8 best Roth IRA investments

A Roth IRA is one of the best possible ways to invest for retirement, and in fact, many experts think it’s the single best retirement account to have. That’s because a Roth IRA allows you to grow your money tax-free for decades and then withdraw it without paying taxes in retirement, too. You can build up a nest egg that the government will never be able to touch again.

Naturally, it makes sense to take full advantage of this account by maxing out your annual contributions. But what are the best investments for your Roth IRA?

You’ll want to focus on investments that have a strong likelihood of growing a lot over the long term, but with little chance of going down. That means steering clear of highly speculative investments.

Here are some of the best investments for your Roth IRA and why they may work for you.

Best investments for a Roth IRA

• S&P 500 index funds
• Dividend stock funds
• Value stock funds
• Nasdaq-100 index funds
• REIT funds
• Target-date funds
• Small-cap funds
• Bond funds

8 best Roth IRA investments for your retirement

1. S&P 500 index funds

One of the best places to begin investing your Roth IRA is with a fund based on the Standard & Poor’s 500 Index. It’s a collection of hundreds of America’s top companies, including many of the names you know and use every day (Amazon, Apple and Microsoft, for example).

Over time the index has performed well, with average annual returns of about 10 percent. With this index fund, you’ll enjoy a broadly diversified portfolio that includes some of the world’s strongest companies, meaning you’ll have reduced risk and the potential for solid gains. It also doesn’t hurt that these funds often come with low expense ratios, meaning you won’t pay a lot to the fund’s managers, so more of your returns stay in your pocket.

2. Dividend stock funds

Dividend stock funds are another popular option. Companies that pay dividends tend to be in mature industries and generate a ton of cash, allowing them to distribute the money to shareholders. The best companies increase their payouts annually for decades, turning your investment into a dividend dynamo. Plus, they tend to be less volatile than an average fund.

Dividend stock funds can be particularly attractive in a Roth IRA because of their relative safety (they’re in a mature industry) and the fact that the dividends are not subject to tax. Investors can roll dividends right back into the dividend fund and keep the payouts growing year after year.

3. Value stock funds

Value stock funds include stocks that are more value-priced than the rest of the market, helping you find the stocks that are relative bargains. That means value stocks tend to be less volatile than the rest of the market, and they tend to have good returns over time. Plus, many of these companies also pay dividends, meaning you can enjoy attractive returns plus a cash payout.

Because of their (usually) lower volatility, value stock funds may make an attractive addition to a Roth IRA. And of course, any dividends can be plowed right back into the value stock fund, too.

4. Nasdaq-100 index funds

A Nasdaq-100 index fund focuses on the largest names trading on the Nasdaq exchange, which is chock full of tech firms you might use every day, including Amazon, Apple and Meta Platforms (formerly known as Facebook). This kind of fund gives you high exposure to these top players, even more than you’d get in an S&P 500 index fund, supercharging your returns if these stocks do well.

If you believe in the continued growth of tech stocks, this kind of Nasdaq fund is a great place to invest, potentially for decades. You’ll get some diversification and may be able to compound your money at attractive rates. Of course, inside a Roth IRA you won’t pay any capital gains taxes, either on your sales or when you make a qualified withdrawal from the account.

5. REIT funds

Real estate investment trusts (REITs) may sound fancy, but it’s just the name for a special kind of tax-advantaged company that manages real estate investments. By law, REITs must pay out most of their income as dividends in exchange for not having to pay tax at the corporate level. That tax-advantaged structure means that they’re a preferred place for real estate investors.

Perhaps unsurprisingly, REIT funds are popular with investors because they pay out high dividends, and they have a strong track record of returns over time, too. Plus, inside the Roth IRA you won’t owe any taxes on those dividends, allowing you to reinvest them in more shares. It’s a double whammy of investment returns that keep many investors hooked on REITs.

6. Target-date funds

A target-date fund is a good pick for investors who don’t want to focus on managing a portfolio. With a target-date fund, you choose the year when you want to access the money, and the fund automatically moves you from riskier, high-return assets (stocks) to safer, low-return assets (bonds) as you approach your date. Deposit money and let the fund company run the show.

If there’s a downside to target-date funds, it’s that they can cost more than other funds, though their expense ratio is still often reasonable. But that additional cost is for their extra management. Also, it may make sense to pick a target date that’s five or 10 years later than you actually want to retire, because that leaves more high-growth assets in your portfolio. By doing this, you help ensure that you won’t outlive your money, a risk that can prove very stressful in your retirement years.

7. Small-cap stock funds

Funds that invest in small companies – those called small-cap stocks – are an attractive place for long-term investment returns. Small-caps have the potential to grow quickly over time, and they’re often high-growth companies, but not always. Because they’re smaller and have fewer financial resources, small caps tend to be riskier, but they can make up for it with high returns.

Because of their potential for growth over time, small-caps can be a good investment for a Roth IRA, letting you compound your money. You can invest in a fund focused exclusively on small caps, such as an index fund that tracks the Russell 2000, and enjoy the relative safety created by the fund’s well-diversified portfolio of holdings.

8. Bond funds

Bond funds may not perform as well as stocks over the long term, but they can generate meaningful income that is tax free when it’s held in a Roth IRA. Try to find core bond funds that hold highly rated bonds, which means the companies are likely to meet their debt obligations.

High-yield bond funds offer higher returns, but they come with additional risk that can make them behave more like stocks than bonds. The bonds held in high-yield funds are non-investment grade, or junk, because there’s a real risk they won’t be able to make their interest payments.

Watch out for highly speculative investments

If you’re investing the money you need for your retirement, you want to balance the prospect for strong, long-term returns with taking reasonable risks. For example, a well-diversified portfolio of stocks is likely to outpace most investments over time. Yet in the short term, stocks can fluctuate significantly. But overall, a portfolio of stock index funds is a time-tested way to build wealth.

Recently, some companies have begun offering the ability to purchase cryptocurrencies such as Bitcoin in an IRA or 401(k). While Bitcoin has had a strong run since it was first introduced in 2009, it’s an unproven and highly speculative asset. These features make it inappropriate for retirement accounts.

That’s led some investing experts to caution that using a retirement account to invest in cryptocurrencies is “gambling” and “pure, unadulterated speculation.”

Instead, stick to the tried-and-true methods of building wealth in your retirement accounts, because that money must be there when you need it.

Roth IRA FAQs

• Can anyone contribute to a Roth IRA?

  No, there are income limits for contributing to a Roth IRA. For the 2024 tax year, single filers can make the full $7,000 contribution if their income is below $146,000. Those over age 50 can make an additional $1,000 contribution. If you’re single and make $161,000 or more, you can’t contribute to a Roth IRA. The income limits for a married couple filing jointly range from $230,000 to $240,000.

  There are still ways to get money into a Roth IRA if your income is high. Here’s what to know about the backdoor Roth IRA.

• How much can you contribute to a Roth IRA?

  Roth IRA contribution limits are $7,000 for those under 50 years old, or $8,000 for those age 50 and older for the 2024 tax year.

• Which investments should you avoid in a Roth IRA?

  You should avoid speculative investments in a Roth IRA because you’re relying on these investments to fund your future retirement. Cash is also a poor investment for a Roth IRA because it’s likely to lose value over time due to inflation. Municipal bonds should also be avoided because their tax advantage isn’t needed in a tax-advantaged account.

Bottom line

A Roth IRA is a great investment account for retirement, and investors should look to take maximum advantage of it. Find investments with a strong, long-term track record and stay clear of highly speculative investments. With potentially decades to let your Roth IRA compound, you can give yourself every chance of building a huge nest egg that’s untouchable by the taxman.

— Bankrate’s Brian Baker contributed to an update of this story.