What You Can Actually Invest in a Roth IRA

A Roth IRA is a container, not a choice. Once you open one, you decide what goes inside it—stocks, bonds, mutual funds, exchange-traded funds (ETFs), or a mix of all of them. The IRS does not care which of these you pick. What matters is that you are putting money into a Roth account instead of a regular brokerage account, which means your earnings grow tax-free and you can withdraw them tax-free in retirement.

The real decision is not "what can I invest in" but "what should I invest in given my age, how much risk I can handle, and when I need the money." A 25-year-old with 40 years until retirement can weather stock market drops that would panic a 60-year-old. Someone who might need the money in five years should not own the same things as someone who will not touch it for 30 years.

Your brokerage—Vanguard, Fidelity, Charles Schwab, or whoever holds your Roth—will let you buy individual stocks if you want to. Most people should not. A simpler path is to buy funds that hold dozens or hundreds of stocks or bonds for you, so one bad company does not wreck your account.

Key Takeaways

  • A Roth IRA can hold stocks, bonds, mutual funds, ETFs, and some other investments, but the IRS bans collectibles, life insurance, and certain other assets.
  • Most people should own a mix of stock funds and bond funds rather than individual stocks, because funds spread your risk across many companies.
  • Your age and how many years until you retire should drive how much you put in stocks versus bonds—younger people can usually handle more stock risk.
  • Low-cost index funds and target-date funds are the simplest starting point because they require almost no ongoing decisions from you.
  • You can change what you own inside your Roth whenever you want without tax penalties, so your first choice does not have to be perfect.

Stock Funds: The Core of Most Roth Accounts

A stock fund is a collection of shares in many companies, managed by a fund company. When you buy one share of a stock fund, you own a tiny piece of all those companies. If one company fails, it barely dents your fund because you own hundreds of others.

The two main types are index funds and actively managed funds. An index fund tracks a list—the S&P 500 (500 large U.S. companies), the total U.S. stock market, or international stocks. It does not try to beat the market; it just copies it. An actively managed fund pays a manager to pick stocks they think will outperform. That manager costs money, usually 0.5% to 1% or more per year. Most actively managed funds do not beat index funds over long periods, so most people pay extra for no gain.

For a Roth, start with a low-cost index fund. Vanguard's Total Stock Market Index Fund (ticker VTSAX if you buy directly, or VTI if you buy shares), Fidelity's Total Market Index Fund (FSKAX or FTIHX), and Schwab's U.S. Total Stock Market Index Fund (SWTSX) all track the entire U.S. stock market and cost less than 0.05% per year. If you want international stocks too, add a fund that tracks developed markets (like VTIAX or VXUS) or emerging markets (like VEMAX or VWO).

Bond Funds: The Stability Piece

A bond fund holds debt—usually government or corporate bonds. When you own a bond fund, you are lending money to governments or companies, and they pay you interest. Bonds are less volatile than stocks: they do not swing up and down as wildly, but they also do not grow as fast over decades.

A bond fund is useful if you are close to retirement, if you cannot sleep at night watching your account drop 20% in a bad market year, or if you want to reduce the overall risk in your Roth. A common mix for someone in their 50s might be 60% stock funds and 40% bond funds. Someone in their 30s might be 90% stocks and 10% bonds, or even 100% stocks.

For bond funds, look for total bond market funds (like VBTLX, FXNAX, or SWAGX) that hold a mix of government and corporate bonds. They cost under 0.05% per year and require no decisions from you. Avoid individual bonds unless you have a specific reason—they are harder to buy and sell, and a fund does the work cheaper.

Target-Date Funds: The Set-It-and-Forget-It Option

A target-date fund is a single fund that holds both stocks and bonds, and it automatically shifts toward more bonds as you get older. If you choose a 2055 target-date fund and you plan to retire around 2055, the fund starts with mostly stocks (because you have 30 years) and gradually becomes more conservative as 2055 approaches.

This is the easiest choice if you do not want to think about rebalancing. You buy one fund, and it does the work. Vanguard, Fidelity, and Schwab all offer target-date funds with costs under 0.10% per year. The downside: you have less control, and the fund's idea of "conservative" might not match yours. Some people prefer to own separate stock and bond funds so they can adjust the mix themselves.

If you go the target-date route, pick the fund with the year closest to when you think you will retire. If you are 35 and plan to retire at 65, choose a 2050 or 2055 fund. The exact year does not matter much—the fund will adjust either way.

What You Cannot Own in a Roth IRA

The IRS bans certain investments in a Roth. You cannot own collectibles (art, stamps, coins, memorabilia), life insurance, or most commodities (gold, oil, wheat). You also cannot own stock in a business you control, and you cannot use your Roth to buy real estate directly (though you can own a real estate investment trust, or REIT, which is a fund that owns buildings and pays you rent income).

These rules exist to prevent people from using a Roth as a tax shelter for non-investment assets. In practice, they do not affect most people. If you stick to stock funds, bond funds, and ETFs, you are fine.

How Much to Own of Each Type

The split between stocks and bonds depends on three things: your age, your risk tolerance, and how soon you need the money. A rough guide is to subtract your age from 110 or 120—that is the percentage you might put in stocks. A 30-year-old would put 80 to 90% in stocks and 10 to 20% in bonds. A 60-year-old might do 50% stocks and 50% bonds.

This is not a rule. Some 60-year-olds can handle 70% stocks because they have other income and a long life expectancy. Some 30-year-olds sleep better with 60% stocks because market drops stress them out. The best mix is the one you will stick with, not the one that looks best on paper.

You can change your mix whenever you want inside a Roth—no taxes, no penalties. If you own 80% stocks and a market crash makes you panic, you can shift to 60% stocks. If you get a big raise and feel more confident, you can shift back. This flexibility is one reason a Roth is powerful: you can adjust as your life changes.

Low-Cost ETFs as an Alternative

An exchange-traded fund (ETF) is similar to a mutual fund but trades like a stock. You can buy it through any brokerage, and it holds many companies or bonds. The main difference from a mutual fund is that ETFs often have slightly lower costs and trade throughout the day (mutual funds trade once per day at the closing price).

For a Roth, ETFs and mutual funds are roughly equivalent. Vanguard's VTI (total U.S. stock market) and VBTLX (total bond market) are both excellent. Fidelity's FTIHX and FXNAX work the same way. If you prefer ETFs, buy VTI and BND (or VBTLX's ETF equivalent, BLV) and you have a complete portfolio. The cost difference between a good ETF and a good mutual fund is usually less than 0.01% per year, so either path works.

Frequently Asked Questions

Can I own individual stocks in a Roth IRA?

Yes, you can buy individual company stocks in a Roth through any brokerage. However, most people should not, because one bad company can hurt your account. A fund spreads your risk across hundreds of companies. If you want to own individual stocks, keep them to a small part of your Roth (maybe 5 to 10%) and own funds for the rest.

Should I pick a fund based on past performance?

No. Past performance does not predict future results, and funds that did best in the last five years often do worse in the next five. Instead, pick based on cost (lower is better), what the fund owns (does it match what you want?), and whether you understand it. A boring, cheap, simple fund will serve you better than a flashy one with a great recent track record.

What if I do not know how much risk I can handle?

Start with a target-date fund matching your retirement year. It is designed for someone like you, and you can always change it later. If you want more control, go 80% stock fund and 20% bond fund, then adjust based on how you feel during market drops. If a 20% drop makes you want to sell, you probably need more bonds.

Can I move money between investments inside my Roth without paying taxes?

Yes. You can sell one fund and buy another inside your Roth with no tax consequences. This is one of the biggest advantages of a Roth—you can rebalance, change your mind, or shift strategy without the IRS taking a cut. The only limit is that you cannot add more than the annual contribution limit ($7,000 in 2024, though this changes yearly) to your Roth in a calendar year.

Is it better to own one fund or several?

One fund is simpler. A target-date fund or a total market index fund alone will work. Several funds give you more control—you can own 70% U.S. stocks, 20% international stocks, and 10% bonds, for example. For most people starting out, one fund is better because it requires fewer decisions and costs almost nothing more.