Best Investments for Your Roth IRA

Broad-based stock and bond index funds are good starting points for a Roth IRA

Reviewed by Melody Bell

When constructing a portfolio for your Roth IRA—a type of tax-advantaged individual retirement account—you have a variety of investment options to choose from.

Unlike traditional IRAs, Roth IRAs can grow tax-free. However, fund contributions are not tax-deductible, as they are with traditional IRAs. And you can make fund withdrawals without paying taxes or penalties, as long as you abide by the Roth IRA withdrawal rules: you must have reached at least age 59½, and you must have been contributing to your Roth IRA for more than five years.

If you’re building a Roth IRA to save for retirement, you’ll want to design a portfolio using a long-term, buy-and-hold approach. A strong portfolio will be diversified across different asset classes, such as stocks and bonds, and across market sectors. Further diversification can be obtained by investing in assets from different geographic regions. You should also focus on minimizing costs, such as fees, because they are a major factor in determining returns over the long term.

A few core index funds, including exchange-traded funds (ETFs) and conventional mutual funds, may be enough to meet most investors’ diversification needs at a minimal cost. On the surface, the tax efficiency of ETFs may appear to make them a favored fund option since they don’t regularly distribute capital gains. But capital gains are not taxed in a Roth IRA; thus, ETFs lose one of their primary advantages over mutual funds. As a result, investors should consider both ETFs and mutual funds when considering investments for their Roth IRA.

Key Takeaways

• Roth IRAs are a type of tax-advantaged individual retirement account that should be invested in with a long-term perspective in mind.
• A good foundation for a Roth IRA portfolio is a combination of a broad-based U.S. stock index fund and a broad-based U.S. bond index fund.
• Investors looking to increase their diversification might consider adding a global or international stock index fund or even an emerging markets fund for those with a greater appetite for risk.
• Investors are likely to want to shift into less risky assets as they approach retirement.

U.S. Stock Index Funds

One of the central building blocks of a long-term retirement portfolio is a broad-based, passively-managed (and thus low-cost) U.S. stock index fund, which will serve as the main driver of growth for most investors.

You can choose either a total market fund or an S&P 500 index fund. U.S. total market funds attempt to replicate the performance of the entire U.S. equity market, including small-cap and mid-cap stocks, whereas an S&P 500 index fund is focused entirely on large caps. Small- and mid-caps may exhibit higher volatility and produce slightly higher returns, but the difference will be fairly minimal over the long term.

Note

There’s strong evidence that index funds, which attempt to mimic the performance of an index by passively investing in the securities included in the index, generally outperform actively-managed funds over the long term. One reason for that outperformance is differences in costs, such as management fees.

A passively-managed U.S. stock index fund, when held for the long term, has the potential to benefit from the growth of the U.S. equity market over time. Such a strategy may avoid the significant trading costs of actively-managed funds whose managers try to time the short-term ups and downs of the market.

A broad-based U.S. stock index fund carries a certain degree of risk but provides you with fairly strong growth opportunities. It’s foundational for a long-term retirement account. However, those with a very low risk tolerance or who are approaching the age of retirement may find a more income-oriented portfolio to be a better option.

U.S. Bond Index Funds

Adding a U.S. bond index fund to your investment portfolio will help reduce your portfolio’s overall risk. Bonds and other debt securities typically offer investors more stable and secure sources of income compared to stocks, but they tend to generate lower returns. A low-cost bond fund that tracks a U.S. aggregate bond index can provide investors with broad exposure to this less risky asset class. An aggregate bond index typically provides exposure to Treasurys, corporate bonds, and other types of debt securities.

For a long-term retirement portfolio, you’ll want to have exposure to stocks and bonds, which you can achieve through a single stock index fund and a single bond index fund. The proportion of stocks to bonds will depend on two primary factors: how close you are to retirement age, and how risk-averse you are.

The traditional investing approach has been that a 60/40 portfolio—60% stocks and 40% bonds—will satisfy the needs of most investors, and that the proportion of stocks to bonds should shrink as the investor ages. Another yardstick is “100 minus your age.” This means that a 30-year-old should hold 70% stocks and 30% bonds, and by age 40, they should have a 60/40 portfolio.

However, many financial experts, including Warren Buffett, recommend holding a higher percentage of stocks, as people are living longer and thus are more likely to outlive their retirement savings. Investors should always consider their own financial situation and risk appetite before making any investment decision.

A broad-based U.S. bond or fixed-income fund is generally less risky than an equity fund. However, bond funds don’t provide the same growth potential, which means generally lower returns. They can be useful tools both for risk-averse investors and as part of a portfolio diversification strategy.

Global Stock Index Funds

You can diversify your portfolios further by adding a global stock index fund that holds a broad selection of non-U.S. stocks. A long-term portfolio that includes a global stock index fund provides exposure to the broader world economy and lessens exposure to the U.S. economy in particular. Inexpensive funds that track an index like the MSCI ACWI (Morgan Stanley Capital International All Country World Index) Ex-U.S. or the EAFE (Europe, Australasia, Far East) Index provide broad geographical diversification at a relatively low cost.

Investors with a greater degree of risk tolerance may choose to invest in an index fund with a particular focus on emerging market economies. Emerging market countries, such as China, Mexico, and Brazil, may exhibit higher but more volatile economic growth than other countries, such as France or Germany. Though it’s riskier, a portfolio with greater exposure to emerging markets has traditionally yielded higher returns than a portfolio that’s focused on non-emerging markets.

Consistent with modern portfolio theory, risk-averse investors will find that investing in a broad-based U.S. stock index fund and a broad-based U.S. bond index fund provides a significant degree of diversification. Adding a global stock index fund to the mix provides a greater degree of diversification, and it has the potential to maximize returns over the long term while minimizing risks.

What Is Best to Invest in for a Roth Individual Retirement Account (Roth IRA)?

Some of the best investments for a long-term retirement account like a Roth IRA are a few inexpensive core index funds. A single low-cost U.S. stock index fund and a single low-cost U.S. bond index fund provide enough diversification to maximize returns and minimize risk over the long term for most investors. Adding a low-cost global index fund will provide added diversification.

Can You Choose Your Own Investments in a Roth IRA?

Yes, you can choose your own investments in a Roth IRA. You can open a Roth IRA using an online broker. When you’re ready to buy investments to hold in the account, you will have many options to choose from.

Can You Have Two Roth IRAs?

Yes, you can have two Roth IRAs — or more. There is no limit to the number of Roth IRAs that you can have. However, increasing the number of Roth IRAs does not increase the total amount that can be contributed each year. Whether you have one IRA or multiple IRAs, the total contribution limit across all IRAs is the same. For 2024, that limit is $7,000 for people under age 50, and $8,000 for people age 50 and older, thanks to a rule that permits $1,000 in catch-up contributions.

The Bottom Line

If you’re looking to save for retirement with a Roth IRA, you’ll want to focus on the long term and choose investments that are inexpensive and provide significant diversification. One of the simplest ways to do this is to invest in a few core index funds. Ideally, a strong portfolio will contain a single U.S. stock index fund, which provides broad exposure to U.S. economic growth, and a single U.S. bond index fund, which provides exposure to relatively safer income-generating assets. For added diversification, consider adding a global stock index fund, which provides exposure to a broad range of international, including emerging, markets.

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