Roth IRA vs. Stocks: What's the Difference?

When planning your finances, it’s important to know the difference between a Roth IRA and stocks. A Roth IRA is a type of account that gives you tax benefits, while stocks are investments you can hold in that account. The Roth IRA lets your investments grow tax-free, and stocks are one kind of investment you can put inside it. A financial advisor can help you determine when a Roth IRA and stocks investments make sense for your portfolio.

How a Roth IRA Works

A Roth IRA operates on a fundamentally different tax principle than many other retirement accounts. When you contribute to a Roth IRA, you’re using money that has already been taxed. This means your contributions aren’t tax-deductible in the year you make them, unlike traditional IRA contributions.

Once your money is inside a Roth IRA, it grows completely tax-free. Any interest, dividends, or capital gains that accumulate within your account aren’t subject to annual taxation. This tax-sheltered growth can significantly boost your retirement savings over time, especially during long investment periods.

Unlike traditional IRAs, Roth IRAs don’t require minimum distributions during the original account holder’s lifetime. This means your money can continue growing tax-free for as long as you wish, making it an excellent wealth transfer vehicle for heirs. Roth IRAs also offer considerable investment flexibility. You can invest in a wide range of assets, including stocks, bonds, mutual funds, ETFs, and even certain alternative investments.

How It Works to Invest in Stocks

Investing in stocks means buying a piece of a company. When you own a stock, you become a shareholder and can benefit if the company grows. You might earn money if the stock’s price goes up or if the company pays dividends from its profits.

To start investing in stocks, you need to open a brokerage account. Traditional brokerages give more personal help but often charge higher fees. Online brokerages are usually cheaper and let you manage your own investments, which makes them a popular choice for beginners.

Successful stock investing requires ongoing management and periodic rebalancing. This means reviewing your investments regularly. You’ll need to adjust allocations based on performance so that your investment portfolio remains aligned with your financial goals and risk tolerance. Many investors follow a buy-and-hold strategy, focusing on long-term growth rather than short-term market fluctuations.

How to Invest in Stocks With Your Roth IRA

A couple comparing investments in a Roth IRA.

Most Roth IRAs allow you to invest in a wide range of securities, including individual stocks, mutual funds, exchange-traded funds (ETFs), bonds, and certificates of deposit. If you’re comfortable researching companies, you can invest in individual stocks within your Roth IRA. This approach gives you complete control over which companies you own and when you buy or sell shares.

One advantage of investing in stocks through a Roth IRA is the long-term perspective it encourages. Since retirement accounts are designed for long-term growth, you can focus on quality investments rather than short-term market fluctuations. This makes your Roth IRA an ideal vehicle for stock investments that may experience volatility but offer strong growth potential over decades.

Your stock allocation within a Roth IRA should typically decrease as you approach retirement. Younger investors might allocate 80-90% of their Roth IRA to stocks, while those nearing retirement might reduce that to 50-60%. This gradual shift helps protect your retirement savings from market downturns when you have less time to recover.

Alternative Investment Options

While Roth IRAs and stocks are popular investment vehicles, diversifying your portfolio with alternative investments can provide unique benefits and risk management opportunities. These four common options often behave differently from traditional markets, potentially offering stability during economic downturns:

Real estate investment trusts (REITs): REITs allow investors to gain exposure to real estate without directly purchasing property. These investment vehicles pool money to purchase and manage income-producing properties, distributing at least 90% of taxable income to shareholders as dividends, making them attractive for income-focused investors.
Commodities: Investing in physical goods like gold, silver, oil, or agricultural products can serve as a hedge against inflation. Commodities often move independently of stock markets, providing portfolio diversification and potential protection during periods of currency devaluation or economic uncertainty.
Peer-to-peer lending: This alternative investment connects borrowers directly with investors through online platforms, bypassing traditional financial institutions. Investors can earn attractive interest rates by funding personal or business loans, though they should be aware of default risks and carefully evaluate borrower creditworthiness.
Collectibles: Items like art, wine, vintage cars, or rare coins can appreciate significantly over time while providing enjoyment beyond their investment value. However, collectibles typically require specialized knowledge, may have high transaction costs, and can be illiquid compared to traditional investments.

Bottom Line

A couple discussing their investment portfolio.

When comparing a Roth IRA and stocks, you should understand how they serve different roles. A Roth IRA is a type of account that offers tax benefits. Stocks are investments you can hold inside that account. Many people use both — opening a Roth IRA and choosing stocks or stock funds to grow their money inside it.

Investment Planning Tips

Whether you are investing for retirement or another financial milestone, an advisor can help you analyze different investments for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know how much your investments could grow over time, SmartAsset’s investment calculator can help you get an estimate.