Roth IRAs: Investing and Trading Do’s and Don’ts

Roth individual retirement accounts (usually known as Roth IRAs) are considered one of the best retirement plans and long-term investment accounts that anyone can have. Because they are funded with after-tax dollars, you can withdraw your funds in retirement (after age 59½) tax-free. Roth IRAs can hold almost any financial asset except life insurance and collectibles, so that makes them versatile for diversified investing.

A Roth IRA can be an excellent tool for growing your nest egg, especially if you understand the do’s and don’ts of investing for these accounts. Here’s a quick look at managing your Roth IRA to make the most of it.

Unlike traditional IRAs, Roths have no required minimum distributions (RMDs) during the owner’s lifetime—so you can leave the money alone for it to keep growing tax-free for your heirs.

You can contribute up to $7,000 ($8,000 if you’re age 50 or older) a year to your IRA(s) in 2024. And while you can withdraw your contributions at any time (for any reason), you generally must be at least age 59½—and you must have first contributed to the IRA five years prior—to withdraw earnings without incurring taxes or penalties.

Roth IRA vs. Traditional IRA

Created in 1997, a Roth IRA is the younger sibling of traditional individual retirement accounts (IRAs). The most significant difference between these two IRAs is how they’re taxed. Roth IRAs are funded with after-tax dollars, meaning that contributions aren't tax-deductible. But once you start withdrawing funds in retirement, the money is tax-free.

Conversely, traditional IRA contributions usually are made with pretax dollars. You can deduct your contributions (depending on your income and other factors), but you pay income tax on withdrawals during retirement.

Roth IRAs vs. Traditional IRAs
	Roth IRAs	Traditional IRAs
Contributions	Contributions aren't tax- deductible	Contributions may be tax-deductible
Contribution Limits	$7,000 in 2024	$7,000 in 2024
Catch-up Contribution	$1,000 if you're age 50 or above	$1,000 if you're age 50 or above
Income Limits	Not eligible to contribute if modified adjusted gross income (MAGI) is between $146,000 and $161,000 in 2024 for single filers or between $230,000 and $240,000 in 2024 if you’re married filing jointly	No income limits
Withdrawals	Tax- and penalty-free if you’re at least age 59½ and it has been at least five years since you first contributed to a Roth IRA	No penalty if you’re at least age 59½, but withdrawals are taxed as ordinary income
Age Limit for Contributions	No age limit	No age limit
RMDs	No RMDs for the account owner’s lifetime	RMDs begin at age 73 or 75, depending on the year you were born

Popular Roth IRA Investments

Roth IRAs can hold just about any financial asset except life insurance and collectibles; however, the “big-box” IRA companies (for example, Charles Schwab, Fidelity, and Vanguard) typically stick to the assets that they sell (and make money from)—such as stocks, bonds, and mutual funds. If you want to access non-traditional assets such as real estate and precious metals, you'll need a custodian that offers a special account called a self-directed IRA (SDIRA).

Here’s a rundown of some of the more popular investments for standard (in other words, not self-directed) Roth IRAs:

• Stocks: income-oriented stocks that pay high dividends or growth stocks that can yield high returns.
• Bonds: interest-paying debt instruments offered by the U.S. government, states, municipalities, and corporations.
• Mutual funds: professionally managed investment funds that can offer simplicity, low expenses, and diversification.
• Exchange-traded funds (ETFs): baskets of securities that trade like individual stocks, offering diversification, low expenses, and high potential yields.
• Target-date funds (TDFs): a diversified mix of equities and fixed-income investments that automatically rebalances as you get closer to retirement.
• Real estate investment trusts (REITs): companies that own, operate, or finance income-producing real estate and pay dividends to investors.

Prohibited IRA Investments

There are a handful of investments that you can’t hold in a Roth IRA:

• Life insurance
• Collectibles, including art, rugs, metals, antiques, gems, stamps, most coins, alcoholic beverages, and certain other tangible personal property

According to the Internal Revenue Service (IRS), if you invest your IRA in a collectible, then the amount that you invest is considered distributed in the year when you acquired the item—and you may have to pay an added 10% penalty tax on the early distribution.

Prohibited Roth IRA Transactions

A prohibited transaction in a Roth or traditional IRA is any improper use of the account by the owner, their beneficiary, or any disqualified person—including the owner’s fiduciary or family members. The IRS strictly prohibits the following transactions in IRAs:

• Borrowing money from an IRA
• Selling property to an IRA
• Using an IRA as security for a loan
• Buying property for personal use with IRA funds

Margin Accounts and Roth IRAs

Margin accounts are brokerage accounts that let you borrow money from your brokerage firm to buy securities. The broker charges interest, and the securities are used as collateral. Margin lets you buy more securities with less of your own cash, magnifying both gains and losses.

Because the IRS prohibits using an IRA as security for a loan, you generally can’t use margin to trade with an IRA. If you do, the IRS could consider the entire IRA as distributed. This means that you would owe income tax on the full IRA amount—plus a 10% penalty if you’re younger than 59½ or it’s been fewer than five years since you first contributed to an IRA.

Still, some brokers allow something known as “limited margin,” which is like getting a cash advance on the securities that you sell. For example, if you sell a stock in your IRA, there could be a delay between the trade’s execution and when you receive the cash in your account. If you have a limited margin account, you could make another trade while waiting for the previous trade to settle—the stock sale in our example. This means that you can manage the investments in the account quicker and more readily.

Limited margin is available for most IRA types, including the Roth, traditional, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) varieties. Brokers that allow limited margin for IRAs have specific eligibility requirements (e.g., a minimum balance), and your account must be approved for this type of margin before placing any trades.

Roth IRA Withdrawals

In general terms, withdrawal rules for Roth IRAs are more flexible than for traditional IRAs and 401(k)s.

Roth IRA withdrawal rules differ depending on whether you take out your contributions or your investment income. Contributions are the money that you deposit into an IRA, while income and earnings are your profits. Both grow tax-free in your account.

• Withdrawing contributions: You can withdraw your Roth IRA contributions at any time, for any reason, with no tax or penalties. That’s because contributions are funded with after-tax dollars, so you’ve already paid income taxes on that money.
  
• Withdrawing earnings: If you withdraw IRA earnings, you may be subject to income taxes and a 10% penalty, depending on your age and how long you’ve had the account.  
  

In general, you can withdraw your earnings with no taxes or penalties if:

• You’re at least 59½ years old.
• It has been at least five years since you first contributed to any Roth IRA. This is called the five-year rule.

The Bottom Line

Roth IRAs are a popular way to save for retirement due to their tax advantages and lack of RMDs. While many investors stick to stocks, bonds, and mutual funds in their Roth IRAs, investing in non-traditional assets like real estate and cryptocurrency is possible if you have an SDIRA. 

Of course, keep in mind that alternative investments have greater earnings potential—but more risk, too. As such, SDIRAs are generally best suited for investors who already have substantial experience with buying and selling non-traditional assets and understand the tax implications and potential volatility of those investments.