Investing Your Roth IRA

investing your roth ira

Investing your roth ira allows you to save tax-free money for retirement. It also allows you to benefit from the snowball effect of compound interest — your earnings and interest are reinvested, earning more and more each year. And your withdrawals at retirement are tax-free, too.

But investing your IRA comes with some unique challenges, and understanding the differences between Roth IRA investments and those in pre-tax accounts can help you get the most out of your account.

First, you need to decide what kinds of investments are right for you. For example, you should avoid high-risk assets like cryptocurrencies and mutual funds with excessive fees. But you shouldn’t shy away from riskier investment strategies like value or growth and income investing, because you can earn higher returns over the long run with these types of investments.

Then, consider your investing timeline and goals. If you expect your income to increase over time, a Roth might make more sense for you than a traditional IRA because it gives you the freedom to withdraw your contributions without penalty.

When choosing an investment strategy, your goals, investment timeline and asset allocation should all be taken into consideration. For example, if you’re saving for college, you might want to invest in dividend stocks because their generous dividends can give your retirement savings a boost. But if you’re in the early stages of your career and are expecting your tax rate to go up, you might be better off with a more aggressive strategy that can grow faster than traditional IRA investments.

One way to take the guesswork out of your investing is to work with an investment pro. A financial professional can help you determine the best mix of investments for your retirement accounts — and your other accounts, too – to maximize your overall wealth. Many investors choose to invest their IRA in a target-date fund, which offers a diversified portfolio that automatically adjusts over time. While that’s an option to consider, there are other options available if you prefer more personalized guidance.

If you’re ready to start investing your IRA, connect with a SmartVestor pro. We’ll match you with a local financial professional who can answer your questions and help you make sense of all your investment options. This article was written by NerdWallet’s team of personal finance experts. It’s based on research from peer-reviewed studies, government websites and academic papers. It’s fact-checked and edited for clarity and relevance. This service is free for our users. NerdWallet does not accept compensation from the companies whose products we review. We may receive a commission from purchases you make after clicking on our links. We strive to keep our content accurate and up-to-date, but we may miss a thing or two along the way. If you find an error, please let us know. Thanks!