What our your investment options with a Roth Ira?

[Guest John Neipert]

Once you contribute to a Roth Ira, what are your investment options? Can you buy stocks with your contributions? How is this handled?

[John G]

First you must find a custodian for your Roth or regular IRA. Choices include banks, brokerages, and mutual funds.

You have a wide arrange of investment choices. The most common include: CDs, money market accounts, bonds, mutual funds, stocks and some types of stock options. I have listed these in assending order of both risk and return (except stock options where "return" is hard to define).

The most conservative investments are the IOU types, such as CDs, money markets and bonds. Of these, only the first can ever be "insured" against loss of principal (such as with a Bank CD). Anything that is "insured" is by definition less risky and therefore gives a very low return.

IRA investments are typically very long term investments. Therefore I highly recommended a heavily percent of equities (stocks). One good way to get started is with a broad based mutual fund. Here you are looking for NO LOAD versions, which means no front end or back end commissions. You may want to read the prior March issues of Consumer Reports for a good intro and a very short list of some mutual funds. Why funds? Because you get a lot of diversity which is hard to achieve when you are just getting started and have a limited pool of assets.

Who should be your custodian? Well if you are ultra conservative your local bank. But if you understand the general concept of investment risk, try either a brokerage or a mutual fund family. There are many choices that have good web sites. You can change custodians as your knowledge and investment strategy changes or if you do not like the service you are getting.

Good luck.