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Key Takeaways
- Roth IRA earnings vary based on chosen investments, such as CDs and bonds with predictable returns or stocks with potential higher returns and risks.
- You can contribute up to $7,000 annually to a Roth IRA, with an additional $1,000 catch-up for those aged 50 and older, subject to income limits.
- A diverse Roth IRA portfolio can be achieved through stocks, bonds, mutual funds, ETFs, and target-date funds.
- Common Roth IRA investments include stocks, bonds, mutual funds, and ETFs, but collectibles like coins and antiques are prohibited.
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Roth IRAs offer incredible benefits as retirement savings accounts, including tax-free earnings growth on your money, compounding your investment growth, and helping you to build wealth in retirement. However, the interest rate or rate of return on your investment significantly impacts your earnings growth.
Roth IRAs offer a myriad of investment options, including certificates of deposit (CDs), stocks, mutual funds, and bonds. Discover your investment options and how you can enhance your rate of return on your Roth IRA, while understanding the risks associated with each investment.
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Strategies for Investing in Your Roth IRA
Roth IRAs offer many benefits to help you save for retirement, including tax-free withdrawals in retirement and tax-free earnings growth on your contributions and earnings. However, you can’t take your contribution amounts as a tax deduction, like you can with traditional IRAs.
A Roth IRA is a type of retirement savings vehicle and not an investment in and of itself. Instead, a Roth IRA allows you to put your money to work in multiple investments, enhancing your interest rate or return on those investments, provided you meet certain rules.
Some common investments for Roth IRAs include:
You can also have a Roth self-directed IRA (SDIRA), whereby you have many more investment options, including real estate. However, some financial institutions, such as banks, mutual fund companies, and brokerage firms, may only offer traditional and Roth IRAs. If you want to invest in alternative investments, you will need to contact a firm that specializes in self-directed IRAs.
Estimating Potential Returns on Your Investments
Estimating the interest rates from fixed-rate investments, such as a CD from a bank or brokerage firm, or a corporate or government bond, is straightforward. However, other types of investments can be more challenging, if not impossible.
Stocks
With stock investments, some companies pay dividends—usually a quarterly cash payment to stockholders—at a consistent rate over many years, allowing you to forecast your rate of return on the dividend. However, the stock price will fluctuate, depending on the overall direction of the market and that company’s particular fundamentals. As a result, you could lose money on the stock price and wipe out your return from your dividends.
Funds
With mutual funds and ETFs, your return will depend on the investment holdings within the funds. For example, an index mutual fund or ETF might invest in a specific stock or bond index, such as the S&P 500, meaning the holdings mirror that of the index. The fortunes of your index fund depend on the performance of the underlying index.
Active or Passive Management
With actively managed mutual funds, the performance will depend on how well the fund manager chooses investments for the fund’s portfolio. Actively-managed funds also tend to come with higher fees, which eat into your rate of return. Conversely, index funds tend to have lower fees since they are passively managed, meaning no one is actively trading in and out of positions.
Important
Mutual funds are required to report their past performance, but that doesn’t tell you how well they’ll do in the future.
Tracking Performance
Both index funds, ETFs, and fund managers can have good years and bad—for example, up 15% one year, down 15% the next.
You can consult a mutual fund’s prospectus to see how it performed over various periods, such as the past 10 years. However, fund companies are quick to note that “Past performance is no guarantee of future results.”
Over time, stocks have outperformed bonds and other fixed-income investments. Therefore, stocks or stock funds could be a good choice if you are in it for the long haul. However, don’t expect a high rate of return every year, and please consider your risk tolerance before investing.
Diversification Strategies for Protecting Your Investments
As with investing outside retirement accounts, the safest way to build a Roth IRA portfolio is to diversify among several different types of investments, such as a variety of stock and bond funds.
Buying a target-date fund (TDF) can help with diversification since it invests in a diverse portfolio based on how many years you have to go before retirement or some other milestone.
Most investment professionals agree that, although it doesn’t guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.
How Much Can I Put Into a Roth Individual Retirement Account (Roth IRA)?
You can contribute up to $7,000 to a Roth IRA, and for those who are age 50 or older, you can contribute an additional $1,000 as a catch-up contribution. However, how much you can contribute is also limited by your tax filing status and modified adjusted gross income (MAGI).
- If you file your taxes as single or head of household for 2025, you can make a full contribution to a Roth IRA if your income is less than $150,000 and a phased-out partial contribution up to $165,000. You cannot contribute if you earn more than $165,000.
- For married couples filing jointly, the income limit for a full contribution is less than $236,000; for a partial contribution, it’s $236,000 but less than $246,000.
- For a married individual filing a separate return, your income limit is between $0 and $10,000. Remember, if your income exceeds the maximum Roth IRA income limit, you can still contribute to a traditional IRA.
Is There Any Easy Way to Diversify My Roth IRA Portfolio?
You can diversify your Roth IRA portfolio through several different types of investments, such as various stock and bond funds. You can also opt for a target-date fund (TDF) composed of mutual funds or ETFs.
A target-date fund periodically rebalances asset-class weights to optimize risk and returns for a predetermined time frame—often, a person’s anticipated retirement date. Typically, the asset allocation shifts to a more conservative balance of funds as the target date approaches.
Which Types of Investments Can You Make in a Roth IRA?
Common Roth IRA investments include stocks, bonds, mutual funds, annuities, ETFs, and certificates of deposit (CDs). However, you cannot hold antiques, stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry, fine wine, electric trains, and other toys in these accounts. Coins also aren’t allowed, with some exceptions.
The Bottom Line
Roth IRA accounts represent a vehicle for building wealth in retirement. The rate of return on your Roth IRA depends on your choice of investments. Some investments that can comprise a Roth IRA, like bonds and CDs, have predictable interest rates, but stocks and stock funds that are frequently in these accounts are much less predictable, although they might provide a better return over the long term.
