Roth IRAs: Investing and Trading Do’s and Don’ts

Roth individual retirement accounts (Roth IRAs) are considered one of the best retirement plans and long-term investment accounts that anyone can have. Because Roth IRAs are funded with after-tax dollars, you can withdraw your funds in retirement (after age 59½) tax free. What’s more, unlike traditional IRAs, Roths have no required minimum distributions (RMDs) during the owner’s lifetime—so you can leave the money alone to keep growing tax free for your heirs.

You can contribute up to $6,000 ($7,000 if you’re age 50 or older) to an IRA for 2021 and 2022. And while you can withdraw your contributions at any time (for any reason), you generally must be at least age 59½—and you must have first contributed to an IRA at least five years ago—to withdraw earnings without incurring taxes or penalties.

A Roth IRA can be an excellent tool for growing your nest egg, especially if you understand the do’s and don’ts. Here’s a quick look at managing your Roth IRA to make the most of it.

Key Takeaways

  • Roth individual retirement accounts (Roth IRAs) are funded with after-tax dollars, and qualified distributions in retirement are tax free.
  • For the 2021 and 2022 tax years, you can contribute up to $6,000 ($7,000 if you’re age 50 or older) a year to your IRA(s).
  • Most brokerage firms, banks, and investment companies offer Roth IRAs and a variety of investment choices for the accounts.
  • Stocks, bonds, mutual funds, exchange-traded funds (ETFs), and target-date funds are popular Roth IRA investments.
  • By law, IRAs can’t hold life insurance or collectibles such as art, rugs, metals, antiques, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.

Roth IRA vs. Traditional IRA

Introduced in the 1990s, a Roth IRA is the younger sibling of traditional individual retirement accounts (IRAs). The most significant difference between these two IRAs is how they’re taxed. Roth IRAs are funded with after-tax dollars, meaning that contributions are not tax deductible. But once you start withdrawing funds in retirement, the money is tax free.

Conversely, traditional IRA contributions are made with pretax dollars. You can deduct your contributions (depending on your income and other factors), but you pay income tax on withdrawals during retirement.

Roth IRAs vs. Traditional IRAs
   Roth IRAs  Traditional IRAs
Contributions Contributions are not tax deductible Contributions may be tax deductible
Contribution Limits $6,000 or $7,000 if you’re age 50 or older $6,000 or $7,000 if you’re age 50 or older
Income Limits You can’t contribute if your modified adjusted gross income (MAGI) is above $140,000 for 2021 ($144,000 for 2022) for single filers or $208,000 for 2021 ($214,00 for 2022) 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 72

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 nontraditional 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:

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.

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.

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 are not subject to required minimum distributions (RMDs) during the owner’s lifetime.

What is the five-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 Jan. 1 of the tax year when you first contributed to any Roth.

So, for example, if you opened a Roth IRA in April 2022 and designated the contribution for the 2021 tax year, your five-year holding period would start in January 2021 and end on Dec. 31, 2025. 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, 2026.

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 nontraditional 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 nontraditional assets and understand the tax implications of those investments.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. “Roth IRAs.”

  2. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”

  3. Internal Revenue Service. “Issue Snapshot — Investments in Collectibles in Individually Directed Qualified Plan Accounts.”

  4. Internal Revenue Service. “Issue Snapshot — Investments in Collectibles in Individually Directed Qualified Plan Accounts.”

  5. Internal Revenue Service. “IRA FAQs: Investments.”

  6. Internal Revenue Service. "Publication 591-A (2021), Contributions to Individual Retirement Arrangements.”

  7. Internal Revenue Service. “Retirement Topics — Prohibited Transactions.”

  8. Fidelity. “Limited Margin Trading within an IRA.”

  9. E*TRADE. “How to More Actively Trade in Your IRA Account.”

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