Roth IRA Investment Choices in 2022

Retirement Account (IRA). This allows you to put dollars away — often with a tax-advantaged status for the day you retire.

Depositing in an IRA allows the money to potentially earn interest while you invest it ahead of when you need it in retirement. There are distinct advantages of a Roth IRA and an increasing number of options vying for your money. What are some of the investment choices available for investors?

What is a Roth IRA?

While IRAs come in several varieties, the Roth IRA has the potential to be one of the most advantageous. While you pay the taxes on the money you deposit into the account up front, this allows individuals at retirement age to withdraw free of taxation. While this might sound like a disadvantage at face value, the benefit becomes clear when you understand how the account is designed to harness inflation rather than falling victim to it.  

After those initial taxes are paid, any capital gains earned while invested through the account are shielded from taxation. This explains why nearly 25 million Americans (10% of American taxpayers) own Roth IRAs, according to the Tax Policy Center of the Urban Institute & Brookings Institution. Moreover, on average, people have historically seen between 7% and 10% tax-free annual growth in accounts that are well-managed.1

Another advantage of the Roth IRA is the fact it doesn’t have required minimum distributions like traditional IRAs. This means your money can continue to grow as long as you have eligible earned income — regardless of your age. 

On the other hand, you are subjected to the same contribution limits imposed upon a traditional IRA, based upon your modified adjusted gross income (MAGI). This prevents those with higher earning potential from benefitting more than those whose earnings are mainstream.

You can also have as many Roth IRAs as you’d like, as long as the total amount contributed each year is at or below the annual contribution cap ($6,000 annually, $7,000 if you’re over 50). This can help you further diversify your portfolio.

The following table outlines the contribution limits in greater detail.

Income Limits for Contributing to a Roth IRA
Filing Status2021 MAGI2022 MAGIContributions
Single or Head of Household   
 Less than $125,000Less than $129,000Up to the limit

$125,000 to less than $140,000$129,000 to less than $144,000Reduced amount
 $140,000 or more$144,000 or moreZero
Married Filing Jointly or Qualifying Widow(er)   
 Less than $198,000Less than $204,000Up to the limit
$198,000 to less than $208,000$204,000 to less than $214,000Reduced amount
 $208,000 or more$214,000 or moreZero
Married Filing Separately   
 Less than $10,000Less than $10,000Reduced amount
 $10,000 or more$10,000 or moreZero

Roth IRA Pros 

Tax-Free Appreciation – As stated above, the primary benefit of a Roth IRA is the ability to grow your savings unencumbered by taxes. Given that taxes tend to go up over time, you’ll effectively pay today’s tax rate on money you’ll use in the future when rates are likely to be higher. 

No Required Distributions – Minimum distributions do not apply to Roth accounts. Where you’re required to start withdrawing funds at the age of 72 with a traditional IRA, there is no such requirement with a Roth account.

Uncomplicated Withdrawals – Your contribution withdrawals can be accomplished easily, making a Roth a smart way to supplement your emergency fund. Keep in mind however, capital gains must remain sequestered until you’ve held the account for five years and reached the age of 59.5. Otherwise you’ll encounter a 10% penalty and taxes, although there are certain exceptions to this rule

Lower Taxable Income – Tax diversification can become an issue in your post-career years because some retirement income, such as Social Security payments and 401(k) disbursements, are taxable. Sourcing part of your retirement income stream from a Roth can help you avoid inclusion in a higher tax bracket, as those disbursements will keep your taxable income lower.

Roth IRA Cons

Up Front Taxes – Yes, this is also listed as a pro, but taxes are still taxes. Putting money in a traditional IRA can feel better psychologically because it can look like you’re saving more. 

Low Annual Contribution Cap – At $6,000 annually ($7,000 if you’re over 50), the annual contribution limit on a Roth is pretty low. Granted, traditional IRAs have the same limits, but you’ll still need another vehicle, such as a 401(k), with a higher contribution limit. You won’t make it through retirement with the income from a Roth IRA alone. 

Requires Concerted Effort – Unlike a 401(k), the funds aren’t automatically deducted from your earnings. Moreover, you have to go out of your way to establish a Roth account and feed it every year. Yes, you can set up automated banking to handle deposits for you, but managing a Roth account still requires more conscious action on your part than a 401(k) does.

And again, there are the income limits detailed in the chart above. 

What Makes a Potentially Strong Roth Investment?

Remember, you pay the taxes on the funds you put in a Roth IRA up front, so you’ll have no tax liability on the gains those dollars achieve. This distinctive trait makes the money in a Roth account better suited to certain types of investments. 

Putting it into assets capable of generating what would otherwise be highly taxable income, such as dividends, interest or short-term capital gains can be a wise approach. Similarly, investments capable of producing an abundance of long-term appreciation are nicely suited for Roth IRA investment dollars. 

Long story short, any investment that would trigger a significant tax liability is usually going to be well-suited to the characteristics of a Roth IRA. The same is true for assets with an elevated potential for growth, large dividends or high turnover 

Typical Roth IRA Investment Options

Another benefit of the Roth IRA is its funds can be invested in a variety of investment opportunities, other than life insurance or collectibles. This is both a good thing and a bad thing. It’s good in that you have a high degree of flexibility. It’s bad in that along with that flexibility comes the requirement to choose carefully to avoid neutering the advantages. 

With that in mind, let’s take a look at a few examples of potential investments for a Roth IRA.

Mutual funds are favored by many investors— and particularly Roth IRAs. In fact, according to the Investment Company Institute, some 18% of Roth IRAs are invested in mutual funds. The move here is to use an actively managed fund, one likely to generate lots of trades and short-term capital gains, as they have a higher tax liability than long-term gains. 

Income-oriented stocks often pay high dividends, which means they can encounter high taxation in a standard investment account. The same is true for preferred shares. Held in a non-retirement account, the proceeds from these assets could trigger a tax liability equivalent to that applied to your regular income. However, you’ll pay no taxes on that money at all, nor earnings that money might generate in turn, if you operate within the withdrawal rules of a Roth IRA.

Growth stocks, such as those underpinning small-cap and mid-cap companies with strong appreciation potential over time, may also be well-suited for Roth IRA investment dollars. Normal investments in these types of companies would encounter long-term capital gains taxes.

As time goes on, your income usually tends to increase. And, the more income you have, the higher the tax bracket you’ll inhabit. Using Roth dollars to fund these investments gives you an umbrella against the higher tax rates you’re likely to encounter in the future when your income has grown. 

High yield debt of corporate bonds is also a potential candidate for Roth IRA funds. Again, the main benefit is the tax shield, except it’s even more relevant in the case of a bond. You are required to take the interest payments from a bond; you can’t protect them by reinvesting. 

Real estate investment trusts (REITs) are a potential way to invest in real estate without encountering the tedious issues associated with the direct ownership of rental property. However,  REITs are required to pay 90% or more of their incomes as annual dividends to shareholders. This can be considered ordinary income by the IRS and taxed as such — unless it’s earned from dollars you have saved in your Roth IRA.

Exchange traded funds (ETFs) are usually positioned to track an index to a particular aspect of the market. This helps keep the costs of an ETF reasonable, because there’s no need for it to be actively managed. However, some ETFs target the performance of high-growth and/or high-income equities. You’d want to fund this type of investment with capital from your Roth account.

Other Roth IRA Investment Options

Roth dollars would be wasted on municipal bonds and municipal bond funds, as those entail no tax liability in the first place. Money market funds, CDs and other low-income placements would be a poor allocation of your Roth money as well.  The case for annuities is less cut and dried though. It might make sense if you’re within five years of needing the money, but less so if the need is farther out on the horizon.

Roth Asset Diversification

Your ideal funds’ allocation strategy will vary according to where you are in life and your associated goals.  Time is on your side when you start young. Go for growth and appreciation-oriented stocks and equity funds. As you get closer to retirement, you’ll want to shift into bonds, REITs and high dividend equities to take advantage of the income streams they provide without selling off your positions. 

Trading vs Investing for the Future 

Both strategies are permitted with Roth accounts, as long as you stay within the established bounds. Investing is usually about achieving long-term gains, while trading is all about exploiting short-term market fluctuations to turn a quick profit. 

As you might imagine, the higher potential rewards to be gained from trading are counterbalanced by greater risk. Thus, the best strategy for your purposes depends heavily upon where you are in life and how soon you anticipate needing your retirement funds. 

Alternative Investments

Certain types of alternative investments may be good candidates for Roth accounts as well.  Yieldstreet has offerings that may fit the bill, enabling you to more readily achieve a diversified portfolio while generating tax-free passive income streams. Offering a curated selection of investment opportunities previously available only to institutions and the ultra-wealthy, Yieldstreet can help you generate income, grow your overall portfolio value or achieve a combination of both goals.

One  notable example of this is Yieldstreet’s Prism Fund, which provides access to multiple alternative asset classes and pays a consistent quarterly distribution. Invested across a broad range of asset classes, the Fund’s diverse specialty finance holdings are sourced from private market opportunities that were historically off-limits to retail investors. The Prism Fund offers an 8% distribution rate, a reasonable degree of liquidity and a transparent fee structure of 1.5% on invested funds. The Fund is also free of load and redemption fees.  
Understanding the potential investment choices for a Roth IRA in 2022 may help position you to take advantage of tax free growth for your retirement dollars. History has shown that paying the taxes up front can yield a better result for many people over time. And, Yieldstreet has some alternative investments that can help you diversify your portfolio.

1 . Risk tolerance, timeline, and underlying performance are contributing factors to growth of portfolio.

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