The Roth IRA is an alternative to the Traditional IRA that
originated in the 1990s in the United States. A Roth IRA differentiates itself
from a Traditional IRA in that it is funded with after-tax dollars rather than
pre-tax dollars. Due to this unique feature, distributions taken from a Roth
IRA after one is 59.5 years of age or older are tax-free. (Distributions taken
before age 59.5 are subject to a 10 percent penalty from the IRS).
A Roth IRA has many different investment options. This article will discuss the merits of investing in two specific investment options for a Roth IRA: mutual funds and stocks.
Mutual Funds
Mutual funds are the most popular investment option for a Roth IRA, chiefly because they provide so much diversification. Unlike stocks or bonds, which only invest in a single asset, mutual funds have their hands in multiple assets. Mutual funds-- both within and outside Roth IRAs-- reached $15 trillion in assets in the United States in 2013.
An astounding 62% of all Roth IRA investments are done within mutual funds; the investment options within a Roth IRA mutual fund include funds with an equity, bond or balanced outlook. Of these three options, mutual funds with an equity outlook are by far the most popular-- according to the Investment Company Institute,they account for more than half (52%) of the mutual funds in Roth IRAs. Equity funds invest in both domestic and international stocks, and are either actively managed or track a stock index. Equity funds typically focus on growth rather than income, and are for more aggressive investors.
Stocks
31 percent of Roth IRA investments are within individual stocks. Like equity mutual funds, there is the possibility of great appreciation over time. However, since individual stocks are volatile and rarely provide the diversification of mutual funds, they are very risky. They should only be invested in by individuals with a high risk tolerance and a long time horizon. Usually the stock market will provide consistent growth over time, but no guarantees are made.
Conclusion
There are a number of ways in which to allocate Roth IRA funds, but stocks and mutual funds are two of the more rewarding. Do your research, be patient, and stay on top of your investments, and you should be fine.
A Roth IRA has many different investment options. This article will discuss the merits of investing in two specific investment options for a Roth IRA: mutual funds and stocks.
Mutual Funds
Mutual funds are the most popular investment option for a Roth IRA, chiefly because they provide so much diversification. Unlike stocks or bonds, which only invest in a single asset, mutual funds have their hands in multiple assets. Mutual funds-- both within and outside Roth IRAs-- reached $15 trillion in assets in the United States in 2013.
An astounding 62% of all Roth IRA investments are done within mutual funds; the investment options within a Roth IRA mutual fund include funds with an equity, bond or balanced outlook. Of these three options, mutual funds with an equity outlook are by far the most popular-- according to the Investment Company Institute,they account for more than half (52%) of the mutual funds in Roth IRAs. Equity funds invest in both domestic and international stocks, and are either actively managed or track a stock index. Equity funds typically focus on growth rather than income, and are for more aggressive investors.
Stocks
31 percent of Roth IRA investments are within individual stocks. Like equity mutual funds, there is the possibility of great appreciation over time. However, since individual stocks are volatile and rarely provide the diversification of mutual funds, they are very risky. They should only be invested in by individuals with a high risk tolerance and a long time horizon. Usually the stock market will provide consistent growth over time, but no guarantees are made.
Conclusion
There are a number of ways in which to allocate Roth IRA funds, but stocks and mutual funds are two of the more rewarding. Do your research, be patient, and stay on top of your investments, and you should be fine.
