Woman on tablet smiling looking out of the window.
Retirement

How to invest your IRA

Keep it simple with an "all in one" fund that does some of the work for you, or customize your own portfolio.
6 minute read
success

You have saved this article
Retirement
IRAs
Education
Page
Managing portfolios
risk-tolerance

What is an IRA and why do investment choices matter?

An individual retirement account, or IRA, is a tax-advantaged retirement savings account that allows individuals to invest in various asset types, including stocks, bonds, and mutual funds. Each investment choice you make within an IRA can influence your long-term savings growth, portfolio diversification, and risk. 

The earlier you contribute to an IRA, the more time your account has to grow through compounding, potentially increasing your retirement savings.

Ready for tax-advantaged retirement saving

Choose an IRA

Common IRA investment options

After funding your IRA, you'll have many retirement investment options to choose from. Each investment comes with a different set of risks, growth potential, liquidity, and fees. Choosing the right investment options will depend on your risk tolerance, age, and personal financial situation.

Stock ETFs and mutual funds

If you want to diversify your investments across an array of stocks, an exchange-traded fund (ETF), or mutual fund can be a good option. These investments are both managed by professionals and invest in stocks based on certain themes, like industries, geographies, or company size.

Learn about the differences between ETFs and mutual funds

Instead of managing multiple stocks, an ETF or mutual fund allows you to own one asset that holds many others. These can be good options for beginner investors looking for a simplified approach while maintaining diversification. However, as you approach retirement, you may need to rebalance stock ETFs and mutual funds to decrease market risk while keeping a diversified portfolio.

Pros:

  • Broad diversification across hundreds or thousands of companies.
  • Wide variety of investment styles and geographic focus areas.
  • Passively managed ETFs and index funds can potentially have low expense ratios. 

Cons:

  • High volatility and potential for short-term losses.
  • Requires more knowledge to build a balanced portfolio.
  • May require periodic rebalancing.

Target-date funds

A target-date fund is a type of mutual fund or ETF that automatically adjusts its asset allocation based on a set retirement date. These funds are great for investors who want the diversification of a complete portfolio in a single investment.

Target-date funds are designed to manage risk while helping you grow your retirement savings through diversified investing strategies. For example, as you approach retirement, a target-date fund will likely rebalance by shifting from investing in a majority of stocks to investing primarily in bonds and other fixed income assets to reduce market risk.

Pros:

  • Diversification across stocks, bonds, and other assets.
  • Professional portfolio management.
  • Built-in rebalancing as you approach retirement.

Cons:

  • A one-size-fits-all approach may not match your specific needs.
  • May have higher fees than other investment options.
  • Limited control over asset allocation.

Asset allocation

How you divide your investment money among different types of investments. Asset allocation helps balance risk and reward while aligning with your investment objectives. 

Fixed income ETFs and mutual funds

Fixed income investments can offer consistent returns typically in the form of interest payments in exchange for an investment. When you purchase a fixed income investment, you're lending money to a borrower in exchange for a predetermined amount of interest paid to you over a specific period of time. By using a mutual fund or ETF for your fixed income investments, you can buy and sell those investments more easily than if you owned individual bonds directly. 

Fixed income can be a good option if you're getting close to retirement and looking for safer investments, or if you have a low risk tolerance. While these investments tend to be safer than many others, it's important to recognize that they still come with risks, such as interest rate changes and inflation. 

Pros:

  • More stable and predictable returns compared with stock funds.
  • Steady income through interest payments and potential tax advantages with certain bond types.
  • Can help reduce overall portfolio volatility.

Cons:

  • Lower long-term returns compared with stocks historically.
  • Interest rates can affect fixed income prices (when interest rates go up, bond prices usually go down, and vice versa).
  • Inflation can reduce what your money can buy over time. 

Other investment options

In addition to mutual funds and ETFs, here are some other choices to consider for your IRA: 

Individual stocks

Invest in companies directly and potentially benefit from capital gains and/or dividends. Stocks are subject to capital gains losses and are considered riskier than most other IRA investment options.

Individual bonds

Fixed income securities that offer interest payments but are subject to credit risk from the borrower and other potential risks.

CDs

Certificates of deposit earn interest over a fixed period. CDs are safe and insured by the FDIC, within limits, but offer low interest rates that may not outpace inflation, among other potential risks.

Credit risk

The risk that the company or government that issued a bond won’t be able to pay back the money they borrowed. This could result in the loss of some or all of your principal investment.

How do the investment options differ between a traditional IRA and a Roth IRA?

There are no differences between your investment options for a traditional IRA versus a Roth IRA. However, it's important to understand the major differences between the 2 account types.

  • Traditional IRA. Typically funded with pre-tax dollars, grows tax-deferred into retirement, and withdrawals in retirement are usually taxed as ordinary income. Any after-tax contributions are distributed tax-free in retirement (while earnings are taxed as ordinary income).1
  • Roth IRA. Funded with after-tax dollars, grows tax-free into retirement, and withdrawals are tax-free if your account has been open for at least 5 years and you've had a qualifying event (such as reaching age 59½, death, or disability).2

Your choice of IRA will depend on your income level, tax status, and other personal factors.

Choosing the right IRA investment strategy

Selecting the right IRA investment strategy for you will depend on several important factors.

  • Diversification. Maintaining a diversified portfolio can help mitigate risks and maximize potential returns.
  • Time horizon. Your planned retirement date can determine how much risk you're willing to take with your IRA investments. 
  • Risk tolerance. Your willingness to withstand market volatility determines how much investment risk you can handle. 
  • Rebalancing. Some investments (like target-date funds) rebalance automatically, while others require manual rebalancing.
  • Fees and commissions. Each asset class has different fees and commissions. Compare your options across investments and brokerage firms to help keep fees low and ensure you're making the most out of your money. 

See how much you should save to reach your retirement goals.

Retirement Income Calculator

Get expert support choosing your IRA investments

With a variety of tools and resources, a Vanguard IRA® makes it easy to manage your retirement portfolio on your own. But if you'd like extra support tailored to your specific financial situation, Vanguard’s professional advice services help you: 

  • Keep more of your money.
  • Increase your confidence through our guidance and financial tools.
  • Get back more time to do the things you love.

Frequently asked questions about IRA investments

Through your IRA, you can invest in real estate through real estate investment trusts (REITs) and real estate stocks, mutual funds, or ETFs.

IRA investments held in a brokerage account are covered by Securities Investor Protection Corporation (SIPC) insurance, subject to limits. This coverage protects against losses if your brokerage firm fails financially, but doesn't protect you from investment losses due to market performance. 

IRA investments can't be made in collectibles, life insurance contracts, and other prohibited investments set by the IRS.

 

IRA investments should be reviewed at least once per year by you or your financial professional to ensure your portfolio aligns with your current goals and financial situation. During these reviews, check whether your investments are still appropriate for your age and risk tolerance, and account for any major life changes that could affect your retirement plans.

Because a 401(k) is an employer-sponsored plan, your investment options are limited by your employer, often to a preselected set of mutual funds or target-date funds. An IRA offers greater investment flexibility, with access to a wide variety of mutual funds, ETFs, and individual stocks and bonds.

Start saving for retirement with Vanguard today.

Open an IRA

1When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.

2Withdrawals from a Roth IRA are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)

 

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. 

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date. 

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.