Investment Guide

A lot of financial experts agree that a Roth IRA is among the smartest approaches to investing for your retirement. In addition to letting your money grow tax-free, a Roth IRA allows you to withdraw it during your retirement tax-free as well. So, you can grow your nest egg without the worry that the government will take something away from it.

Because of the tax advantage, you want to contribute the maximum to your Roth IRA every year. However, what should you invest in? Whatever it is, it should be a long-term investment that has a lot of growth potential and relatively low risk. This would not include anything that is highly speculative.

Here are some suggestions on the best investments to contribute to for your Roth IRA and why they are good options.

Index Funds That Follow the S&P 500

A fund that follows the Standard & Poor’s 500 Index is a good option. This fund follows 500 of the biggest public companies in the United States. These include familiar names like Microsoft, Coca-Cola, Apple, and Amazon.

This index has performed very well over the decades. The average yearly return is around 10 percent. The companies in this basket include some of the most successful businesses, which means there is less risk and more potential for healthy gains. In addition, S&P 500 index funds tend to have low expense ratios, which means you pay fewer fees owning these. 

Gold IRA

A gold IRA allows you to own physical gold, which you cannot own in a regular IRA. A regular IRA lets you own shares in a gold mining company, gold ETFs (exchange-traded funds), and other types of assets that have some linkage to gold, but not the actual gold itself. A gold IRA is a self-directed IRA that allows you to own gold coins, bullions, and other physical forms of gold.

A self-directed IRA allows you to invest in different types of assets such as real estate, and cryptocurrencies. and precious metals like gold. A gold IRA is governed by the same kind of rules that cover traditional IRAs. The contribution limits and rules around withdrawals are the same. You can have a traditional or Roth gold IRA.

Dividend Stock Funds

Dividend stock funds include stocks of companies that pay out dividends regularly. These companies are usually the older, more established companies in the sector that typically have a lot of cash. This enables them to distribute dividends to their shareholders. The stronger companies have increased their dividend payout every year for the past decades. This gives investors a healthy return. 

Dividend stock funds are also not as volatile as other types of funds and are relatively safe because the companies are in mature industries. The dividends are also not taxable. These aspects make the funds a good option for a Roth IRA. After a dividend payout, the investor can reinvest it into the dividend fund and maintain the growth of the dividend every year.

Value Stock Funds

Value stock funds have stocks that are considered bargains compared to other stocks on the market. They are value-priced. They typically have good returns over the long term and are stable. In addition, a lot of companies with value-priced stocks also payout dividends. Not only will you have a nice return, but you will also get a dividend payout in cash.

Value stock funds are good options for a Roth IRA because of their stability. Any dividends are a bonus because they can be reinvested into the value stock fund and keep it growing.

Index Funds that Follow the Nasdaq 100

A Nasdaq 100 index fund includes the largest companies that trade on the Nasdaq stock exchange. These mostly include tech companies. This type of fund includes more of the large tech companies than the S&P 500 index funds. When these companies perform well, they can bring you significant returns.

A Nasdaq 100 index fund is a good way to add diversification to your Roth IRA if you believe that tech stocks will continue to grow over the next decades. When tech stocks do well, your investment would be in a good position for healthy compounding at high rates. In a Roth IRA, you will not incur taxes on capital gains if you sell or make a withdrawal from the Roth IRA account.

Real Estate Investment Trust (REIT) Funds 

REITs have a fancy name, but it is just a type of company that manages real estate investments. According to the rules, REITs can avoid paying corporate taxes by distributing most of the company’s income as dividends. This tax advantage makes these funds very attractive for real estate investors.

It comes as no surprise that investors like REIT funds because they have performed well over time and they pay out healthy dividends. In a Roth IRA, these dividends will not be taxed, and they can be reinvested into the fund to buy more shares. Investors can earn a good return on both fronts.

Small-cap Stock Funds

Small-cap stock funds include small companies. Many investors like these for investing over the long term because the small-cap companies have a lot of potentials to grow fast. These are typically high-growth companies, but some of them are not. Small companies have higher risks because they are smaller with less financial resources. However, their returns can be higher than your average stock fund.

Small-cap funds can be a nice addition to your Roth IRA because they have great potential for growth over the long term. Your returns will compound at a faster rate. The fund is diversified enough to give you a good level of safety while focusing just on small-cap companies.

Funds with Target Dates

A target-date fund is designed for investors who do not prefer to actively manage their portfolios. You choose a fund that has the year when you start accessing your money. When you start, the asset mix that this fund holds might be more geared toward riskier holdings that give you high returns, like stocks.  As you approach the target year, the investment mix of the target-date fund will gradually shift to safer assets with lower returns, like bonds. So, you just contribute your money to the fund and let the fund manager handle rebalancing the mix.

The one possible disadvantage to a target-date fund is that the expense ratio is usually higher, but still within reason. The higher cost reflects the additional management that this fund requires. When you are deciding on a target date, you might want to pick a year that is five to ten years later than the actual year of your first withdrawal. This allows the mix to stay more on high-growth assets like stocks. If you plan, you will not run out of money during your retirement.

Avoid Investments That Are Speculative

When you invest money for retirement, you should balance the returns over the long-term with possible risks associated with it. For instance, returns from stocks have historically outpaced returns of other types of investment vehicles over time, but you will only realize this over the long term. However, if your investment horizon is short, you face greater risks because the stock might be experiencing a downturn just when you want to take out the money. If you hold stocks for the long term, you decrease your risk.

In recent years, cryptocurrencies like Bitcoins have shown up in IRAs and 401(k)s. Bitcoin grew very fast, but it is still a speculative investment because it is still unproven. These are not recommended for any retirement account.

Investment experts warn investors that investing in cryptocurrencies is like gambling. It is purely speculative at this point and the future is uncertain. Rather, it is better to stay with the time-tested approach in building up your retirement accounts because you want to be certain that your money will be in your account when you need to take it out.

Final Comments

A Roth IRA is highly recommended for investors who want to enjoy the tax advantages during retirement. Stick with the tried-and-true methods of investing, and avoid anything speculative. You have many years to allow your Roth IRA to compound, and the growth will not be subject to any taxes at all.