Making Investments in a Roth IRA

This guide explains how to invest in stocks, bonds, and ETFs within a Roth IRA to help grow your retirement savings. You’ll also learn why diversification is essential for building a strong portfolio and how to make the most of your Roth IRA.

A Roth IRA is designed to allow investors to capitalize on long-term, tax-free growth without taxation on withdrawals. When thinking of a Roth IRA, consider first your employers’ 401(k) plan, your employer may match your contributions up to a certain point. You may be leaving money on the table by not investigating this possibility for your retirement plan.

Key Takeaways

• Roth IRA investments can include stocks, bonds, mutual funds, ETFs, and alternative assets, requiring careful selection based on individual risk tolerance and financial goals.
• Diversification across asset classes, sectors, and regions can help mitigate risks in a Roth IRA by aiming to balance performance as economic cycles change, although it does not guarantee consistent returns.
• Minimizing fees through low-cost investment options and regular monitoring of the portfolio may improve overall returns and alignment with financial goals in a Roth IRA.

Roth IRA Investment Options

When it comes to investing in a Roth IRA, the choices are varied, catering to different risk appetites and financial goals. You can include investments such as stocks, bonds, mutual funds, ETFs, as well as more unconventional options like private market companies and alternative investments. According to Fidelity, the key to making the most of your Roth IRA is selecting a combination of investments that aligns with your personal financial objectives, time horizon, and risk tolerance. Each type of investment serves a specific purpose: stocks offer growth potential, bonds tend to provide relative stability, mutual funds and ETFs facilitate diversification, and private market companies or alternative investments can offer unique opportunities, depending on your comfort with risk.¹

Related: Private Markets vs Public Markets: What’s the Difference?

Stocks

Stocks are a common investment choice within a Roth IRA. You can buy individual stocks of publicly traded companies directly in your account. Investors often choose to hold a variety of stocks across different sectors and industries, tailoring their selections to their financial goals, risk tolerance, and investment strategy. Roth IRAs allow you to build and manage your stock portfolio according to your personal preferences.² Stocks, whether you’re experienced or new to investing, may unlock long-term growth in your Roth IRA.

Bonds

There are many types of bonds available to investors. Traditionally bonds are often seen as the key component of an investment portfolio for their stability and tax benefits.³ They are designed to provide fixed income, which may help offset the volatility of stocks. Certain bonds may add stability to your Roth IRA, especially during market downturns. Including bonds tends to create a counterbalance to riskier assets, mitigating overall portfolio risk.

Bonds can provide income that may supplement your Roth IRA’s growth potential; however, bonds can experience losses, and their income is not guaranteed, though they are traditionally considered an important component of a diversified retirement portfolio. Government bonds offer safety, while corporate bonds offer the potential for higher yields.

Mutual Funds

Mutual funds are a go-to choice for many Roth IRA investors due to their typically inherent diversification and professional management. Mutual funds pool resources from multiple investors to create a diversified portfolio managed by financial professionals, allowing investors to access growth potential without requiring daily hands-on management. Also, mutual funds often charge lower fees, which may boost investors’ realized returns.⁴

Exchange-Traded Funds (ETFs)

ETFs, or Exchange-Traded Funds, are popular among Roth IRA investors for their low fees and flexibility. Unlike mutual funds which are purchased at their net asset value NAV at the end of the day, ETFs are traded on stock exchanges, allowing for the ability to buy and sell throughout the trading day.⁵ This makes ETFs an attractive option for those looking to diversify their Roth IRA with fewer expenses.

ETFs’ low fees make them a cost-effective diversification tool. Broad market index funds or sector-specific ETFs in your Roth IRA may help build a diversified portfolio with solid return potential.^{6 7}

Alternative Investments

For those who are risk tolerant and looking to explore beyond traditional investments, self-directed Roth IRAs offer the freedom to invest in a broader range of options, including private market companies and alternative investments like cryptocurrencies.⁸ These investments can provide growth opportunities, albeit with higher risks.⁹

However, investments within a Roth IRA, especially alternative investments, require careful consideration and due diligence to determine if they align with your retirement strategy.

Diversifying Your Roth IRA Portfolio

Diversification has historically been regarded as an important part of an investment strategy. Spreading investments across asset classes, sectors, and regions can help mitigate risk; however, diversification does not eliminate the possibility of loss or guarantee investment success.

Sector diversification is the idea of reducing unsystematic risks by investing in different industries. Geographic diversification spreads investments across regions, hedging against country-specific risks.

Asset diversification may involve combining various investment types such as stocks, bonds, real estate, and alternative investments. The underlying principle is that different asset classes typically respond differently to the same market conditions; thus, when one investment is struggling, another may perform well, helping to balance the overall portfolio risk. However, diversification does not guarantee protection against significant losses, as declines in one asset class can still impact overall portfolio performance.

Minimize Fees and Costs in a Roth IRA

To maximize returns in your Roth IRA, it’s important to minimize the various fees and costs associated with investing. These fees may include account maintenance charges, transaction fees, expense ratios, advisory or robo-advisory fees, sales charges, and commissions. Many providers have reduced or eliminated certain fees, such as annual account maintenance fees. Selecting investment options with lower overall fees—such as low-cost index funds or no-load mutual funds—can help you keep more of your money invested, potentially enhancing your returns in the long run.¹⁰

Online Brokers vs Robo-Advisors for Roth IRA Investments

Choosing between online brokers and robo-advisors depends on your investment style. Online brokers offer direct access to various investment options for hands-on investors who prefer active portfolio management.

Robo-advisors use algorithms to automate portfolio management, aligning investments with your risk tolerance and financial goals. Features like automated rebalancing and lower costs make them appealing to new investors or those seeking a hands-off approach.

Many online brokers now provide robo-advisory services, blending traditional and automated investment options.¹¹

Automating Your Roth IRA Contributions

While many investors automate contributions through an employer-sponsored 401(k), you can also automate your Roth IRA contributions. Automating these contributions streamlines your savings process, making retirement planning simpler and more consistent. By setting up automatic payroll deductions, you ensure consistent contributions, potentially leveraging compounded growth without the need for multiple manual transfers. This method not only helps simplify investing, but also increases participation rates, as automatic deductions encourage more employees to save. The U.S. Department of Labor highlights that a payroll deduction IRA is an easy way for businesses to give employees an opportunity to save for retirement, emphasizing its simplicity and effectiveness.¹²

The Internal Revenue Service (IRS) also supports this approach, stating that under a Payroll Deduction IRA, an employee establishes an IRA with a financial institution and authorizes a payroll deduction for the IRA. The employer’s responsibility is simply to transmit the employee’s authorized deduction to the financial institution.¹³

Setting up automatic payroll deductions simplifies investments and ensures consistent Roth IRA contributions. This automated approach also facilitates dollar-cost averaging, allowing you to steadily build your retirement fund by regularly investing fixed amounts, regardless of market fluctuations, and leveraging the power of compound interest with minimal effort.

Monitoring and Adjusting Your Roth IRA Portfolio

Regularly monitoring and adjusting your Roth IRA portfolio can help ensure alignment with your financial goals. Adopting a buy-and-hold strategy and periodic reviews help you stay on track. Your strategy should consider your time horizon, and consideration of riskier investments based upon longer timeline.

Diversifying your portfolio across asset classes intends to mitigate risks and potentially enhance returns. Many Roth IRA plans allow online changes to investment choices, to make rebalancing easier. Additionally, consulting a financial advisor provides valuable insights for informed decisions.¹⁴

Roth IRA Tax Benefits

One of the most attractive features of a retirement account, such as a Roth IRA account, is its income tax benefits. Investments are taxed pre-investment and thereafter, grow tax-free, and retirement withdrawals are tax-free if certain conditions are met, such as being over age 59½ and having the account Roth IRA account for at least five years.

There are no required minimum distributions during the owner’s lifetime, unlike traditional IRAs, allowing investments to grow indefinitely. These tax advantages make a Roth IRA an appealing tool for long-term wealth building and retirement planning. For tax advice, always consult with a professional.¹⁵

Common Mistakes to Avoid When Investing in a Roth IRA

Avoiding common mistakes can help you maximize the benefits of your Roth IRA. Be careful not to exceed annual contribution limits, as overcontributing can result in penalties. Additionally, maintaining a diversified portfolio is crucial, as concentrating your investments in one area can expose you to higher risks. Spreading your investments across different asset classes helps balance your overall risk.¹⁶

Learn More: Can I Invest in a Roth IRA and 401(k)?

Early withdrawals can incur penalties and tax implications, especially if they violate the five-year rule. Understanding Roth IRA rules and implementing a sound investment strategy can help avoid these pitfalls.¹⁷

FAQs

Can I invest in real estate through a Roth IRA?

Yes, you can invest in real estate through a self-directed Roth IRA, which offers a broader range of investment options, including real estate, business partnerships, and cryptocurrencies. A simple online search can help you find providers who offer self-directed Roth IRA accounts.

What are the contribution limits for Roth IRAs in 2025?

The contribution limits for Roth IRAs in 2025 are $7,000, with an additional $1,000 catch-up contribution allowed for individuals aged 50 or older.¹⁸ You can get more details in our Roth IRA overview article.

Is a Roth IRA a good choice for young investors?

A Roth IRA is often beneficial for young investors due to the potential for decades of tax-free growth. The longer time horizon allows for greater accumulation of tax-free investment gains.¹⁹

What factors can influence Roth IRA investment returns?

Factors influencing Roth IRA investment returns include interest rates, economic conditions, inflation, employment rates, political events, asset allocation, costs, and most of all, starting young.²⁰

Article Sources

1. https://www.fidelity.com/viewpoints/retirement/ira-portfolio ↩︎
2. https://fundresearch.fidelity.com/mutual-funds/summary/315911750 ↩︎
3. https://investor.vanguard.com/investor-resources-education/article/why-bonds-are-likely-here-to-stay ↩︎
4. https://www.schwab.com/mutual-funds/understand-mutual-funds ↩︎
5. https://www.schwabassetmanagement.com/content/etf-trading-and-liquidity ↩︎
6. https://www.fidelity.com/learning-center/smart-money/what-are-etfs ↩︎
7. https://www.thrivent.com/insights/retirement-planning/roth-ira-how-to-invest-diversify ↩︎
8. https://www.theentrustgroup.com/blog/how-to-invest-in-cryptocurrency-with-a-self-directed-ira ↩︎
9. https://www.advantaira.com/self-directed-ira/alternative-investments/ ↩︎
10. https://smartasset.com/retirement/roth-ira-fees ↩︎
11.  https://www.investopedia.com/online-broker-vs-robo-advisor-7568136 ↩︎
12. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/payroll-deduction-iras-for-small-businesses ↩︎
13. https://www.irs.gov/retirement-plans/plan-sponsor/payroll-deduction-ira ↩︎
14. https://investor.vanguard.com/investor-resources-education/portfolio-management/rebalancing-your-portfolio ↩︎
15. https://www.schwab.com/ira/roth-ira/withdrawal-rules ↩︎
16. https://www.fidelity.com/learning-center/smart-money/overcontribute-to-an-ira ↩︎
17. https://www.schwab.com/ira/roth-ira/withdrawal-rules ↩︎
18. https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000 ↩︎
19. https://www.virtuswealth.com/the-top-five-benefits-of-roth-ira-contributions-for-young-people/ ↩︎
20. https://www.empower.com/the-currency/life/roth-ira-investment-returns ↩︎