Best Roth IRA Investments (2024)

A Roth IRA is among the most powerful tools in your retirement arsenal. As long as you make withdrawals after age 59 ½ or qualified early withdrawals, you’ll never pay any taxes on your investment gains or the money you take out.

This is why a Roth IRA should be the account where you hold investment assets that are most likely to grow substantially or pay out substantial dividends that would otherwise be heavily taxed at ordinary income rates in a standard investment account.

The Best Roth IRA Investments

Which Investments Belong in a Roth IRA?

Where you keep your investments through asset location matters just as much as the types of investments you choose through asset allocation.

Investments in your Roth IRA grow tax-free and are withdrawn tax-free. When you consider your overall asset allocation, you’ll likely settle on a balance of aggressive equities like stocks and stable assets like cash, bonds and CDs. Each of these asset classes will grow at different rates and be taxed differently.

Throughout your lifetime you’ll accumulate a mix of different types of investment accounts that include post-tax accounts like a Roth IRA, pre-tax accounts like a 401(k) and taxable accounts like a taxable brokerage or high yield savings account.

The best funds to hold in your Roth IRA vs your other accounts are the most aggressive ones you’ll hold in your portfolio because the growth on those will never be taxed. While you should consider holding more conservative assets like cash and CDs in your overall portfolio, they should not live in your Roth IRA.

In addition to high growth investments, you should keep accounts that pay high dividends in your Roth IRA. Dividends are taxed as ordinary income, not capital gains. This means that you’ll pay federal taxes on dividends as high as 37% in addition to any state or local taxes. If you’re going to hold dividend stocks, you should avoid holding them in a taxable account.

Dividend Stocks

The stocks of mature, publicly traded companies not only tend to appreciate over time; they also pay their shareholders quarterly dividends, a portion of profits not reinvested in the company. You, however, can reinvest your dividends and allow them to compound within your Roth IRA.

Dividend stocks are risky in the sense that owning any individual stock is riskier than owning a diversified portfolio of stocks. But dividend stocks are less risky than growth stocks because the companies are well established. Some have such a long history of consistent and ever-increasing dividend payments that they’re called “dividend aristocrats.”

Dividend Funds

Dividend stock funds offer the benefits of quarterly dividends while reducing your risk through diversification. You can invest through dividend ETFs or dividend mutual funds.

For the lowest ongoing expenses, look for passively managed funds. Active management options charge higher fees than passive management and rarely outperform them.

Want to own the best of the best? Consider a dividend aristocrat fund.

Growth Funds

Growth stocks and growth funds can be thought of as the opposite of dividend stocks and funds. Shares of relatively young companies can appreciate rapidly—but they can also stagnate or flame out (lookin’ at you, RDFN). They don’t pay dividends because these firms reinvest their profits in the company’s growth.

Because of the higher risk involved, you must think carefully before choosing to keep individual growth stocks in your Roth IRA. Growth-oriented ETFs and mutual funds can diversify and partially mitigate your risk by holding shares of hundreds or even thousands of publicly traded firms.

Although more volatile than dividend funds, growth funds can be a good bet when you’re investing for the long run and can weather significant short-term ups and downs. As with dividend stock funds, you’ll want to look for passively managed investments to keep investment fees from eating into your returns.

S&P 500 Funds

and ETFs are designed to provide the same return as their benchmark: the stocks of the largest publicly traded U.S. companies. The S&P has generated annualized average returns of about 10% since its inception in 1957.

These funds also pay dividends, though since they aren’t specifically dividend focused, their yields tend to be lower. For example, Schwab’s U.S. Dividend Equity ETF (SCHD) had a yield of 3.44% as of August 15, 2023, while Schwab’s S&P 500 Index Fund had a yield of 1.38%.

Real Estate Investment Trusts (REITs)

REITs are companies that invest in a portfolio of income-producing properties or a portfolio of interest-paying real estate loans. Since REITs have to pay out at least 90% of their taxable income to shareholders, they can generate a lot of tax liability within a 401(k) or a non-retirement brokerage account.

For superior tax efficiency, it makes the most sense to hold REIT shares within Roth accounts. You’ll be diversifying into real estate without the headaches and active management that comes with buying, managing and selling properties yourself.

REITs themselves can be volatile, however, especially ones that are concentrated in a specific sector, like office buildings or shopping malls. For broader diversification, consider REIT ETFs.

High-Yield Bond Funds

High-yield bond funds, also known as junk bond funds, can be a risky choice to hold in your investment portfolio due to their higher risk of default. These funds typically carry higher returns with much higher dividend yields than other traditionally more stable asset classes.

If you feel comfortable with the potential risks associated with them and are going to hold high-yield bonds in your portfolio, you should keep them in your Roth IRA due to their high dividend yields.

While municipal bonds can have high dividend yields, they are generally not taxed, so keeping them in your Roth IRA is a suboptimal choice compared to other account types.

Roth IRA Frequently Asked Questions (FAQs)