The Best Funds for a Roth IRA

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You can hold stocks, bonds, real estate, certificates of deposit and even annuities inside a Roth individual retirement arrangement. All of these investment types offer certain advantages but also have certain disadvantages. Your age, your need for liquidity and your investment risk tolerance should ultimately determine the kind of investment that you make with your Roth IRA.

Starting a Roth

  • You can start to invest in a Roth IRA as soon as you have earned income, but you cannot make tax-free withdrawals of your earnings until you reach the age of 59 1/2. Therefore, if you start your Roth early in your adult life you should invest in an instrument that can grow at a rate that's fast enough to outpace inflation. Historically, CDs and bonds tend to just about keep pace with inflation, but stocks and mutual funds containing stocks have outpaced inflation over long periods of time. Stocks and mutual funds have no principal guarantees but if you are 30 or 40 years from retiring you have the time to rebound from any market downturns.

Close to Retirement

  • If you are close to retirement age you should take less risk with your investment because if you invest too aggressively you may not have time to recover from a market downturn before you retire. Bond mutual funds usually offer better returns and growth potential than CDs but carry more risk since these investments are not federally insured. If you can reach your retirement savings goal by investing in federally insured products then invest your Roth in a CD. If you are close to your retirement goal but need some growth to enjoy a comfortable retirement then you should consider exposing some of your Roth funds to a degree of risk by investing in mutual funds containing some stocks in major companies but mostly bonds.

Liquidity

  • Once you reach the age of 59 1/2 you can access funds inside your Roth without paying a penalty or any taxes as long as you have held the account for at least five years. If you plan on regularly accessing funds then you need to either move your Roth into a liquid bank savings account or consider buying an immediate annuity with your Roth funds. An immediate annuity converts a lump sum into a monthly income stream that lasts for the duration of your life.

Other Considerations

  • Federal tax laws enable people under the age of 59 1/2 to access Roth funds penalty-free if the funds are used for certain kinds of expenses such as buying a first home or to cover unreimbursed medical expenses. Regardless of your age, if you plan to tap your Roth within the next few years to pay for a home or other eligible expense, you should keep your Roth in a liquid investment. Conversely, if you are close to retirement or already retired but have no immediate need of your Roth funds you can take more risk than someone who needs the Roth funds to cover day-to-day expenses.

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