The 5 Best Investments for Your Roth IRA

October 8, 2021

Are you taking full advantage of your retirement account? Here’s how to take advantage of your Roth IRA, best investments for a Roth, and why they’re the right choice.

Retirement is at the forefront of our minds, yet most Americans aren’t on track for retirement. Only 36% of Americans think they’re on track for retirement. And considering that nearly two-thirds of 40-somethings have less than $100,000 saved, which isn’t much at all considering that you should have at least three times your annual income saved for retirement by age 40.

The key to getting on track is to take advantage of the way your retirement vehicle is taxed. If you have a Roth IRA, you’re in luck—since you contribute with after-tax dollars, you don’t pay taxes on that money again. That means your investment gains can grow without the IRS taking a slice of the pie.

Here’s how to take advantage of your Roth IRA, best investments for a Roth, and why they’re the right choice.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows you to save and invest for retirement by contributing after-tax income. Since you’ve already paid taxes on the money you contribute, you don’t get a tax deduction like a traditional IRA account.

That’s actually a good thing. Since you’ve already paid taxes on the income, you won’t pay taxes when you make withdrawals in retirement (in fact, you don’t pay taxes on any withdrawals as long as you make them after age 59.5).

That’s great news if you think you might be in a higher tax bracket in retirement (which is more common than you might think, between paying off your house, no longer paying for kids, Social Security income, and a side hustle). Even if you won’t be in a higher tax bracket in retirement, you won’t lose money every time you make a withdrawal.

What to Look for in a Strong Roth Investment

When investing for your Roth IRA, you’re looking to earn as much income as you can (the better to build that nest egg) while taking advantage of the Roth’s tax shield to keep Uncle Sam’s fingers out of the pie. With that in mind, you want to look for four features in a great Roth IRA investment:

  1. High growth potential
  2. High dividends
  3. High turnover
  4. Frequent trading events

Because of the way the IRS taxes income, your Roth offers the ideal shield to take advantage of capital gains without losing it all to Uncle Sam in the process.

Roth IRA Best Investments

With that in mind, here are five of the best investments for your Roth IRA (and why they’re the right choice for a Roth in particular).

Actively Managed Mutual Funds

For most Roth IRAs, the simplest option to get started is a mutual fund, a type of company that pools investor money to invest the pool in stocks, bonds, and short-term debt. Retirement accounts in general (and Roth IRAs in particular) have a longstanding love affair with mutual funds.

For your Roth, look for an actively managed mutual fund (as opposed to one that simply tracks an index passively). Actively managed funds make regular trades, which offers more chances for short-term gains. These get taxed at a higher rate than passively managed funds, but that’s where the Roth swoops in: as long as you abide by Roth withdrawal rules, those gains grow tax-free.

Income-Oriented or Growth Stocks

Tax-shielded income is the name of the game with a Roth, and stocks have long been the primary growth vehicle in any investor account. For your Roth in particular, you want to focus on two types of stocks:

  1. Income-oriented stocks
  2. Growth stocks

Income-oriented stocks are stocks that reliably pay dividends with lower risk exposure. Growth stocks are any type of stock with a substantially higher growth rate than the market mean. Both are critical to an income-oriented strategy, and they’re the best type of stock equity for use in a Roth.

Basically, these types of stocks offer the best returns for your retirement nest egg, and because the Roth shields them from your good friend the tax collector, you won’t pay taxes on those dividends as they grow (as long as you abide by Roth withdrawal rules).

High-Yield Debt like Corporate Bonds

High-yield bonds, or high-yield debt, are a type of corporate bond that pays higher interest rates than regular investment-grade bonds because they have a lower credit rating. Don’t let the higher risk of default spook you—remember, the goal is income, and the average Roth only holds 7% bonds or bond funds anyway.

We like high-yield corporate bonds for two reasons. First, they produce more income than regular bonds (which is important because the lower income rate is often what makes bonds unattractive). Second, a Roth offers the ideal tax vehicle to shield that income over time. In fact, this is what makes bond income even more valuable in a Roth—since you can’t reinvest bond interest payments back into the bond the way you would a stock (thus avoiding taxes), Roth protection allows this bond income to grow without Uncle Sam’s annual interference.


A real estate investment trust (REIT) is a company that invests in income-producing real estate. Participating investors can purchase shares in the company to indirectly add real estate investment to their portfolio. REITs invest in almost any kind of income-producing real estate, including:

  • Apartment buildings
  • Hotels
  • Infrastructure
  • Cell towers
  • Warehouses
  • Shopping malls
  • Office buildings

Most REITs focus on a single property type, though a smaller number offer diversified real estate investments.

Since we often work with ordinary investors, we like REITs as a go-to option for Roth real estate investments. For one thing, they’re a reliable income source—REITs are legally obligated to pay at least 90% of their income each year to shareholders as dividends. For another, they allow investors to participate in income-producing real estate without the headache of being a landlord. But most of all, REITs are the most accessible real estate option for ordinary investors.

Here are some of the best REITs available right now. Make sure to work with a financial advisor to ensure your REIT meets the sticky real estate requirements for holding in an IRA.

Diversify with ETFs

Last but not least are exchange-traded funds (ETFs), which are indexes tracking a particular sector, asset class, or commodity but can be bought or sold on the securities market like an individual stock. They’re a rapidly rising competitor to mutual funds, especially in the context of Roth investments.

We prefer diversification with ETFs (rather than using them as your IRA cornerstone) for two reasons. First, ETFs tend to be passively managed, which is how they keep costs down. Second, ETFs aren’t offered as an IRA cornerstone as often as mutual funds.

However, they still make an excellent diversification tool. That’s because many ETFs are index funds like the S&P 500. Basically, instead of trying to beat the market, they try to be the market by matching a segment of market performance. And since buying into the index fund means automatically buying into every company in the index, it’s a great way to rapidly diversify with reduced risk. Plus, there are index funds to match every investment strategy, interest, and asset class.

For your Roth IRA, look for ETFs with high-income or high-growth equities.

Invest for Your Future Success

Ultimately, the Roth IRA best investments are those that prioritize smart growth. The good news is that your Roth offers the ideal shield for growth. However, keep in mind that your Roth isn’t the only way to grow your money for retirement.

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