Lacey Stark
Jun 3, 2024
“If you are a young individual, you have plenty of time in the market to withstand volatility,” explains Anthony DeLuca, a CFP, CDFA and senior financial advisor at Delta Advisory Group. “Your mindset should be more growth-oriented, and therefore, your best investments should be tailored toward equity. On the contrary, someone a few years out from retirement needs to reduce their market risk, and a more conservative portfolio is a better investment choice. A fair mixture of bonds and large-cap funds would be more appropriate.”
Roth Individual Retirement Accounts (IRAs) are an excellent way to diversify and enhance your investment portfolio. Since they are funded with after-tax dollars, the earnings grow tax-free, and withdrawals during retirement are also tax-free. Here are five top investment ideas for Roth IRAs:
Five Best Roth IRA Investments:
Index Funds: These funds track specific indices like the S&P 500, offering diversification, low maintenance, and lower costs. However, they lack downside protection and control over individual holdings.
Bond Funds: These funds hold a variety of bonds, providing diversification and regular returns. They are professionally managed but come with management fees and interest rate uncertainty.
Target-Date Mutual Funds: These funds adjust their asset allocation as the target retirement date approaches, offering diversification and simplicity but potentially higher fees and limited customization.
Dividend Stocks: Stocks from established companies that regularly pay dividends, offering high earning potential and stability, though they come with market risks and lower growth potential compared to non-dividend stocks.
Real Estate Investment Trusts (REITs): These allow investment in real estate properties and provide dividends, offering diversification and liquidity but also market volatility and high fees.
Investment Strategy Considerations
The best investments depend on individual financial goals, risk tolerance, and age. Anthony DeLuca, CFP, CDFA, advises that younger investors should focus on growth-oriented equities due to their ability to withstand market volatility. He explains, “If you are a young individual, you have plenty of time in the market to withstand volatility... your mindset should be more growth-oriented, and therefore, your best investments should be tailored toward equity.” Conversely, those nearing retirement should reduce market risk with a more conservative portfolio, including bonds and large-cap funds. “A fair mixture of bonds and large-cap funds would be more appropriate,” DeLuca notes.
Tips for Maximizing Roth IRA Investments:
Diversify Your Portfolio: Mix lower- and higher-risk investments to spread risk.
Reinvest Dividends and Capital Gains: Benefit from compounding by automatically reinvesting dividends and gains.
Regularly Review and Rebalance Your Portfolio: Adjust your asset mix to ensure it aligns with your financial goals and risk tolerance.
Consider Tax Implications: Since Roth IRA investments grow tax-free, avoid tax-managed funds which may sacrifice performance to reduce taxable gains.
Considerations Before Investing in a Roth IRA:
Contribution Limits: For 2024, the limit is $7,000 (or $8,000 if over 50) across all IRAs.
Income Limits: Eligibility to contribute depends on income levels. Single filers earning less than $146,000 can contribute the maximum, while those earning over $161,000 cannot contribute at all.
Investment Time Horizon: The best investments vary depending on how long you plan to grow your money before retirement.
A Roth IRA can be a valuable part of your investment strategy, tailored to your age, risk tolerance, and financial goals. To start investing, consider index funds, bond funds, target-date mutual funds, dividend stocks, and REITs, and consult with financial advisors as needed.