The best investments for a Roth IRA are ones that generate the most taxable income or have the highest long-term growth potential, since all qualified withdrawals from a Roth are tax-free. That means your Roth is the ideal home for assets that would otherwise cost you the most in annual taxes: corporate bonds, actively managed funds, REITs, and high-growth stocks. The specific mix depends on how far you are from retirement and how much hands-on management you want.
Why Your Roth IRA Deserves Specific Investments
A Roth IRA isn’t just another account. Money inside it grows tax-free, and you pay zero federal tax on qualified withdrawals in retirement. That changes the math on what you should hold there versus a regular brokerage account.
In a taxable brokerage account, bond interest gets taxed as ordinary income every year, and fund distributions from actively managed funds create annual tax bills. Inside a Roth, none of that matters. So the general strategy is to place the most “tax-inefficient” investments in your Roth, where their tax drag disappears, and keep already-tax-efficient investments (like broad index funds you plan to hold for decades) in taxable accounts if you have both.
If your Roth is your only investment account, this distinction matters less. You’ll simply want a well-diversified portfolio built for your timeline.
Investments That Benefit Most From a Roth
Certain asset types gain the biggest advantage from tax-free growth:
- Taxable bonds and bond funds. Corporate bonds, high-yield bonds, and agency debt all pay interest taxed as ordinary income in a regular account. Inside a Roth, that interest compounds without any annual tax hit.
- Actively managed funds with high turnover. Funds where managers frequently buy and sell holdings tend to distribute capital gains each year. Holding them in a Roth eliminates those annual tax bills.
- REITs (real estate investment trusts). REIT dividends are mostly taxed as ordinary income rather than at the lower qualified-dividend rate. A Roth shelters that income completely.
- High-growth stocks or funds. If you believe a particular investment has significant upside over decades, placing it in a Roth means you keep every dollar of those gains. A stock that grows from $10,000 to $200,000 inside a Roth produces $190,000 in completely tax-free profit.
- CDs and money market funds. Their interest is taxed as ordinary income in a brokerage account, so they get the same Roth advantage as bonds.
Building a Portfolio by Time Horizon
Your age and retirement timeline matter more than almost anything else when choosing your mix of stocks and bonds. The further you are from retirement, the more you can afford to hold in stocks, which are volatile in the short term but have historically delivered higher returns over long periods. As you get closer to needing the money, shifting toward bonds and cash reduces the risk of a market downturn hitting right when you need to withdraw.
A common starting framework for your stock allocation: within stocks, put roughly 60% in U.S. large-cap funds, 25% in developed international markets, 10% in U.S. small-cap funds, and 5% in emerging markets. This gives you broad global diversification without overcomplicating things.
For bonds, a mix of investment-grade bonds (about 45% of your bond allocation), U.S. Treasuries (10% to 30%), and smaller slices in international bonds, high-yield bonds, and nontraditional bond funds provides steady income with manageable risk.
If you’re in your 20s or 30s, a portfolio of 80% to 90% stocks and 10% to 20% bonds is reasonable. In your 40s and 50s, gradually shifting toward 60% to 70% stocks makes sense. By retirement, many people hold closer to 40% to 50% stocks, with the rest in bonds and cash.
Target-Date Funds: The Simplest Option
If you don’t want to choose individual funds or rebalance your portfolio yourself, a target-date fund does it all in a single investment. You pick the fund with a year closest to when you plan to retire (like a 2055 fund if you’re roughly 30 years out), and the fund automatically adjusts its mix of stocks and bonds over time. Early on, it holds mostly stocks. As you approach the target year, it gradually shifts toward bonds and cash. This gradual shift is called the fund’s “glide path.”
The tradeoff is cost. Target-date funds typically charge higher expense ratios than plain index funds because of the active management involved in rebalancing. The average actively managed fund charges around 0.44% per year, compared to about 0.05% for a passively managed index fund. On a $100,000 portfolio, that’s a difference of roughly $390 per year. Over decades, those fees compound into a meaningful drag on returns.
That said, a target-date fund that keeps you invested and properly diversified is far better than an index fund you never rebalance or a portfolio you panic-sell during a downturn. The automation has real value if you know you won’t actively manage your investments.
Index Funds and ETFs: Lower Cost, More Control
If you’re willing to do a small amount of work, building a portfolio from a few low-cost index funds or ETFs gives you the same diversification at a fraction of the cost. A classic three-fund approach covers a total U.S. stock market index fund, a total international stock index fund, and a total bond market index fund. You set the percentages based on your age and risk comfort, then rebalance once or twice a year.
ETFs (exchange-traded funds) and index mutual funds are functionally similar for most Roth IRA investors. ETFs trade throughout the day like stocks and sometimes have slightly lower expense ratios. Index mutual funds let you invest exact dollar amounts (rather than buying whole shares) and are simpler to set up with automatic contributions. Either works well inside a Roth.
The expense ratio is the single most important number to compare. A fund charging 0.03% to 0.10% annually is in the low-cost range. Anything above 0.50% deserves scrutiny, because higher fees need to be justified by higher returns, and most actively managed funds fail to beat their benchmark index over long periods.
Individual Stocks
You can buy individual stocks inside a Roth IRA, and for high-conviction picks with significant growth potential, the Roth’s tax-free treatment is especially powerful. If a single stock triples or quadruples in value, you owe nothing on those gains when you withdraw in retirement.
The risk is concentration. A diversified index fund spreads your money across hundreds or thousands of companies. A single stock can drop 50% or go to zero. If you want to pick individual stocks in your Roth, consider limiting them to a small portion of the account (10% to 20%) and keeping the core in diversified funds.
What You Can’t Hold in a Roth IRA
The IRS prohibits a few specific types of investments inside any IRA:
- Life insurance. No type of life insurance policy, whether whole life, universal, term, or variable, can be held inside an IRA.
- Collectibles. Artwork, antiques, rugs, gems, stamps, most coins, and alcoholic beverages are all off-limits.
- Certain derivatives. Any trade with unlimited or undefined risk, such as writing naked call options, is prohibited.
- Personal-use real estate. You can technically hold real estate in a self-directed IRA, but you cannot live in the property, use it personally, or receive rental income directly. The property also cannot be bought from or sold to you, your spouse, your children, or other close family members.
How Much You Can Contribute
For 2026, you can contribute up to $7,500 to your Roth IRA, or $8,600 if you’re 50 or older. Your contribution can’t exceed your taxable compensation for the year, so if you earned $5,000, that’s your maximum. Roth IRA eligibility also phases out at higher incomes, so if you’re a high earner, check the current income limits before contributing.
Whatever amount you contribute, the most important step is actually investing it. Money sitting in a Roth IRA as uninvested cash earns almost nothing. Once you deposit funds, you still need to select and purchase investments within the account. This is a surprisingly common oversight: many people contribute to a Roth each year without realizing their money is just sitting in a default cash position, missing out on years of growth.