A Roth IRA is a tax-advantaged type of retirement savings account that allows you to grow your nest egg using after-tax dollars. You can open a Roth IRA through your local bank, a brokerage firm or a discount broker online. Before you begin making contributions, it's important to consider the types of investments you want to purchase. There are a wide range of investment vehicles available and each features varying levels of risk and return.
A stock is simply an individual share in a company. A company typically issues shares of stock hoping to sell them to investors in order to raise capital. If you're interested in purchasing individual stocks using your Roth IRA contributions, there are several types to choose from. For example, a blue chip stock generally offers more consistent returns over time but come at a higher per-share cost. Penny stocks, on the other hand, carry a much lower price tag but come with a substantially higher risk.
A mutual fund is a collective investment in stocks, bonds or other securities. Mutual funds are typically categorized according to their investment type. For example, some mutual funds invest primarily in stocks while others invest in bonds. An index fund is designed to track and match the performance of a specific market index, such as the S&P 500. An exchange-traded fund differs slightly from a traditional mutual fund in that shares are sold in blocks called creation units, rather than individually.
A bond is a type of debt security in which the issuer pays you interest while you hold the bond note. Bonds are typically used to finance long-term projects and while they carry a lower risk than other investments, they also tend to offer a lower return. Bonds issued by the U.S. Treasury Department are backed by the full faith and credit of the government and are considered some of the safest investments available. Bonds can also be issued by corporate entities or state and local government agencies.
Certificates of Deposit
A certificate of deposit is a special type of savings investment that is typically issued through a bank or other financial institution. Depending on the type of CD you invest in, you may enjoy a fixed or variable interest rate. The money you invest in a CD typically has to remain in the account for a fixed period of time, generally anywhere from three months to five years. If you withdraw from the CD early, you may be hit with a penalty. CDs are considered relatively safe investments with a lower rate of return.
The Employee Retirement Income Security Act of 1974 (ERISA) specifies the types of investments that cannot be funded using Roth IRA contributions. According to the IRS, these include collectibles, such as fine art, antiques, family heirlooms, precious gems and rare coins. You can make investments in certain types of precious metals, such as gold, if certain IRS guidelines are met. You also cannot use Roth IRA funds to invest in life insurance.