Can I Buy Shares of Amazon in My Roth IRA?

Amazon‘s (NASDAQ: AMZN) 20-for-1 stock split announcement has led to a lot of excitement among investors. If you’re eager to get shares of Amazon in your portfolio, you may be wondering whether your Roth IRA (individual retirement account) could be your ticket to becoming a shareholder.

Here are a few things you should consider before stuffing your retirement account with shares of Amazon.

Diving into the Roth IRA for 2022

A Roth IRA is a great way to lock in tax-free income during retirement. It’s especially helpful if you think you’ll have to pay higher taxes in the future. You can fund the account now, invest the money, and watch your money grow tax-free. You’ll be able to withdraw every dollar in your account during retirement without having the IRS breathe down your neck, so long as you abide by the rules.

For 2022, you can tuck away $500 for 12 months if you want to max out your contributions. After you hit 50, you can contribute an extra $1,000, bringing your total maximum contribution to $7,000. If your income exceeds the annual threshold, you won’t be able to make direct contributions to a Roth IRA.

It may not be a good idea to throw money into a Roth IRA if you’re in a financial rut. But if you have your financial house in order, try to tuck away as much as you can into the account. Your contributions may help you gain access to some premium stocks like Amazon. But before you invest, you want to have a retirement game plan so you don’t end up risking all your money on a few stocks.

Adding shares of Amazon to your Roth IRA

There are a few things to think about if you want to go shopping for Amazon’s stock in your Roth IRA. First, it needs to make sense for your portfolio, and it has to align with your goals and risk tolerance. Diversification is key, and you would never want to put yourself in a position where 100% of your retirement earnings depend on the performance of one company.

Let’s say you make your first contribution to a Roth IRA In 2022 and only have $6,000 sitting in your account. If Amazon has a stock price of $3,000, you would need to allocate half of your Roth IRA contributions to the stock to get a whole share. Making a big bet on one stock could put your retirement lifestyle at risk, especially if the stock takes a nosedive.

On the other hand, if you’ve been contributing to a Roth IRA for a few years, it may be feasible for you to pursue a whole share. Let’s say you have $30,000 stashed away in your Roth IRA. Buying a whole share of Amazon at $3,000 becomes less risky because the stock only accounts for 10% of your portfolio.

If a whole share of Amazon is out of the question, buying fractional shares may be more your cup of tea. Let’s say Amazon’s stock price is sitting around $3,000. If you decide to contribute $6,000 to your Roth IRA, you can take 5% of your contribution ($300), and buy 1/10 of a share of Amazon. If you buy those shares before Amazon’s stock split participation date, you can take advantage of the 20-for-1 stock split. On June 3, you’ll go from having 0.10 shares of Amazon to two full shares of the company stock, based on a $3,000 stock price when the stock split.

Buying Amazon after the split

If you haven’t started contributing to your 2022 Roth IRA, you shouldn’t feel pressured to dump money in the account so you can buy shares of Amazon. Although the stock split is a big deal for many investors, it’s only a cosmetic change for the company stock. Amazon is breaking up one share into many slices so that more investors can access shares at an affordable price. A stock split in itself won’t cause the value of your shares to shoot up.

Let’s say you build up your Roth IRA funds and buy shares after the stock split. The shares would go from $3,000 to $150 per share after the stock split. On June 6, you’ll be able to get whole shares at a reduced price.

Evaluate Amazon’s position in your portfolio

You can only contribute so much to a Roth IRA every year, so it’s important that you develop a portfolio that allows you to minimize risk. If you don’t have enough in your Roth IRA to safely load up on shares of Amazon, you can always consider Amazon’s role in your traditional brokerage account. That way, you won’t face any restrictions and you can ensure you’re positioning yourself to have a diversified portfolio of assets that can make your retirement dreams a reality.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlene Rhinehart, CPA owns Amazon. The Motley Fool owns and recommends Amazon. The Motley Fool has a disclosure policy.