Roth IRA & Type of Investments to Hold
The tax-free growth offered in Roth IRAs provides the opportunity for aggressive investing. There is neither concern over annual tax issues while accumulating assets nor any income tax implications when funds are distributed. Liberal investment choices are provided by the Internal Revenue Service with few prohibited options.
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Investment Options
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The IRS allows many investment options in the Roth IRA, all having different levels of risk, growth potential and investment style. Some of the more common Roth IRA investments include savings accounts, certificates of deposit, stocks, bonds and mutual funds. Less commonly pursued Roth IRA investments include precious metals and real estate. The latter are not as common because of the increased regulatory requirements imposed by the IRS and costs associated with administration. IRA custodians are not required to offer every investment so you must find a custodian that meets your investment objectives.
Prohibited Transactions
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The IRS has stringent rules on prohibited investments. Buying collectibles in the IRA results in the value invested in the collectible considered liquidated. This means any earnings in the Roth will be added to income and penalized 10 percent if you engage in prohibited transactions and investments. Collectibles include artwork, antiques, rugs, metals, stamps, coins and tangible property. Exceptions are U.S. minted bullion and coins.
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Comparing Yourself to Others
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What is right for your parents, sister, neighbor or co-worker is not necessarily right for you when it comes to investment options for Roth IRA accounts. The general rule of thumb is to be more aggressive in younger years and transition investments into more fixed income assets as you near retirement. Many people look at this in terms of mutual funds or bank investments, similar options that are available through employer plans. But you may have more experience in real estate or approved precious metals. In this case, diversifying your portfolio requires understanding your strengths to maximize returns over the years.
Choosing Your Best Options
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Other factors to consider are your ability to stomach ups and downs in annual investment performance. Small-cap stocks or international funds might fluctuate widely, leaving you uneasy. Even if you are younger and technically more suited for aggressive portfolios, you still need to sleep at night. Develop realistic return expectations for your portfolio. Conservative investors buying fixed income investments look for 3 to 5 percent in annual returns. Moderate investors buying large-cap stocks and some fixed-income investments expect 6 to 9 percent in annual returns. More aggressive investors seek anywhere from 10 to 100 percent annually but incur much more risk.
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