Roth IRA strategy stalls

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Dear Dr. Don,
I am 25 years old and have maxed out my Roth IRA contributions for three years now. Despite all the research I do on Roth IRAs, I do not understand how to allocate my funds within the Roth IRA. Should I purchase stocks, money markets, etc.?
— Tanya Targets

Dear Tanya,
A Roth IRA is an account that holds the funds you’re investing on a tax-advantaged basis for retirement. The accounts are portable and you can transfer from one trustee to another if you decide to change how the account is invested. I recommend a trustee-to-trustee direct transfer if you decide to move the accounts.

Your basic choices are to hold the Roth IRA account with a bank, a brokerage or a mutual fund company. The decision where to hold the account depends on how you want to invest the money. Banks have Roth IRA CDs that would allow you to invest the money in deposits insured by the Federal Deposit Insurance Corp.

Choosing between a brokerage account and a mutual fund company allows you to invest in stocks, bonds and money market securities either by owning the securities outright in a brokerage account or by owning mutual funds that invest in these securities.

Besides considering how the money is invested, you also want to consider the expense associated with the account and the investments. Annual account fees, investment management fees, commissions and any sales load on a mutual fund investment reduce your realized returns. Investing directly with a no-load mutual fund company can hold down your costs.

Several factors should influence where you choose to invest. They include your attitude toward risk, when you expect to need the money and how comfortable you are in making investment decisions on your own.
 See a video on retirement planning in your 20s.

If you’ve been funding a Roth IRA for three years and haven’t gotten comfortable with where or how it’s invested, you should get some professional advice — ideally from a fee-only financial planner — on how to invest the funds.

If you feel you don’t have enough money invested to make it worthwhile to pay for that advice, use Bankrate’s asset allocation calculator to get an idea of the mix of investments appropriate for your age, risk tolerance and economic outlook.

A target-date retirement fund from a no-load mutual fund family like Vanguard or Fidelity is another investment option to consider if you want your money professional managed over time. In the interest of disclosure, I have retirement accounts with both of those fund families.

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.