How to Choose and Buy Investments Inside Your Roth IRA

You pick the investments yourself, not the IRA custodian

A Roth IRA is a container — it holds money and investments, but it does not tell you what to buy. Once you open a Roth IRA account at a bank, brokerage, or credit union, you transfer money into it, then use that money to purchase stocks, bonds, mutual funds, or other investments through that same institution. The custodian (the bank or brokerage) handles the paperwork and tax sheltering; you decide what goes inside.

The process is straightforward: fund the account, log in to your account dashboard, and place an order for the investment you want. The money sits in a cash holding area until you buy something. Most people do this once a year after they contribute, though you can buy and sell investments inside the account as often as you want without triggering taxes or penalties.

What you can and cannot buy is limited by the IRS. You can purchase stocks, bonds, mutual funds, exchange-traded funds (ETFs), and certificates of deposit (CDs). You cannot buy collectibles, life insurance, or real estate directly. Your custodian may also restrict certain investments — for example, some brokerages do not offer penny stocks or options trading in IRAs.

Key Takeaways

• You must choose your own investments; the custodian does not do it for you, though some offer pre-built portfolios you can select.
• Money you contribute sits in cash until you buy something, so you can take time to decide without losing contribution room.
• Stocks, bonds, mutual funds, and ETFs are all allowed; collectibles and real estate are not.
• You can buy and sell investments inside the account as often as you want without paying capital gains tax or triggering penalties.
• Different custodians offer different investment menus, so compare what each one provides before you open an account.

How to fund your account before you invest

You cannot invest money that is not yet in the account. The first step is to contribute cash to your Roth IRA, either as a lump sum or through a series of transfers. For 2024, the annual contribution limit is $7,000 if you are under 50, or $8,000 if you are 50 or older. You can contribute only up to the amount of earned income you received that year, and you must contribute by the tax filing important date (usually April 15 of the following year).

When you open a Roth IRA, the custodian will give you instructions for funding it — usually a bank transfer from your checking or savings account, a wire transfer, or a check you mail in. Some custodians let you set up automatic monthly transfers. The money arrives in your account as uninvested cash, often held in a money market fund or sweep account that earns a small amount of interest. This cash is yours to invest whenever you are ready.

If you already have a Roth IRA at another institution and want to move it, you can do a direct transfer (also called a trustee-to-trustee transfer) where the old custodian sends the money directly to the new one. This avoids taxes and penalties. You can also do a rollover, where you withdraw the money yourself and deposit it into the new account within 60 days, but this is riskier because you have to meet the important date.

Choosing between individual investments and pre-built portfolios

Most custodians offer two paths: pick individual investments yourself, or choose a pre-built portfolio that the custodian manages for you. Individual investing means you research and select specific stocks, bonds, or funds. Pre-built portfolios — often called target-date funds or robo-advisor portfolios — are collections of investments that the custodian has already assembled based on your age or risk tolerance. You pick the portfolio, and the custodian rebalances it automatically.

Target-date funds are the most common pre-built option. They are named by the year you plan to retire — for example, a "2050 Target Date Fund" is designed for someone retiring around 2050. The fund starts aggressive (more stocks, fewer bonds) when you are young, then gradually shifts to conservative (more bonds, fewer stocks) as you approach retirement. You buy one fund and do not have to think about rebalancing.

If you choose individual investments, you will need to decide how much of your money goes into stocks versus bonds, and which specific funds or stocks to buy. This requires more research and ongoing attention, but gives you more control. Many people start with a straightforward three-fund portfolio: a total stock market index fund, an international stock index fund, and a bond index fund, split according to their age and risk tolerance.

Understanding investment costs and how they affect your returns

Every investment charges a fee, either as a percentage of the money you invest (called an expense ratio) or as a flat dollar amount per transaction. These fees matter because they come out of your returns. A fund with a 1 percent expense ratio costs you $100 per year for every $10,000 invested. Over 30 years, that compounds into thousands of dollars in lost growth.

Index funds and ETFs typically have the lowest costs, often 0.03 to 0.20 percent per year. Actively managed mutual funds, where a manager picks stocks for you, usually cost 0.50 to 1.50 percent or more. Individual stocks have no ongoing fee, but you may pay a commission when you buy or sell — though most brokerages now offer commission-free stock trading.

Your custodian may also charge account fees, though many waive them if you maintain a minimum balance or set up automatic deposits. Compare the fee structure of different custodians before you open an account. Over decades, choosing low-cost investments can mean tens of thousands of dollars more in your retirement account.

Placing your first investment order

Once your money is in the account, log into your custodian's website or app and navigate to the trading or investing section. Search for the investment you want to buy by its ticker symbol (a short code like VTSAX for Vanguard Total Stock Market Index Fund) or name. The system will show you the current price and let you enter the number of shares you want to buy or the dollar amount you want to invest.

For mutual funds, you typically buy by dollar amount — you might invest $5,000 in a single fund. For stocks and ETFs, you buy by share count — you might buy 10 shares of a particular stock. Review your order before you submit it. Most orders execute during market hours (9:30 a.m. to 4 p.m. Eastern time on weekdays), though some custodians let you place orders after hours or on weekends and they execute the next trading day.

After your order executes, the investment appears in your account holdings. You can now hold it, buy more of it, or sell it whenever you want. Selling inside a Roth IRA does not trigger capital gains tax, so you can rebalance or change your strategy without penalty. The money from a sale goes back into your cash holding area, ready to invest again.

Rebalancing and adjusting your investments over time

As your investments grow at different rates, your original mix of stocks and bonds will drift out of balance. If you started with 80 percent stocks and 20 percent bonds, and stocks grew faster, you might end up with 85 percent stocks and 15 percent bonds. Rebalancing means selling some of the winners and buying more of the losers to get back to your target mix. This keeps your risk level where you intended it.

You can rebalance as often as you want inside a Roth IRA without tax consequences. Most people rebalance once a year, either on a set date like January 1 or after a major market move. If you own a target-date fund, the fund manager rebalances automatically, so you do not have to do anything.

As you get older, your strategy may shift. Many people gradually move from aggressive (more stocks) to conservative (more bonds) as they approach retirement. You can do this by changing your target-date fund, or by manually adjusting your stock-to-bond ratio in individual investments. The earlier you start, the more time your investments have to grow, so even small contributions made early in your career can become substantial by retirement.

Common mistakes to avoid when investing in a Roth IRA

The biggest mistake is leaving money in cash and never investing it. Some people contribute to a Roth IRA, then leave the money sitting in the cash holding area because they are unsure what to buy. That cash earns almost nothing. If you are unsure, a target-date fund is a safe starting point — it is diversified, low-cost, and requires no ongoing decisions.

Another common error is trading too frequently. Buying and selling investments constantly in hopes of beating the market usually backfires. You pay transaction costs, you may miss gains, and you distract yourself from the long-term strategy that actually builds wealth. For most people, buying a diversified portfolio and holding it for decades works better than frequent trading.

A third mistake is choosing investments based on recent performance. A fund that had great returns last year may underperform this year. Instead, focus on low costs, diversification, and a strategy that matches your age and risk tolerance. Past performance does not predict future results, but low costs and broad diversification do predict better long-term outcomes.

Frequently Asked Questions

Can I invest in individual stocks in a Roth IRA?

Yes. Most brokerages let you buy individual stocks commission-free inside a Roth IRA. However, picking individual stocks requires research and carries more risk than diversified funds. If you are new to investing, starting with a low-cost index fund or target-date fund is usually a better choice.

What happens if I buy an investment and it loses value?

You can hold it and wait for it to recover, sell it and move the money to a different investment, or do nothing. Losses inside a Roth IRA do not create a tax deduction like they do in a regular account. The advantage is that gains are tax-free, so you can afford to take more risk.

Do I have to invest all my money at once?

No. You can contribute your annual limit all at once, or spread it across the year in smaller amounts. You can also invest the money all at once, or buy investments gradually over weeks or months. There is no penalty for timing — the tax benefits explore regardless of when you invest the money.

Can I change my investments after I buy them?

Yes. You can sell any investment and buy a different one as many times as you want. There is no capital gains tax inside a Roth IRA, so switching strategies or rebalancing costs you nothing in taxes. The only cost is any trading fee your custodian charges, and most brokerages now offer commission-free trading.

What if I do not know which investments to pick?

A target-date fund matching your expected retirement year is a straightforward choice that requires no ongoing decisions. Alternatively, a straightforward three-fund portfolio (total stock market, international stocks, and bonds) split by your age is a proven approach. Both are low-cost and diversified.