Can I Buy ETFs for My Roth IRA?

You can invest in a wide variety of assets in a Roth IRA, including exchange-traded funds (ETFs). When your Roth IRA is held by an online broker or traditional broker-dealer, it can facilitate the purchase of ETFs.

Including ETFs in your Roth IRA can be an inexpensive and effective way of investing in your retirement. The returns you’ll see from adding carefully selected ETFs are magnified by the tax-free growth afforded by a Roth IRA.

Benefits of ETFs in a Roth IRA

ETFs are a great way to build a solid retirement portfolio because they provide diversification and typically have lower fees than traditional mutual funds. A majority of ETFs are passively managed and track indexes and sectors⁠, which result in lower expense ratios.

Like mutual funds, ETFs offer both broad diversification and access to very specific sectors in the market. For example, there are ETFs that track specific indices such as the S&P 500, technology sector ETFs, and socially responsible ETFs.

Another benefit is that ETFs trade on an exchange like stocks, unlike mutual funds, which can only be purchased at the end of each trading day.

Creating leverage within a Roth IRA can be next to impossible due to investment restraints on retirement accounts. Including a leveraged ETF in your Roth IRA is one way to solve this problem. A leveraged ETF uses derivatives and debt to boost the returns of the underlying index it tracks. Keep in mind that while returns can be boosted on the upside, leveraged ETFs can also amplify losses, making them riskier investments.

Choosing ETFs for a Roth IRA

ETFs simplify the task of investing. They trade like a stock during market hours and provide investors access to a basket of many stocks in one product. At the same time, choosing the best ETFs for retirement can be challenging because there are so many available.

Consider the tax advantages of Roth IRAs. Contributions are made with after-tax dollars, which means investments grow tax-free and you also don’t pay any tax on withdrawals at retirement. More aggressive and growth-oriented funds are appropriate for a Roth IRA because of the benefits of tax-free growth.

If you are nearing retirement or are already retired, you may want to choose ETFs with high income distributions. These could be distributed to you as tax-free retirement income.

The Bottom Line

ETFs are among the many types of investments allowed in a Roth IRA. They offer a combination of diversification, low costs, and the flexibility to trade like a stock. In order to include ETFs in a Roth IRA, you’ll need to have an account with a financial institution that offers them.