Start with your time horizon and risk tolerance

What you invest in your Roth IRA depends almost entirely on when you need the money and how much volatility you can stomach. If you are 25 and will not touch this account for 40 years, you can own stocks that swing wildly in value because you have time to recover from downturns. If you are 60, you probably want bonds or stable investments that do not drop 20 percent in a bad year. The Roth IRA itself is just a container — the tax rules are the same whether you hold a money market fund or individual stocks inside it.

The second question is whether you want to pick individual investments or let someone else do it. Most people are better off with a fund — either a mutual fund or an exchange-traded fund (ETF) — because a single fund gives you instant diversification across dozens or hundreds of companies. Picking individual stocks requires research, time, and a willingness to be wrong. There is no shame in choosing not to do that.

Key Takeaways

  • Stock funds are standard for Roth IRAs held by people under 50 because the long time horizon lets you ride out market drops.
  • Target-date funds automatically shift from stocks to bonds as you approach retirement, so you do not have to rebalance yourself.
  • Bond funds and money market funds are safer but grow more slowly, and they make sense only if you are within 10 years of retirement or cannot tolerate stock market swings.
  • You can hold individual stocks, bonds, CDs, or even real estate investment trusts (REITs) in a Roth IRA, but most people benefit from starting with a low-cost index fund.
  • Your brokerage firm — Vanguard, Fidelity, Charles Schwab, or another — determines which investments are available to you, so compare their fund lineups before opening an account.

Stock funds for long-term growth

If you are more than 15 years from retirement, a stock fund is the most common choice. Stock funds own shares in companies, and over decades they have historically returned about 10 percent per year on average (though individual years vary wildly). The advantage of a fund over individual stocks is that if one company fails, your money is spread across hundreds of others.

The simplest option is a total stock market index fund, which owns a small piece of nearly every publicly traded company in the United States. Vanguard's Total Stock Market Index Fund (ticker VTSAX if you buy it directly, or VTI if you buy the ETF version) and Fidelity's Total Market Index Fund (FSKAX) are examples. These funds charge very low fees — often 0.03 to 0.04 percent per year — because they simply track an index rather than paying a manager to pick stocks.

If you want exposure to international companies as well, you can split your Roth IRA between a U.S. stock fund and an international stock fund. A common split is 70 percent U.S. and 30 percent international, though the exact split is a personal choice. Vanguard Total International Stock Index Fund (VTIAX) and Fidelity International Index Fund (FTIHX) are low-cost options.

Target-date funds for hands-off investing

A target-date fund is a single fund that automatically becomes more conservative as you approach retirement. You pick the fund based on the year you expect to retire — for example, a "2055 Target Date Fund" if you plan to retire around 2055. When you are young, the fund holds mostly stocks. As the target year gets closer, the fund gradually shifts to bonds and other stable investments.

The advantage is that you never have to think about rebalancing or changing your strategy. The fund does it for you. The disadvantage is that you have less control, and the fees are slightly higher than a plain index fund (usually 0.08 to 0.15 percent per year). Most major brokerages offer target-date funds: Vanguard Target Retirement 2055 Fund (VFFVX), Fidelity Freedom Index 2055 Fund (FIKFX), and Schwab Target 2055 Fund (SWYFX) are examples.

Bond funds and stable investments for near-retirees

If you are within 10 years of retirement or you lose sleep over stock market drops, a bond fund is more appropriate. Bonds are loans you make to governments or companies; they pay you interest and are far less volatile than stocks. A bond fund holds dozens of bonds, so if one issuer defaults, the impact is small. Bond funds typically return 3 to 5 percent per year, depending on interest rates and the type of bonds held.

A total bond market index fund owns a mix of government and corporate bonds across different maturity dates. Vanguard Total Bond Market Index Fund (BND or VBTLX) and Fidelity Bond Index Fund (FBNDX) are examples. These funds charge 0.03 to 0.05 percent per year. You can also hold individual bonds or bond ladder strategies inside a Roth IRA, but that requires more active management.

Money market funds and high-yield savings accounts are the most stable option. Money market funds hold very short-term debt and are nearly as safe as bank deposits. They currently yield around 4 to 5 percent per year, though that rate changes with Federal Reserve decisions. The trade-off is that they grow much more slowly than stocks or bonds. Use them only if you are very close to retirement or you cannot tolerate any volatility.

Individual stocks and alternative investments

You can hold individual stocks inside a Roth IRA if you want to pick companies yourself. The tax advantage is powerful: any gains are tax-free forever. But individual stock picking requires research, and most people who try it underperform a simple index fund. If you do own individual stocks, keep them as a small portion of your Roth IRA — perhaps 10 to 20 percent — and fill the rest with diversified funds.

Other investments allowed in a Roth IRA include real estate investment trusts (REITs), which own commercial or residential property; exchange-traded funds (ETFs), which are funds that trade like stocks; and even some alternative investments like precious metals or commodities. However, most of these are more complex and carry higher fees than a basic stock or bond fund. Start simple, and explore alternatives only after you understand the basics.

How to choose a brokerage and compare fund options

Your choice of brokerage — Vanguard, Fidelity, Charles Schwab, E*TRADE, or another firm — determines which funds are available to you and what you pay to buy them. Most major brokerages offer their own low-cost index funds and charge no commission to buy or sell funds. However, some brokerages charge fees to buy funds from other companies, which can add up over time.

Before opening a Roth IRA, compare the fund lineups at two or three brokerages. If you want to own Vanguard funds, Vanguard itself is usually cheapest, but Fidelity and Schwab also offer Vanguard funds with no commission. If you are drawn to Fidelity funds, Fidelity is the obvious choice. Look at the expense ratios (the annual fee as a percentage of your balance) and whether the brokerage charges commissions to buy or sell.

Rebalancing and adjusting your strategy over time

Once you have chosen your investments, you do not need to trade constantly. In fact, frequent trading is usually a mistake — it triggers taxes (though not in a Roth IRA) and costs money in commissions. A reasonable approach is to review your allocation once a year and rebalance if one investment has grown much larger than the others.

As you age, your strategy should shift. If you started with 100 percent stocks at age 25, you might move to 80 percent stocks and 20 percent bonds at age 45, and 50 percent stocks and 50 percent bonds at age 60. A target-date fund does this automatically. If you are using individual funds, set a calendar reminder to review your allocation every January and adjust if needed.

Frequently Asked Questions

Can I change what I invest in after I open my Roth IRA?

Yes, you can buy and sell investments inside your Roth IRA as often as you want with no tax penalty. There are no contribution limits on trading within the account. However, frequent trading usually hurts returns because you pay commissions and miss gains. Most people benefit from choosing a strategy and sticking with it for years.

What if I do not know whether to pick stocks or bonds?

A target-date fund removes the decision. Pick the fund that matches your expected retirement year, and it will automatically balance stocks and bonds for you. If you want more control, a simple split like 80 percent stock index fund and 20 percent bond index fund works for most people under 50.

Is it better to own one fund or several?

One fund is simpler and works fine if it is diversified — a total stock market index fund or a target-date fund both own hundreds of holdings. Splitting between a U.S. stock fund and an international stock fund adds diversification but requires you to rebalance. For most people, one or two funds is enough.

Do I have to invest all my money at once?

No. You can contribute to your Roth IRA throughout the year and invest the money whenever you are ready. Some people contribute monthly, others once a year. The timing of when you invest matters less than the fact that you are investing regularly over decades.

What happens if the stock market crashes after I invest?

If you are young and not retiring soon, a crash is actually an opportunity — your regular contributions buy more shares at lower prices. If you are close to retirement, a crash is painful but temporary; historically, the market has recovered within a few years. This is why your strategy should match your timeline: stocks for long horizons, bonds for short ones.