How to invest money in Roth IRA

The Roth IRA is a gift from the tax code. Every dollar of profit you make in this account is yours to keep, forever, tax-free.

Golden coins stacked in front of a growing green plant

Wait, You Need to Actually Invest!

The biggest mistake people make with a Roth IRA is contributing the money and then leaving it as cash. A Roth IRA is not a bank account; it is a 'bucket' that can hold many different types of investments. If you put in $6,500 but don't use that $6,500 to buy stocks, ETFs, or mutual funds, your money will never grow. Once the funds land in your account, you must log back in and place a 'Trade' to buy the investments you want.

Because Roth IRA growth is tax-free, it is the perfect place to hold high-growth assets like Total Stock Market Index Funds or aggressive growth ETFs. If a $10,000 investment grows to $100,000 over 30 years, you would owe $15,000+ in taxes in a normal brokerage account. In a Roth IRA, you owe $0. This 'tax alpha' makes the Roth IRA the most valuable real estate in your financial portfolio.

The Core Investment Selection

The Broad Market approach: Buy VTI (Total Stock Market) or VOO (S&P 500). This gives you exposure to the entire US economy.
The Global approach: Add VXUS (International) to ensure you aren't overly dependent on the US market.
The Dividend approach: Some investors use the Roth for high-dividend stocks. Since dividends are normally taxed as income, holding them in a Roth allows you to keep 100% of that passive income.

Rules and Flexibility

Unlike a 401(k), you can withdraw your original contributions from a Roth IRA at any time for any reason without penalty. This makes the Roth a backup emergency fund (though it should be a last resort). However, you must leave the earnings in the account until age 59.5 to avoid taxes and penalties. This flexibility, combined with tax-free growth, makes the Roth IRA the 'Swiss Army Knife' of retirement accounts.

Real Life Examples

Mrs. Williams

Teacher • $60k Income • 20% Savings Rate

Mrs. Williams maxes out her Roth IRA every January. She invests it all in a broad market fund and knows that when she retires, she can take out all that growth without giving a cent to the IRS.

Mr. Johnson

Project Manager • $90k Income • 10% Savings Rate

Mr. Johnson contributes to his Roth monthly. He uses it to buy shares of established companies he likes. He's built a solid portfolio, though it's less diversified than Mrs. Williams'.

Mr. Smith

Sales Executive • $120k Income • 5% Savings Rate

Mr. Smith finally opened a Roth IRA but forgot to actually buy any investments. His $6,000 sat in the 'settlement fund' for three years, earning 0% while the market went up 40%.