Can a Roth IRA Be Used to Buy Stocks?

Many people see IRAs as a product that various types of financial institutions sell. For instance, one common misconception is that IRAs have to invest in bank certificates of deposit, because when you open an IRA at a bank, your only choice at that bank will typically be a CD. However, one of the best attributes of IRAs is that you can invest in a wide range of different types of investments, and in particular, the Roth IRA gives you the maximum possible tax benefit from the huge growth potential in stocks.

What can Roth IRAs invest in?
Like any IRA, Roth IRAs have flexible limits on what they can hold as investment assets. You can hold nearly any financial asset, including CDs, bank accounts, mutual funds, ETFs, stocks, bonds, and cash alternatives like money market mutual funds, within a Roth IRA.

In fact, it's easier to look at what the IRS doesn't allow you to buy in an IRA. Specifically, life insurance policies aren't eligible holdings for an IRA, and you also generally can't buy collectibles. That means that you can't buy artwork, antiques, stamps, gemstones, and many other types of tangible personal property for a Roth IRA. Yet even some items that most people would consider to be collectibles, including certain precious-metals bullion and coins, are allowed within Roth IRAs.

Just because the IRS allows you to invest in nearly anything within a Roth IRA doesn't mean that the institution that holds your IRA account will agree. For example, physical real estate is generally allowed in a Roth IRA as long as you don't use it for personal use. Yet it often takes a specialized self-directed IRA trustee to allow you to actually include a real-estate asset within an IRA, as most trustees prefer simple stocks and other easily priced items.

Why stocks in a Roth IRA are smart
The key attribute of a Roth IRA is that any gains on the assets within the account are tax free, even when you withdraw them in retirement. That makes it most beneficial to look for investments that will appreciate in value the most for your Roth IRA.

Historically, stocks have provided much stronger returns than bonds, cash, and other typical Roth IRA investments. As a result, putting stocks or stock mutual funds in a Roth IRA have the best chance of making the account balance grow the most, thereby taking maximum advantage of the tax-free nature of the account by maximizing the tax-free profits.

That said, holding only stocks in a Roth IRA isn't always the best idea. Many investors prefer to have a diversified retirement portfolio, and if the Roth IRA is your primary retirement investing vehicle, then making sure it has some more conservative investments, in addition to a selection of stocks, can be a prudent move.

Nevertheless, the key point is that you can invest a Roth IRA in stocks if you want. If someone tries to get you to open a Roth IRA without giving you that option, then you should consider finding another provider that will.

For more on IRAs -- Roth and traditional alike -- check out the Fool's IRA Center. We have plenty of information to help you get started investing and figure out what option might work best for you.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!