Investing and Trading Do’s and Don’ts

Popular Roth IRA Investments

Roth IRAs can hold just about any financial asset except life insurance and collectibles; however, the “big-box” IRA companies (for example, 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’ll need a custodian who offers a special account called a self-directed IRA (SDIRA).

Here’s a rundown of some of the more popular investments for standard (in other words, 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, municipalities, and corporations.
• 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 (TDFs): 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, the amount invested is considered distributed in the year the item is acquired. You would owe income tax on the earnings from the distribution, and if you are under 59½, a 10% early withdrawal penalty may also apply.

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. Margins let 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 a margin to trade with an IRA. If you do, the IRS could treat the amount as a distribution, and you’ll owe income tax on the earnings. If you’re under 59½, a 10% penalty may also apply to the full amount.

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.

Limited margin is available for most IRA types, including the Roth, traditional, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) varieties. Brokers that allow limited margin for IRAs have specific eligibility requirements (e.g., a minimum balance), and your account must be approved for this type of margin before placing any trades.

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.

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 in their Roth IRAs, investing in non-traditional assets like real 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 and potential volatility of those investments.