Roth IRA Investment Options

[Guest jinvest]

I have a ROTH IRA that has been set up since 2001 and am curious about what types of investments can be utilized as part of the ROTH program. I can't seem to find an IRS publication or information elsewhere on the internet. Can an investment in a private small business be used?

[JanetM]

See IRS Notice 2004-8 for what not to do.

[John G]

Most folks invest their Roths and IRAs in mutual funds, stocks, bonds, CDs and money market accounts. There are limitations or prohibitions on many other kinds of investments like real estate, collectables, coin/bullion, etc.

Besides the IRS imposed limitations, you have custodian imposed limitations. Custodians can limit investment options for many reasons such as: problems with valuing the asset at year end, mismatch to skills/experience of account holder, and simplicity (they just aren't interested in high cost, messy "deals").

[Guest archimedes_pie]

In addition to stocks, bonds, and ETFs. I have invested in Call Options (and done extrememly well) through Ameritrade. I believe it may also be possible to write covered calls, but I haven't done so yet.

[John G]

Archimedes - whooaa

Lets get the advice to match to author - in this case it sure sounds like a novice.

Beginning investors should not be thinking about calls or covered calls. These are "options" which are not suitable for a beginner, heck, not suitable for a lot of experience investors. Some of the reasons: it is hard to make money with options (80% lose money), commissions are a larger percent of the position (much larger than with buying stocks), the bid/ask spread is huge compared to stocks (another reason why it is harder to "win"), they expire and so often you trade them before expiration date which means more time spent monitoring positions, and they are complex investment tools that require a lot of knowledge to use. Also note, that many IRA custodians do not allow their IRA customers to even use options. [custodian not IRS rule]

Most beginning investors should focus on mutual funds because you get diversity, invest in dollar amounts (rather than shares), and can avoid commissions with NO LOAD funds. ETFs are very much like mutual funds and are potentially another (relatively new) category of investments that beginners could select.

Jinvest - the IRS takes no position with regard to investment selection. Their job is financial/admin governance and tax collection. You can find info in Kiplinger Financial, the Wall Street Journal, Money, Worth and many books you will find in your local library.

Learning how to invest is a lifetime job. The days of great pension plans and Social Security have faded. The new rules are: "you are in charge". At a minimum you will need to spend 1 hour a month reading about investing, IRA/Roths, mutual funds, etc. That's probably less time than you spend shopping for electronics or a car in a year.