax rates.”

Best investments for a Roth IRA

While it’s natural to want to find the best investments for your Roth IRA, there is no list of funds that will be right for everyone.

“There is no such thing as a ‘best investment,’” Schlagbaum said. “Everyone’s situation is vastly different, and there will always be a nuanced way of looking at finance.”

But for many people, index funds and exchange-traded funds are smart options. They offer low investment fees, portfolio diversification and a proven track record.

U.S. stock index funds

U.S. stock index funds are some of the best investments for a Roth IRA. are popular choices.

“By doing the S&P, you’re getting a piece of all 500 companies (in the index),” said Myles Clements, a certified financial planner and financial advisor with Fort Pitt Capital Group. If some companies in the index have a bad year, their losses can be offset by other firms’ gains.

The benefit of a stock index fund is you have a well-diversified portfolio that tracks the performance of a segment of the stock market. Because of their passive nature, these funds also tend to have low investment fees.

There are several U.S. stock indexes, each following a different group of public companies. For instance, while the S&P 500 tracks the performance of large firms, the Russell 2000 is focused on small companies. When you invest in a total stock market index fund, you gain exposure to every part of the market, including large-cap, mid-cap and small-cap stocks.

U.S. bond index funds

U.S. bond index funds can help mitigate your investment risk. While they generally have lower returns than stocks, they also have less volatility, meaning they typically perform better during economic downturns. But that is not always the case. The bond market plummeted in 2022 and has not performed well in the recent high interest rate environment.

Unlike stocks, which generate a return through capital appreciation, bonds allow you to earn a fixed income in the form of interest payments. That interest can be reinvested to help your portfolio grow even more.

Global stock index funds

U.S. stocks and bonds make up the majority of most investors’ portfolios. But you can diversify your portfolio even more by investing in global stock index funds. These funds include stocks from around the world, allowing you to gain exposure to markets and companies from other countries.

Dividend stock funds

Your Roth IRA investments grow tax-free and can be withdrawn tax-free in retirement. As a result, it can be beneficial to use this account for income-producing assets that might otherwise increase your tax burden.

One example of an income-producing asset to add to your Roth IRA portfolio is a dividend stock fund. These funds specifically invest in dividend stocks, which provide consistent distributions to their shareholders. You can then reinvest the dividends to grow your portfolio even more.

REIT funds

In most cases, you can’t invest directly in real estate using your Roth IRA. That is possible only if you have a self-directed IRA, which is a specialized account that can come with more risk and fees. But you can still gain exposure to real estate by investing in real estate investment trust funds.

A REIT is a company that owns and operates real estate investments. You get many of the benefits of owning real estate without some of the downsides, such as the time commitment required.

Like other stock funds, a REIT fund holds a variety of REITs, which means you can gain exposure to many companies with a single investment.

Target-date funds

Target-date funds are among the most popular investments for retirement accounts, and it’s easy to see why. These mutual funds, also known as life-cycle funds, gradually adjust their asset allocation over time as you near retirement.

The benefit of target-date funds is they can give you a fully diversified portfolio with a single investment. And because the fund is tied to your retirement year and adjusts over time, you don’t have to worry about making changes to your portfolio yourself.

Not everyone is a fan of target-date funds, though. “I wouldn’t recommend it,” Clements said. “It becomes a portfolio that is on autopilot.” While that’s convenient, a customized portfolio that changes over time to match your financial needs and risk tolerance may perform better.

Investment overview

As you can see below, Roth IRA investments vary in their return potential and risk profile.

Things to consider

As you evaluate your Roth IRA investment options, be sure to keep the following factors in mind.

Balance risk with returns

When it comes to your retirement fund, prioritizing stability over speculation may seem like a top priority. But you also need your investments to grow over time.

“If someone is 20 years old, they probably shouldn’t be buying bonds in an IRA,” Clements said. While bonds are generally a safe and stable investment, a young adult has decades before retirement and can afford to take some risk in order to achieve higher returns.

Still, some investments are probably best avoided by most people. For instance, while cryptocurrencies like bitcoin offer the potential for high returns, their volatility makes them risky for retirement accounts. Instead, focus on tried-and-true investment methods, such as diversified portfolios of stocks or mutual funds, which offer steady, reliable growth over time.

Factor in tax implications

Understanding the tax implications of your investments is key. Some investments, such as municipal bonds, are generally exempt from federal taxes, rendering no additional benefit when housed in a Roth IRA. But investments like REITs, which yield generous dividends that aren’t sheltered from taxes, could greatly benefit from a Roth IRA’s tax-free growth.

Leverage your retirement timeline

Consider your trading activity and investment timeline. In a Roth IRA, active traders won’t need to report capital gains taxes each year, and distributions during retirement are tax-free. Also, the longer your investment horizon, the higher the potential returns, which could help you save on tax dollars when you eventually make withdrawals.

Balancing your investment decisions with these considerations can lead to a more secure retirement.

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