IRAs allow you to hold shares of individual stocks and ETFs that focus on growth. According to traditional investing wisdom, younger investors can allocate a greater percentage of their portfolio towards such funds since retirement may still be years away.
A successful Roth IRA portfolio should contain an assortment of investments, such as ETFs and mutual funds that track market indexes.
Income Stocks
Roth IRAs provide you with a means of creating income by shielding investments from taxes upon withdrawal, making them an excellent way to generate passive income by sheltering investments from tax. That makes them ideal places for holding municipal bonds, real estate investment trusts (REITs) and companies offering dividends that won’t usually be taxed at regular income rates.
Income stocks provide shareholders with reliable funds they can reinvest to compound their returns over time, making them attractive long-term holdings within a Roth IRA, particularly for investors near retirement.
For an investment with both growth potential and income potential, try REIT funds such as SCHH that offer market-weighted portfolios of U.S. REITs with an impressive 4.1% yield at just 0.07 expense ratio. VWELX value stock funds also aim to deliver above-average dividend yields by selecting stocks at relative bargain prices relative to overall market prices.
Growth Stocks
Growth stocks are companies expected to experience substantial revenue increases in the future, leading to high share prices. Since they typically do not pay dividends but instead reinvest all profits back into fueling growth and increasing market share, these riskier securities may lose value over time.
Value stock funds offer investors relative bargains by featuring stocks priced below their true worth, giving investors opportunities for profit as their true values become evident to the stock market. Value stocks also tend to be less volatile and will help preserve wealth over the long term, making these funds ideal for your Roth IRA account.
Once you’ve selected investments, consult with a financial advisor to create and implement an investment plan tailored specifically to your time horizon, risk preferences and financial circumstances. Or use an online fiduciary platform like Fiduciale that matches you with vetted investment advisors that can offer advice and guidance about your IRA plan.
Core Funds
No matter which stocks you invest in, it is always advisable to diversify your portfolio with core funds in order to minimize risk and ensure a steady rate of growth for your portfolio.
Hold dividend-paying stocks in your Roth IRA because the income will not be subject to taxation, unlike when held in a traditional account. Furthermore, any capital gains they produce can be protected.
Target-date funds provide an automated approach that automatically allocates investments based on your retirement year and risk tolerance. NerdWallet writers are subject matter experts with access to both primary and secondary sources who produce high-quality content that has been fact checked for accuracy. We only include reliable financial products and services in our rankings/reviews that have all their fees disclosed, including any commission earned if purchased via links found on the site.
Bonds
Typically, it makes financial sense to invest in high-yield investments with an IRA because federal taxes apply on any distributions or realized capital gains realized within. This includes income funds that invest in mortgage-backed securities, junk bonds and preferred shares as well as REITs that pay out high dividends. On the other hand, cash equivalent investments (such as money market mutual funds or certificates of deposit) or low yielding bond portfolios like municipal bonds may not make as much sense given federal taxes apply on any distributions or capital gains realized within.
Roth IRA investors need to strike a delicate balance between stability and growth over time when selecting investments for their Roth IRAs. Investors can do this by diversifying across three main asset classes: stocks, bonds and core funds via ETFs – similar to mutual funds but much cheaper and with greater diversification capabilities than their mutual fund counterparts – with BKAG as the ideal stock ETF and SPDW as ideal bond ETFs; for core funds consider VBKR.
