Hylland Capital
The next generation in financial planning

Ask an Advisor Archive

Your Personal Finance Questions - Answered!

“What investment is best for my ROTH IRA”

Today’s answer is a continuation off of yesterday’s question on the best investments for a traditional IRA. As a reminder you can go to hyllandcapital.com/ask to find previous ask a financial advisor segments.

The question is:

“What investment is best for my ROTH IRA”

 

Transcript - Best Investment for a Roth IRA

Like traditional IRAs, ROTH IRAs allow for tax free growth when the investments are within the ROTH. However where these accounts differ is that when you withdrawal from a ROTH IRA you pay no taxes, whereas when you withdrawal from  a traditional IRA, whatever you withdrawal is taxed as income.

So on a basic level, the investments that are best in a ROTH IRA are investments that you expect to grow the most over time. This means stocks and REITs. And while a ROTH IRA would save you the taxes from the interest payment of bonds, it is typically better for bonds to be allocated in a traditional IRA or 401k since they have lower expected appreciation.

And while it is not always the case, many times a ROTH IRA is drawn down later in retirement than taxable investing accounts, 401ks, and traditional IRAs. This means that ROTH IRAs should be invested with a slightly longer time horizon than your other retirement accounts, which typically means a higher allocation to stocks.

Lastly, If you plan on passing investments down as an inheritance, leaving a ROTH IRA for inheritance is usually preferred as it creates less taxes for your heirs. In this case, you are effectively investing a ROTH account for a very long time horizon. So even if the rest of your investments are allocated more conservatively in bonds, you will want your ROTH invested mainly in stocks.

Matt Hylland