Key points

• Stocks, bonds, mutual funds and other securities can be held in a Roth IRA.
• Roth IRA investments vary in their return potential and risk profile.
• The best investments for a Roth IRA typically have low fees and offer diversification.

A Roth IRA lets you contribute after-tax money and withdraw funds tax-free during retirement. But you must select the right investments to make the most of this savings vehicle. Look for assets that offer diversification, feature low fees and provide the right risk level. 

6 best investments for a Roth IRA

Wanting to find the best investments for your Roth IRA is natural. But no list of funds is right for everyone.

“There is no such thing as a ‘best investment,’” said Brennen Schlagbaum, a certified public accountant and the founder of Budgetdog, which offers financial courses and advice. “Everyone’s situation is vastly different, and there will always be a nuanced way of looking at finance.”

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

1. U.S. stock index funds

U.S. stock index funds are among the best investments for a Roth IRA. S&P 500 index funds 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 example, while the S&P 500 tracks the performance of large firms, the Russell 2000 focuses on small companies. A total stock market index fund provides exposure to every part of the market, including large-cap, mid-cap and small-cap stocks.

Two of the largest U.S. stock index funds by assets under management are the Fidelity 500 Index Fund (FXAIX) and Vanguard 500 Index Fund Admiral Shares (VFIAX). A high AUM is a sign of general popularity and investor confidence.

2. 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 isn’t always the case. The bond market plummeted in 2022 and hasn’t 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.

Two of the largest U.S. bond index funds by AUM are the Vanguard Total Bond Market II Index Fund Institutional Shares (VTBNX) and Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX). 

3. Global stock index funds

U.S. stocks and bonds make up the majority of most investors’ portfolios. But you can diversify your portfolio further 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.

Three of the largest global stock index funds by AUM are the Vanguard Total International Stock Index Fund Investor Shares (VGTSX), Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) and American Funds EuroPacific Growth Fund (AEPGX).

4. Dividend stock funds

Your Roth IRA investments grow tax-free and can be withdrawn tax-free in retirement. So using this account for income-producing assets that might otherwise increase your tax burden can be beneficial. 

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 more.

Three of the largest dividend stock funds by AUM are the Schwab US Dividend Equity ETF (SCHD), Vanguard High Dividend Yield ETF (VYM) and iShares Core Dividend Growth ETF (DGRO). 

5. REIT funds

In most cases, you can’t invest directly in real estate using your Roth IRA. It’s possible only with 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 benefits of owning real estate without some of the downsides, such as the time commitment required.

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

Three of the largest REIT funds by AUM are the Vanguard Real Estate Index Fund Admiral Shares (VGSLX), Vanguard Real Estate Index Fund Institutional Shares (VGSNX) and Vanguard Real Estate II Index Fund (VRTPX).

6. Target-date funds

Target-date funds are among the most popular investments for retirement accounts. It’s easy to see why. These mutual funds, also known as life-cycle funds, gradually adjust their asset allocation 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 to match your financial needs and risk tolerance may perform better. 

We specified a target retirement date of 2050 to 2055. Three of the largest target-date funds by AUM are the Vanguard Target Retirement 2050 Fund (VFIFX), Vanguard Target Retirement 2055 Fund (VFFVX) and American Funds 2050 Target Date Retirement Fund (RFITX).

Investment overview

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

How does a Roth IRA work?

Roth IRAs allow you to enjoy tax-free investment growth and tax-free withdrawals once you reach age 59½ and your account has been open for five years.

They 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 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.

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

Things to consider

Keep the following factors in mind as you evaluate your Roth IRA investment options.

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.

“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 to achieve higher returns.

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

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. This 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.

Frequently asked questions (FAQs)

How do you grow money in a Roth IRA?

The best way to grow money in a Roth IRA is by investing in assets that will appreciate and can generate an income, such as bonds and dividend stocks.

Can you choose your own investments in a Roth IRA?

Yes, you can choose your own investments in a Roth IRA. Most brokerage firms offer a wide variety of investment options. One exception is if you have your Roth IRA through a robo-advisor. In this case, the computer algorithm may choose investments on your behalf.

How old do you have to be to open a Roth IRA?

In most cases, you must be 18 years old to open your Roth IRA. But if you’re under the age of 18, an adult can open a custodial Roth IRA on your behalf. You’ll get control of it once you reach adulthood.

What is the downside of a Roth IRA?

The biggest downside of a Roth IRA is you can’t deduct your contributions like you can with a traditional IRA or 401(k). As a result, it won’t help you to reduce your tax burden now.