Whether you have been investing for years or are just starting out, knowing what you’re investing in is important. With thousands of stocks and bonds to choose from, as well as mutual funds, exchange-traded funds (ETFs), and index funds, there are likely companies that align with your belief systems—and some that do not.
Is it possible to invest in a socially responsible Roth individual retirement account (Roth IRA)? Yes, but first you need to know what a Roth is and what it isn’t.
- Socially responsible investing means that the companies or funds are working to make an impact for a specific cause.
- A Roth individual retirement account (Roth IRA) is a tax-advantaged account that holds investments.
- Any Roth IRA can invest in socially responsible companies or funds.
What Is an IRA?
An individual retirement account (IRA) is a tool for investing your money with added tax advantages, independent of an employer. The two most common types of IRAs are traditional and Roth IRAs. The differences lie in when you receive your tax savings.
A traditional IRA allows you to deduct your contributions from your taxes in the year when you contribute. This can be very advantageous because it lowers your taxable income. However, you will have to pay taxes on the money when you withdraw it later in life. If you expect to be in a higher tax bracket in retirement, this could cost you money.
A Roth IRA allows you to make contributions with money that has already been taxed. You won’t get a tax deduction in the year when you contribute, but you also won’t incur any taxes when you withdraw the money later. For seniors on a fixed income, this can make a huge difference.
Don’t want to do all the research on which companies are making a social impact? Look for socially responsible funds, which are growing in popularity at many brokerages and robo-advisors.
What Is Socially Responsible Investing?
When you decide how to invest your contributions, you have a huge variety of options. You can choose from many mutual funds, ETFs, or individual stocks based on their likelihood to grow. Socially responsible investments take into consideration their impact on society, whether that’s because of the products or services that they sell or how they conduct their business.
The term “socially conscious” is ambiguous. Many causes can fall under this category. Investment advisors look at investments as they share key environmental, social, and governance (ESG) factors. Using ESG as a guide, investors may gravitate toward companies that reduce their carbon footprint, promote gender equality, employ and elevate diverse populations, or work toward certain social change ideals.
It’s important to note that socially responsible investing is not guaranteed to make the most money. If pure gain is your goal, then funds that are stacked based on historical growth and stability will likely earn more money. However, investing in socially conscious causes can give them the fuel that they need to grow and become more successful.
As socially responsible investing becomes more popular, some brokerages are building mutual funds and ETFs that focus on brands that align in ideology and impact. To determine whether a fund or company aligns with your values, check out the prospectus of the fund or read over the mission statement. You can also look to nonprofit organizations that you support to find out who supports them and invest accordingly.
What’s a Socially Responsible Roth IRA?
As we mentioned before, a Roth IRA is simply a tax-advantaged tool for investing on a personal basis. Once your Roth is established, you can choose whatever investments you wish and make your IRA as socially conscious as you desire.
Are there specific socially responsible Roth individual retirement accounts (Roth IRAs) available?
Since a Roth individual retirement account (Roth IRA) is only the tax-advantaged account surrounding your investments, there is no one kind of Roth IRA. Once your Roth IRA is set up, you can choose socially responsible companies in which to invest.
How can I tell if an investment is socially responsible?
There are several ways to invest responsibly. Many brokerage firms and robo-advisors now offer socially responsible mutual funds that group together companies that make an environmental, social, or governance (ESG) impact.
Another way to find the right fit is to research companies individually. Investigate which companies are currently trading and visit their websites to find our what they do and how they do it. Independent research firms like Morningstar also analyze funds for not only profitability but also business practices.
Are socially responsible companies profitable?
There is no guarantee of profitability for any company. Markets shift and companies come and go. However, there’s also no guarantee that they won’t succeed. Many socially responsible mutual funds now try to balance socially responsible companies in a way that lessens risk.
The Bottom Line
A Roth IRA on its own is just a tax-advantaged investment account for retirement. How you choose to invest the money that you contribute is up to you. Many companies are now using social causes to distinguish themselves from the competition. It’s your choice as an investor to determine which causes matter most to you and how the companies in which you invest are taking action to meet their goals.