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Because a Roth IRA is tax-advantaged, any gains within the retirement account are tax-exempt, including immense growth of stocks. In this article, 8 experts discuss whether or not a Roth IRA is the best place to hold stocks.
Especially If Someone Is In A 25% Effective Tax Rate Or Less
“I love the Roth IRA for holding various investments, especially if someone is in a 25% effective tax rate or less. Some people may have a Roth 401k option which may have a company match which is a great option as well. If you don’t have that option or you’ve already maxed out your Roth 401k at work, I’m a big fan of paying the tax now and putting it in a Roth IRA! Since 1913, the average maximum federal tax rate has been 57.69%. Today, that max rate is 37% and the income someone can make before hitting that top rate is fairly high. With such a substantial national debt today, it is my opinion that there are just too many unknown variables and the Roth is the best place to invest unless you are paying an obscene amount in taxes as an effective rate. Also, keep in mind a Roth IRA has the same advantages as a tax-qualified account where you can rebalance your investments without paying capital gains on growth. Unlike a traditional IRA though, a Roth IRA has a lesser-known feature that allows you to access the cost basis (the amount you contributed over time) without any penalties, even before age 59½! This is, of course, not a great idea since we are using this tool to save for retirement, but having that bit of extra liquidity can help in emergency situations.
If you do decide to invest in a Roth IRA, I always encourage people to make it the last account you source retirement income from. I love really maximizing the potential of that asset to compound tax-free with a long time horizon.”
Garrett Konrad, Partner, IFC
Save The IRAs For Your Retirement Goals And Keep The Capital You Want To Use For Short term Goals
“Both traditional IRAs and Roth IRAs have pretty fantastic tax benefits for investors who are investing for retirement. If that’s your goal then there isn’t a better choice you could make. If you’re an investor who has a more immediate financial goal, or a goal that requires liquidity, neither a traditional nor a Roth IRA are a good choice. Any tax savings are negated by early withdrawal penalties and these penalties can really add up.
If your goal is associated with something much more near-term, stay away from IRAs. Lifestyle upgrades, vacations, starting a business, paying college tuition for your son or daughter…these are financial goals that are incompatible with IRA accounts. For these goals stick with dedicated, standard, taxable brokerage account portfolios. Additionally, consider a personal opportunity fund or a stockpile of cash (or highly liquid assets) that can be put into action to take advantage of opportunities that arise.
This cash could be put to use buying up equities with depressed prices during a market downturn, take advantage of limited window investments, or kickstart a personal business project. In short, save the IRAs for your retirement goals and keep the capital you want to use for short term goals close at hand – don’t mix the two!”
Bryan Bonwich, Senior Finance Contributor, ClydeBank Media
It Simply Depends On Your Goals
“A Roth IRA can be one of the best options for investing. But is it THE best? It simply depends on your goals.
First, what is your investment time horizon? If you aren’t investing for the long-term (I like to use 7 years or longer as my own benchmark), you may want to consider not investing in stocks at all due to market volatility.
Can you keep your hands off of that invested money? You may be penalized for withdrawing your funds from your Roth IRA before the age of 59-1/2. For hopeful early retirees, I love that the Roth IRA actually allows you to withdraw up to your contribution amount before that age without penalty. Still, though, I don’t recommend withdrawing the funds before you are ready to intentionally retire.
Finally, let’s talk about the taxes. With a Roth IRA, you contribute after-tax money, but you are not taxed on the growth. This is a huge advantage compared to a taxable investment account. But how does it compare to tax-deductible contribution accounts like a 401k or an IRA? It depends on your current tax bracket versus your tax bracket when you’ll be withdrawing the money (ideally during retirement). So, typically, a Roth option (Roth IRA or Roth 401k) will be best if you are in a lower tax bracket now compared to during your retirement. Therefore, a Roth IRA may be a good choice for students or people earlier in their careers with lower incomes.
Plus, one final unknown. What will the federal tax brackets be later, when you are retired and accessing the funds? Of course, no one knows for sure.
There’s 100% definitive answer on what the best investment account option will be. But you can make strategic, educated decisions. Any tax-advantaged account that you qualify for is a better option than a taxable account — if you’re investing for the long-term and not inducing an early withdrawal penalty.
I recommend reviewing your personal financial details with a tax expert or certified financial planner to make the most effective decision for your own specific situation. Also, note that all retirement accounts have contribution and income limits.”
Mr. SR, Semi-Retire Plan
Asset Allocation Always Trumps Asset Location
“The first thing to realize is that asset allocation always trumps asset location. First, figure out the right mix of stocks and bonds and then you can start thinking about where to locate each of those types of assets.
Roth IRAs are ideal for REITs and high-yield bonds and not necessarily equities. Since you do not pay taxes on the growth or income, REITs are ideal because they both spin-off income each year and they have the potential for solid long-term growth. Next up, investment-grade bonds that also have a high yield where you can receive and re-invest that income tax-free each year.
Equities are already very tax-efficient if you are not selling and buying each year. You can let them grow in a taxable account and manage the tax consequences yourself via tax-management in certain years (lower-income years).
If you are into active trading with equities, then yes a Roth IRA is the perfect place to do that.”
Mike Morton, Owner, Morton Financial Advice, LLC
Pick Your Poison
“Whether or not a Roth IRA is the best place to hold stocks is reliant on individual financial goals. A Roth IRA means it’s tax-free later but some people might need the immediate benefit from tax deductions through traditional IRAs. It’s really a personal decision. The benefit is that buying and selling stocks within an IRA will not generate taxable consequences and you do not report your dividends. Whether that’s worth it has to be evaluated on an individual basis.”
Chane Steiner, CEO, Crediful
A Roth IRA Is Especially Good For Dividend Stocks
“Although a Roth IRA is generally a great place to hold stocks, it’s especially so for dividend stocks.
What is considered a dividend stock?
Public companies that make a profit can decide on a number of ways to use the extra money:
1. Reinvest in the business to help it continue to grow
2. Repurchase shares in the company, thereby making each share outstanding more valuable
3. Repay the debt they have
4. Use the profit to pay their shareholders
While companies can choose a mix of choices above – when they decide to use some or all of their profit to pay their shareholders, it’s known as a dividend payment.
So why would dividend-paying stocks be better in a Roth IRA?
Well, if you were to put these stocks that pay dividends in a non-retirement account, you’d be subject to capital gains taxes of up to 20%.
Even in a standard retirement account like a traditional IRA, you would end up paying taxes once you begin withdrawing from the account. That’s because while you contribute to a traditional IRA with tax-free dollars, you owe taxes when you start taking money out.
However, in a Roth IRA, you would be sheltered from all taxes and keep everything! Since your contributions were taxed when you put them in, your investments earnings, dividends included, grow tax-free. That’s a major advantage a Roth IRA has over other investment and retirement accounts.
The best strategy is to put ordinary stocks in your traditional accounts, and place your dividend-paying ones into your Roth IRA account.”
John Pham, Founder, The Money Ninja
Generally, But Not Always
“A Roth IRA is generally the best place to hold stocks due to the never-taxed feature, but not always. For example, one of the benefits of a Roth IRA is the ability to withdraw your contributions at any time for any reason with no taxes or penalties. You may know you’ll need those funds for something soon, in which case you probably don’t want the volatility exposure that stocks have.
Another instance where you don’t want stocks in a Roth IRA is when you don’t want bonds in a taxable account. For example, you may be trying to keep your income low to stay under a tax threshold to avoid IRMMA surcharges or take advantage of the QBI deduction. Depending on your overall situation, you may be able to lower your income by shifting stocks to a taxable account and bonds to a tax-favored account.”
Robert Lindstrom, Founder, Provision Financial Planning
Having A Mix Of Non-Qualified Accounts Gives An Investor Ultimate Flexibility In Managing Their Retirement Income Distributions
“The key attribute of a Roth IRA is that any gains on the investments within the account are tax-free, even when withdrawn in retirement, essentially giving an investor tax-free profits on aggressive growth stocks. Here is one simple illustration to demonstrate the difference between putting stock in a Traditional IRA instead of a Roth IRA. Let’s say an initial stock investment of $5,000 grows to $16,000 over 15 years, roughly an 8% annual rate of return. If that investment was held inside a Traditional IRA and then distributed, the investor would have to report an additional $16,000 of income on their federal tax return and pay “Uncle Sam” $3,840 of their profits (assuming they are in the 24% tax bracket.) That same stock distributed from a Roth IRA would not have to be reported as income, thus not owing any tax on the distribution.
In addition, for those individuals who are interested in transferring wealth, Roth IRA’s that are funded with aggressive stocks can be a valuable estate planning tool. Roth IRA’s do not have any required minimum distribution (RMD) rules during the account holder’s lifetime so money from a Roth IRA can pass directly to a beneficiary. The beneficiaries receive the money tax-free as well, thus preserving the tax-free profits of the aggressive stock first purchased in the Roth IRA.
Account diversification can be just as important as asset diversification, so having a mix of non-qualified accounts, Traditional IRA’s and Roth IRA’s gives an investor ultimate flexibility in managing their retirement income distributions as illustrated in the example above. Additionally, aggressive stocks are usually more volatile than other investments and need time to recover when the inevitable market downturn occurs. By not being forced to take distributions in a Roth IRA, an investor can “ride out” the market and not be forced to sell the stock to cover any required distributions.”
Mark A Brinser, CFP®, Stewardship Advisors, LLC
Depending on individual investment goals, a Roth IRA can be the best place to hold stocks. If you are interested in holding equities in this type of retirement account, factor in the advice from these experts, do your due diligence, and consult a financial professional.