Question

what is the best type of investment asset to place in a ROTH IRA?

Answer 1

Stocks, bonds and mutual funds are all appropriate investments to hold in an IRA. But some subcategories of these assets are better suited to a Roth IRA than a traditional IRA. These certain assets are more Roth-friendly, because of the way the IRS taxes income. The less tax-efficient an investment is, the bigger the benefit of holding it in a Roth IRA. Its is beneficial to hold any investments in a Roth IRA that bring:

• High growth potential (individual stocks that could dramatically rise in value)
• Generous dividends (REITs or other investments that spin out income)
• High levels of turnover (actively managed mutual funds)
• Frequent trading events (where investor activity triggers taxable events)

Let’s say an investor earmarks $5,500 to buy a handful of stocks with high growth potential in her Roth IRA. During the next 25 years, the companies thrive and generate an average annual return of 15% per year. Her investments are now worth roughly $180,000. If she holds those stocks in a Roth IRA, that’s $180,000 she can withdraw from the account tax-free, regardless of what tax bracket she find herself in during retirement.House the money in a traditional IRA and she’d walk away with roughly $150,000 after paying taxes (if she was married, filing jointly and taking the standard deduction). This is why it’s wise to stash your most aggressive growers — investments with higher total return prospects — in a Roth IRA. Investments that will benefit from tax-free growth offered by the Roth include small-cap stocks and mutual funds, international stocks (particularly emerging market companies or funds that focus on holding these types of companies), high-yield corporate bonds and initial public offerings, or IPOs.