A Roth individual retirement arrangement is a special type of IRA account. Instead of putting in money tax-free and paying taxes when you withdraw the money in retirement like a regular IRA, you contribute after-tax dollars and pay no tax on qualified distributions. This makes Roth IRAs an especially good place to stash investments that pay high returns.
Stocks that pay dividends, especially those that pay generous dividends, are very good assets to place in a Roth IRA. When you combine tax-free dividend payments with the ability to reinvest those dividends to buy more stock, this can add up to significant compounded growth. Letting this growth happen in a Roth IRA means that you will withdraw all of that money without having to pay taxes on it.
High-yield bonds are also good candidates for a Roth IRA. Their potential for high returns makes the most out of your Roth's tax-free status. Since bonds frequently offer periodic interest payments, you also benefit from the fact that you don't have to pay tax on the interest that you earn.
If you haven't hit your $5,500 cap for Roth IRA contributions yet, consider putting growth stocks into the account. While growth stocks may or may not pay dividends, they should appreciate significantly over time. For example, as of the date of publication, the price of Microsoft's stock has grown by approximately 38,400 percent since its initial public offering. A Roth saves you from having to pay capital gains taxes when you cash in your appreciation.
Real Estate Investment Trusts
Real estate investment trusts, which are like mutual funds that hold buildings instead of pieces of companies, are also excellent investments to place in your Roth IRA. It's not uncommon for them to provide a 10 percent annual return, much of which comes in the form of distributions of the profit they earn from owning buildings. The tax-free nature of Roth IRA holdings goes well with their healthy returns.
Certain types of assets have no place in a Roth IRA. Putting tax-advantaged assets that give you tax-free money in a Roth wastes your opportunity to put non-tax-advantaged assets in there. For example, if you own a rental home that gives you income that is canceled out by depreciation, it would probably not be a good asset to put in a Roth. Tax-free municipal bonds also do not belong in Roth IRAs.
- The Arbor Investment Planner: How to Divide Your Assets Between Taxable and Tax Deferred Accounts
- Journal of Financial Planning: Tax Deferral: When Does It Make Sense and When Does It Cost Cents (or Dollars)?
- IRS: Retirement Topics - IRA Contribution Limits
- CNN: Are REITs a Safe Investment for Retirement?
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.