Roth IRAs: Investing and Trading Do’s and Don’ts (2024)

Roth IRAs vs. Traditional IRAs
	Roth IRAs	Traditional IRAs
Contributions	Contributions are not tax deductible	Contributions may be tax deductible
Contribution Limits	$6,500 in 2023	$6,500 in 2023
Catch-up Contribution	$1,000 if you're age 50 or above	$1,000 if you're age 50 or above
Income Limits	Not eligible to contribute if modified adjusted gross income (MAGI) is above $144,000 ($153,000 in 2023) for single filers or $214,00 ($228,000 in 2023) if you’re married filing jointly	No income limits
Withdrawals	Tax and penalty free if you’re at least age 59½ and it has been at least five years since you first contributed to a Roth IRA	No penalty if you’re at least age 59½, but withdrawals are taxed as ordinary income
Age Limit for Contributions	No age limit	No age limit
RMDs	No RMDs for the account owner’s lifetime	RMDs begin at age 73 or 75, depending on the year you were born

Popular Roth IRA Investments

Roth IRAs can hold just about any financial asset except life insurance and collectibles; however, the “big box” IRA companies (e.g., Charles Schwab, Fidelity, and Vanguard) typically stick to the assets that they sell (and make money from)—such as stocks, bonds, and mutual funds. If you want to access non-traditional assets such as real estate and precious metals, you need a custodian that offers a special account called a self-directed IRA (SDIRA).

Here’s a rundown of some of the more popular investments for standard (i.e., not self-directed) Roth IRAs:

Stocks: income-oriented stocks that pay high dividends or growth stocks that can yield high returns.
Bonds: interest-paying debt instruments offered by the U.S. government, states, and municipalities.
Mutual funds: professionally managed investment funds that can offer simplicity, low expenses, and diversification.
Exchange-traded funds (ETFs): baskets of securities that trade like individual stocks, offering diversification, low expenses, and high potential yields.
Target-date funds: a diversified mix of equities and fixed-income investments that automatically rebalances as you get closer to retirement.
Real estate investment trusts (REITs): companies that own, operate, or finance income-producing real estate and pay dividends to investors.

Prohibited IRA Investments

There are a handful of investments that you can’t hold in a Roth IRA:

Life insurance
Collectibles, including art, rugs, metals, antiques, gems, stamps, most coins, alcoholic beverages, and certain other tangible personal property

According to the Internal Revenue Service (IRS), if you invest your IRA in a collectible, then the amount that you invest is considered distributed in the year when you acquired the item—and you may have to pay a 10% penalty tax on the early distribution.

While coins are generally prohibited in IRAs, you can invest in one-, half-, quarter-, or one-tenth-ounce U.S. gold coins or one-ounce silver coins minted by the U.S. Treasury Department. An IRA also can invest in some platinum coins and certain gold, silver, palladium, and platinum bullion.

Prohibited Roth IRA Transactions

A prohibited transaction in a Roth or traditional IRA is any improper use of the account by the owner, their beneficiary, or any disqualified person—including the owner’s fiduciary or family members. The IRS strictly prohibits the following transactions in IRAs:

Borrowing money from an IRA
Selling property to an IRA
Using an IRA as security for a loan
Buying property for personal use with IRA funds

Margin Accounts and Roth IRAs

Margin accounts are brokerage accounts that let you borrow money from your brokerage firm to buy securities. The broker charges interest, and the securities are used as collateral. Margin lets you buy more securities with less of your own cash, magnifying both gains and losses.

Because the IRS prohibits using an IRA as security for a loan, you generally can’t use margin to trade with an IRA. If you do, the IRS could consider the entire IRA as distributed. This means that you would owe income tax on the full IRA amount—plus a 10% penalty if you’re younger than 59½ or it’s been fewer than five years since you first contributed to an IRA.

Still, some brokers allow something known as “limited margin,” which is like getting a cash advance on the securities that you sell. For example, if you sell a stock in your IRA, there could be a delay between the trade’s execution and when you receive the cash in your account. If you have a limited margin account, you could make another trade while waiting for the previous trade to settle—the stock sale in our example. This means that you can manage the investments in the account quicker and more readily.

Unlike a standard margin account, you can’t trade short positions or establish naked options positions in a limited margin account.

Roth IRA Withdrawals

In general terms, withdrawal rules for Roth IRAs are more flexible than for traditional IRAs and 401(k)s.

Roth IRA withdrawal rules differ depending on whether you take out your contributions or your investment income. Contributions are the money that you deposit into an IRA, while income and earnings are your profits. Both grow tax free in your account.

Withdrawing contributions: You can withdraw your Roth IRA contributions at any time, for any reason, with no tax or penalties. That’s because contributions are funded with after-tax dollars, so you’ve already paid income taxes on that money.
Withdrawing earnings: If you withdraw IRA earnings, you may be subject to income taxes and a 10% penalty, depending on your age and how long you’ve had the account.

In general, you can withdraw your earnings with no taxes or penalties if:

You’re at least 59½ years old.
It has been at least five years since you first contributed to any Roth IRA. This is called the five-year rule.

Frequently Asked Questions

Can You Lose Money in a Roth Individual Retirement Account (Roth IRA)?

Due to its tax advantages, Roth individual retirement accounts (Roth IRAs) are one of the best options available for retirement savers; however, like other investments, your Roth IRA can lose money. For example, you could lose money in your Roth IRA due to market downturns, early withdrawal penalties, or because the account hasn’t had sufficient time to compound.

Should I Convert My Traditional IRA Into a Roth IRA?

It depends on the timing and the income tax bracket that you expect in the future. A Roth IRA conversion might make sense if you expect to be in a higher tax bracket after you retire than you are now. A Roth conversion may also make sense because, unlike traditional IRAs, Roth IRAs arenot subject to required minimum distributions (RMDs)during the owner’s lifetime.

What Is the 5-Year Rule for Roth IRA Withdrawals?

You can withdraw your Roth IRA contributions at any time with no tax or penalty, no matter how old you are; however, withdrawals of earnings are tax- and penalty-free only if you’re at least age 59½ and satisfy a five-year holding period known as the five-year rule. The five-year period starts on January 1 of the tax year when you first contributed to any Roth.

So, for example, if you opened a Roth IRA in April 2023 and designated the contribution for the 2022 tax year, your five-year holding period would start in January 2022 and end on Dec. 31, 2026. Assuming you are at least age 59½, you could withdraw your earnings from any Roth IRA that you own tax and penalty-free starting on Jan. 1, 2027.

The Bottom Line

Roth IRAs are a popular way to save for retirement due to their tax advantages and lack of RMDs. While many investors stick to stocks, bonds, and mutual funds for their Roth IRAs, investing in non-traditional assets likereal estate and cryptocurrency is possible if you have an SDIRA.

Of course, keep in mind that alternative investments have greater earnings potential—but more risk, too. As such, SDIRAs are generally best suited for investors who already have substantial experience with buying and selling non-traditional assets and understand the tax implications of those investments.