What are Roth IRA investment options?

A Roth IRA is an individual retirement account (IRA) that uses after-tax dollars to grow your money tax-free, allowing you to make tax-free withdrawals in retirement given you meet specific qualifications. To qualify, your Roth IRA must have been open for at least five years, and withdrawals generally must occur after age 59½ (or another qualifying exception).

While contributing to a Roth IRA can help grow your retirement funds, you still have to allocate those contributions to investment and savings options to help your money grow over time.

When deciding what to invest your Roth IRA in, it’s important to consider the different asset choices available, including: 

• Index funds and mutual funds

• Exchange-traded funds (ETFs)

• Stocks

• Bonds

• Real estate investment trusts (REITs)

While there’s no single “best” asset for a Roth IRA, it is important to consider your long-term investment goals and risk tolerance to choose the assets that will best suit your needs. In general, investments that offer potentially higher returns involve greater risks; therefore, it is wise to consider how much possible loss you are willing to take when choosing what to invest in.

Here are some potential Roth IRA investment options:

Index funds and ETFs are both investment vehicles that aim to track a market index (like the S&P 500). They are known for their low cost, instant portfolio diversification, and liquidity. While they are similar options, the main difference is how they trade, with index funds often trading once a day, while ETFs trade like individual stocks throughout the day, fluctuating with market prices. Both options are suited for long-horizon growth, offering broad market exposure, passive management, and tax efficiency.

Mutual funds are a type of investment vehicle that pools money from many investors to buy a diversified mix of stocks, bonds, or other assets. Unlike ETFs, which trade like stocks throughout the day, mutual funds are priced once daily at market close and often have higher associated minimum investments or fees.

However, they are also used in Roth IRA investments due to their built-in diversification, professional management, and potential for long-term growth. This aligns well with a Roth IRA’s tax-free growth and withdrawal benefits.

Dividend stock funds invest in companies that regularly pay out dividends (a share of profits). When invested within a Roth IRA, these dividends can grow tax-free, meaning you won't lose part of that income to taxes each year. When invested in the long run, reinvested dividends can significantly boost compounding and your earnings.

However, it is still important to consider the possible risk associated with this type of investment.

Bond funds are pooled investments that hold a mix of bonds, such as government, municipal, or corporate debt, so instead of buying individual bonds, you can get instant diversification across various issuers and maturities. They are generally considered more stable compared to stock funds, since bonds focus more on income and capital preservation rather than high growth, but may still come with risk of loss.

This investment type can be a good fit for a Roth IRA due to the tax-free growth potential, and they help balance risk in your retirement portfolio by providing a cushion against stock market volatility.

Real estate investment trusts, REITs, are companies that own, finance, and operate income-generating real estate and sell shares to raise funding to keep managing their properties. REITs allow you to invest in real estate without having to do the management yourself, and in return you get paid through dividends. When investing in REITs inside a Roth IRA, dividends and capital gains are shielded from taxes while the funds remain in the account, and qualifying withdrawals of your funds in retirement are completely tax-free.

Selecting the right Roth IRA investment strategy for you will depend on several different factors. You might want to consider the following when tailoring your investments to meet your needs. 

• Align with your time horizon & risk tolerance: Your retirement time horizon and investment risk tolerance may greatly influence how much risk you are willing to take and how much time you have to recover from market volatility. Younger savers may have a more growth‑oriented approach, but when nearing retirement they might shift to a more  income-focused asset allocation.

• Consider fees, minimums & account accessibility: All investment options come with varying fees, accessibility, and minimum deposits. You might want to consider expense ratios, trading costs, and platform features to see what best fits your budget and liquidity needs.

• Optimize for tax efficiency & asset location: Consider investments that can help you reduce tax liabilities. Minimizing taxes can help you keep more of your returns when you are in retirement.

• Avoid common mistakes: Avoiding common mistakes such as over-investing in speculative assets, failing to invest the money within your Roth account, and missing contribution limits or deadlines can help you ensure you are getting the most of your investments.

Roth IRAs are powerful retirement tools, but their real value comes from how you choose to invest the money inside them. From broad-based funds like ETFs and index funds to income-focused options like dividend stock funds and REITs, the right allocation is based on your individual needs and can help you balance growth, stability, and tax efficiency. By aligning your investments with your long-term goals, risk tolerance, and time horizon, you’ll give yourself the best chance to make the most of your Roth IRA’s unique tax advantages.

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Yes, you can hold CDs in a Roth IRA. Putting a CD inside a Roth IRA allows you to earn interest at a fixed rate without having to pay taxes on the earnings, due to the tax rules of the Roth IRA. You could also benefit from qualified tax-free withdrawals in retirement, once you meet age and time requirements. Whether holding CDs in a Roth IRA is a good idea depends on your investment goals and liquidity needs.

Your asset allocation in your Roth IRA depends on your age, goals, and risk tolerance. Younger investors tend to lean heavily toward stocks for growth, since they have more time to recover from market fluctuations, while those closer to retirement may take a more conservative approach to reduce risk and generate stable income.

Yes, alternative investments are allowed, but typically only through a self-directed Roth IRA. These carry higher risks and complexity, so they may not suit everyone’s retirement plan.

Excess contributions can trigger annual penalties from the IRS until the extra money is removed. It’s best to correct the mistake promptly to avoid compounding penalties.

The 2025 Roth IRA contribution limit is $7,000 ($8,000 if you’re 50 or older, including catch-up contributions), and is a combined limit across all IRAs. You can split contributions between them, but the total cannot exceed these limits. Eligibility to contribute to a Roth IRA phases out at higher incomes, starting at $150,000 for single filers and $236,000 for joint filers.¹

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

¹ https://www.irs.gov/publications/p590a