Favorite FIRE Investments in Your Roth IRA

Roth IRAs allow investors to build a source of tax-free income for their retirement. You may withdraw money from a Roth IRA at any time—even in early retirement—and it will not be taxed at that time as long as you stay within the rules.

Many FIRE investors contribute to Roth IRAs. FIRE plans can involve IRAs the same way traditional retirement planning does: as a vehicle for long-term investment. Alternatively, many FIRE investors set up a Roth IRA conversion ladder that allows them to convert money invested in traditional retirement accounts into tax-free Roth IRA investments.

The best investments to hold in your Roth IRA for FIRE planning depend on which approach you are taking, and in this article, we’ll guide you through your options.

Key Takeaways

  • A Roth IRA can hold any financial asset that a traditional IRA holds. However, there are some types of investments that are particularly well suited to a Roth IRA.
  • It's best to hold investments that would otherwise trigger substantial taxes—those with high growth potential, big dividends, or high levels of turnover are all good options.
  • That’s true whether you are following a FIRE plan or a traditional retirement plan, with an important exception. Investors looking to retire soon should allocate more retirement assets to growth- and appreciation-oriented individual stocks or equity funds.

Planning Roth IRA Investments For FIRE

There are two main ways in which FIRE investors—the acronym stands for financial independence, retire early—can use Roth IRAs. One resembles the standard way in which traditional retirement planning uses these accounts: as a long-term investment vehicle. The other is to build a Roth IRA conversion ladder, in which funds from regular retirement accounts—401(k)s, 403(b)s, and traditional IRA plans—are converted into investments in your Roth IRA.

There are some similarities between these approaches when it comes to planning your Roth IRA investments. The best Roth IRA investments are the ones that can take advantage of the way the retirement vehicles are taxed, whether you are following a FIRE plan or not.

A Roth IRA can hold any financial asset that a traditional IRA holds. In fact, aside from life insurance and collectibles, Roth IRAs can hold just about any financial asset. However, when it comes to investing in Roth IRAs, not all assets are created equal. To take full advantage of the Roth IRA's tax-sheltering properties, it's best to hold investments that would otherwise trigger substantial taxes. Investments with high-growth potential, big dividends, or high levels of turnover are all good options.      

It’s best to use your Roth IRA for investments that would otherwise trigger substantial taxes. Investments with high growth potential, big dividends, or high levels of turnover are good options.

Best Roth IRA Investments For FIRE

The best investments for Roth IRAs are largely the same, whether you are following a FIRE or traditional retirement plan. The difference, for those following a FIRE plan, is the investment window they have available.

In other words, there are some types of investment that are particularly well suited to Roth IRAs, but which you choose will depend on your investment horizon and when you plan to retire. Younger investors, or those planning to retire soon, should allocate more retirement assets to growth- and appreciation-oriented individual stocks or equity funds. Conversely, those who are retired or close to retirement would typically have a higher allocation of their investments in bonds or income-oriented assets, such as REITs or high-dividend equities.

Whichever plan you are following, however, there are some investments that are very well suited to Roth IRAs:

  • Income-oriented stocks are common shares that pay high dividends, or preferred shares that pay well regularly. Typically, when you hold stocks in a non-retirement account, you pay taxes on any dividends you earn, but as long as you obey the Roth withdrawal rules, you won’t ever pay tax on those dividends or any other earnings if they are in a Roth IRA.
  • Growth stocks are small-cap and midcap companies that seem ripe for appreciation down the road. Normally, their serious growth would trigger a tax bite, albeit at lower long-term capital gains rates (usually 15%). But it won't matter that these stocks are worth substantially more when you cash them in after retirement. If held in a Roth, you won't owe any taxes on them at all.
  • Corporate bonds and other high-yield debt are ideal for a Roth IRA. It's the same principle as with the high-dividend equities—shield the income—only more so.
  • Real estate investment trusts (REITs), publicly traded portfolios of properties, are big income producers, though they also offer capital appreciation.
  • It’s also possible to invest directly in real estate via your Roth IRA. You can own single-family homes, multiplex homes, apartments, condos, co-ops, and even land in a Roth IRA. But you'll need a self-directed IRA to do so.

What Are the Best Investments for a Roth IRA?

Whether you are following a FIRE plan or saving for retirement on a more typical timeline, the investments are similar. What's different is how aggressively you save money in an investment account. Good options include income-oriented stocks, growth stocks, indirect real estate investments, and direct real estate investments.

Is a Roth IRA Good For FIRE?

Yes. Roth IRAs can form a valuable part of a FIRE strategy, either as a long-term investment vehicle, a source of emergency funds, or as part of a Roth IRA conversion ladder.

Can You Have Two Roth IRAs?

You can have multiple traditional and Roth IRAs, but your total cash contributions can't exceed the annual maximum, and your investment options may be limited by the IRS.

The Bottom Line

A Roth IRA can hold any financial asset that a traditional IRA holds. However, there are some types of investments that are particularly well suited to a Roth IRA. To take full advantage of the Roth IRA's tax-sheltering properties, it's best to hold investments that would otherwise trigger substantial taxes. Investments with high growth potential, big dividends, or high levels of turnover are prime candidates.

That’s true whether you are following a FIRE plan or a traditional retirement plan, with an important exception. Investors looking to retire soon should allocate more retirement assets to growth- and appreciation-oriented individual stocks or equity funds.

Article Sources

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  1. Internal Revenue Service. "Roth IRAs."

  2. Internal Revenue Service. "Rollover to a Roth IRA or a Designated Roth Account."

  3. Internal Revenue Service. "IRA FAQs," Select "Investments: What types of investments can I make with my IRA?"

  4. Internal Revenue Service. "Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)," Page 31.

  5. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  6. U.S. Securities and Exchange Commission. "Investor Alert: Self-Directed IRAs and the Risk of Fraud."

  7. Internal Revenue Service. "Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)," Page 9.

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