Good Roth IRA Investments
Like regular IRAs and 401(k) plans, Roth IRAs do not require the investor to pay taxes on dividends, interest, or capital gains acquired while the investments are within the Roth IRA. Unlike those other plans, the Roth IRA also does not require taxes to be paid on any money withdrawn from the account once the owner reaches retirement age. Also, unlike the other retirement accounts, contributions to a Roth IRA are not tax-deductible or made with pre-tax dollars. So, what makes a smart investment for a Roth IRA?
Roth IRAs already provide the owner with a complete tax shelter. As such, there is no reason to put tax-advantaged investments such as municipal bonds inside of a Roth IRA. Municipal bonds provide most investors with tax-free income and as a result pay lower interest rates than equivalent non-tax advantaged bonds.
Annuities should NEVER be placed into a Roth IRA. The main selling point of an annuity is its tax deferral element which is of no use inside of a Roth IRA. If an investment professional suggests using an annuity inside of a Roth IRA, be very cautious. Many firms and advisors have paid penalties for these actions. Remember, there is no such thing as “double tax deferral."
Good Roth IRA investments are either those that generate taxable income during their life, or those that will produce potentially large capital gains. Thus, when used as part of an overall investment portfolio in which other retirement investments are held in a coordinated manner inside of accounts like 401(k) plans and traditional IRAs, the more aggressive elements of the retirement portfolio should be held inside of the Roth IRA.
Investments such as zero-coupon bonds, or other bonds which generate taxable income with no accompanying cash payment also make good investments for any tax deferred retirement accounts, including Roth IRAs.
As you approach retirement and become more conservative in your investing, the investments made inside of your Roth IRA should be those that you intend to keep the longest. Unlike traditional IRA accounts and 401(k) accounts, there are no required minimum distributions, RMDs, required on Roth IRA accounts, so investments can be held longer without the need to sell.
Also, see our guide to convert traditional IRA to Roth IRA.