Just Because Money’s in Your Roth IRA Doesn’t Mean You’re Investing It

On the May 4 episode of How to Money, co-host Joel Larsgaard described setting up a Roth IRA for his daughter at Fidelity. He received a call from the brokerage flagging that most of the account was sitting in cash. His takeaway, delivered on air: “I know a lot of people, they think they’re investing, but they just have those dollars sitting there as cash.”

A Roth IRA is a tax wrapper around the investments you choose inside it. Money that lands in the account and never gets allocated to a fund earns whatever the broker’s default cash sweep pays. That’s often a money market yield near the 3.8% fed funds rate or the 4.4% available on the 10-year Treasury. That sounds fine until you compare it to what the same dollars would have done in equities.

The verdict: Larsgaard is right, and the math is brutal

The advice is correct, and the cost of ignoring it is the single largest hidden tax on young retirement savers. Cash drag, the gap between the return on idle cash inside a brokerage account and the return on the assets the account was supposed to hold, is the culprit.

In fact, consider a 25-year-old who maxes a Roth IRA contribution of $7,000 and forgets to buy anything.

Over the last decade, the SPDR S&P 500 ETF (NYSEARCA: SPY | SPY Price Prediction) returned 249% on a price basis. That took shares from about $206 to about $718. A $7,000 contribution invested in the index roughly a decade ago would be worth about $24,000 today. The same $7,000 sitting in a 4% sweep would be worth roughly $10,400. The lost compounding inside a tax-free account is the entire point of using a Roth.

Over five years, SPY is up 73%. Over the past year alone, it returned 27%. A saver who funded the account in May 2025 and never clicked “buy” left a quarter of their potential balance on the table in 12 months.

Why does this happen now?

In March, the University of Michigan consumer sentiment index sat at 53.3, which is recessionary territory. In addition, the personal savings rate has slid from 6% in early 2024 to 4% in the first quarter of 2026. People who fund a Roth in this environment are often anxious about deploying it. A money market sweep paying near 3.8% feels like a real return when headlines are bleak. Inside a Roth, that comfort costs decades of forgone compounding.

Who the warning fits and who it doesn’t

The Larsgaard advice is sharpest for savers under 50 with a 15-year-plus runway. There are no near-term withdrawal needs. And a Roth balance under six figures. For that profile, equity exposure is the entire reason the account exists.

It fits less cleanly for someone within five years of retirement who is intentionally building a cash bucket to cover early withdrawals. Or, for a saver parking a one-time contribution before dollar-cost averaging over the next several months. Cash held intentionally serves a strategy. Cash held by accident creates the drag.

What to do this week

1. Log in and check the position list. If you see “FDIC Cash,” “SPAXX,” “Government Money Market,” or any sweep label as the largest holding, the account is funded but not invested.
2. Pick an allocation before you pick a fund. A target-date index fund or a broad S&P 500 index fund covers the basics for most Roth savers. That’s without requiring a security selection decision.
3. Place the trade and set automation. Most brokerages allow automatic investment of new contributions into a chosen fund. That removes the “deposit and forget” failure mode entirely.
4. Audit annually. Confirm contributions cleared, the auto-invest rule is still active, and dividends are reinvested rather than dropping back into cash.

Larsgaard’s point survives any quibble about market timing or risk tolerance: the Roth IRA is the bucket that has to be filled with the water. Funding the bucket and walking away is the most expensive mistake a young saver can make inside the most powerful tax shelter the IRS offers.