Nearly a quarter of American households indicate they own Roth IRAs, and with good reason.

These robust retirement plans provide numerous tax advantages, have few eligibility requirements, and are a simple way to accumulate wealth as you move closer to retirement age.

How much wealth you build often depends on your contributions and the assets in your portfolio.

Understanding the assets available and how they can affect growth makes investing in your IRA easier and can ensure you’re on the right path to retirement.

Benefits of Roth IRA

Roth IRAs are an excellent way to build generational wealth and plan for retirement. Here are a few of the benefits of opening a Roth IRA:

• Tax Advantages. Contributions and earnings grow tax-free while in your account. And since contributions are made with after-tax dollars, qualified withdrawals, including earnings, are 100% tax-free in retirement.
• No Required Minimum Distributions (RMDs). If you have a traditional IRA, the IRS mandates that you start taking RMDs by the April following your 73rd birthday. Roth IRAs are not subject to RMD mandates, allowing you to keep funds in your account for as long as you wish.
• Investment Diversification. You can open a Roth IRA alongside other retirement accounts, such as a 401(k), SEP, or a Traditional IRA
• Increased Access to Funds. Once your account is open for five years, you can access contributions without penalty, regardless of whether you’ve reached retirement age. Traditional IRAs do not provide that same level of flexibility, as withdrawals before retirement age are typically penalized unless an IRS exception applies.

Common Asset Options in a Roth IRA

When you open a Roth IRA, you can often choose between an array of investment assets. Here are some common options for investors.

1.  Index Funds. U.S. Index Funds track stock market indices, such as the S&P 500 and the NASDAQ 100. This exposes investors to a broader market and reduces the risks often associated with investing in individual stocks.
2.  Dividend Stock. Some companies pay stockholders a share of their earnings, or dividends. Investing in dividend stocks can create a passive income stream that also benefits from compound interest growth.
3.  Mutual Funds. When you invest in a mutual fund, you’re purchasing a collection of assets from a pool of investors. The mutual fund is managed, providing a hands-off, low-risk way to diversify your portfolio without selecting individual investments.
4.  High-yield Bonds. High-yield bonds are issued by companies with lower credit ratings. They offer higher interest rates in exchange for the increased default risk. As such, they can prove attractive if you’re willing to accept greater volatility for the chance of higher returns.
5.  Growth Fund. Growth funds are collections of stocks expected to grow at a faster-than-average rate. Grouped as mutual funds or exchange-traded funds (ETFs), these funds can offer higher earnings than basic stocks but can also be riskier. You can typically invest in small, mid, and large-cap funds, with small-cap funds representing the highest risk.

Tips to Invest Your Roth IRA

Building an investment strategy to build compound interest in your Roth IRA and balance risk can leave you with more money at retirement. Here are some tips to follow:

1. Build an Asset Allocation Strategy

Consider your investment goals and the assets available to determine how best to allocate your funds and diversify your portfolio. A well-balanced portfolio allows you to spread risk while leveraging opportunities that meet your goals.

2. Balance Risk

As you develop your asset allocation strategy, consider your risk tolerance and how it relates to your goals. Some assets are more closely tied to the market than others. For instance, bonds carry less risk than mutual funds, while mutual funds carry significantly less risk than high-yield bonds and growth funds. Balancing your risk can help you sustain market volatility.

3. Self-Direct to Reach Alternative Assets

A standard Roth IRA limits your investment options to stocks, bonds, and the above-mentioned assets. Self-directed IRAs allow you to invest in alternative assets, many of which have higher earning potential. Options include real estate, cryptocurrency and commodities.

4. Adapt Your Strategy to Your Time Horizon

Your investment approach should evolve with your age and retirement timeline. Younger investors might take on more risks early on to capture higher earnings while they have time to weather losses. Those closer to retirement might shift to more stable, income-focused assets.

5. Consult a Financial Professional

Financial advisors can provide personalized guidance and help you customize an investment strategy that supports unique goals and risk profiles. They can also help you determine the best investment vehicles for your short and long-term objectives.

Opening a Roth IRA can be a great way to build wealth using tax-free compound interest. For useful tips to self-direct and invest your Roth IRA, be sure to read our blog for more insights.

FAQs

How does the tax-free growth benefit of a Roth IRA work?

Roth IRA funds, including contributions, earnings, dividends and capital gains, grow tax-free while in the account.  Since contributions are made with after-tax dollars, qualified withdrawals are tax-free in retirement.

What are the contribution limits for a Roth IRA in the current tax year?

The base Roth IRA contribution limit in 2025 is $7,000, or $8,000 if you’re 50 or older. However, the Roth IRA contribution limits may be lower based on your adjusted gross income and tax filing status.

IRA contributions can change annually, so also check the latest IRS guidelines to ensure your contributions don’t exceed the annual limit.

Who is eligible to contribute to a Roth IRA, and what are the income limits?

You can contribute to a Roth IRA if you have an earned income in that year. However, your ability to contribute depends, in part, on your income level. The most current IRS regulations are as follows:

• Single/heads of households: Reduced contributions for those earning $150,000 to $165,000 annually. Participants are ineligible if their income exceeds $165,000.
• Married couples filing jointly: Reduced contributions for those earning $236,000 to $246,000 annually. Participants are ineligible if they earn more than $246,000.
• Married filing separately: Ineligible if they earn $10,000 or more annually.