As 2023 winds down, savvy investors have another task to add to their year-end financial checklist: saving up for an upcoming annual Roth IRA contribution for 2024.
“A Roth IRA is an account that you can contribute after-tax contributions to, with investment returns, income and dividends growing tax-deferred,” says Scott Krase, wealth manager at Connor & Gallagher OneSource.
For 2024, the Roth IRA contribution limit has seen a beneficial increase, allowing individuals under 50 to contribute up to $7,000, while those over 50 can take advantage of an additional $1,000 in catch-up contributions, raising their total to $8,000.
However, keep in mind that not every investor will qualify for a Roth IRA. Whether or not you can access this account depends on your household’s modified adjusted gross income, or MAGI. For 2024, single filers who make less than $146,000 can qualify, whereas those filing jointly who make less than $230,000 are also eligible.
That being said, for those who can access it, the Roth IRA stands out as a powerful investment tool due to its unique tax advantages. Contributions to a Roth IRA are made with after-tax dollars, meaning that while there’s no immediate tax deduction, the real magic happens over time.
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This is because investment earnings within a Roth IRA grow tax-free, and qualified withdrawals in retirement are not subject to federal income taxes.
This tax-efficient growth makes the Roth IRA an especially economical account for holding certain types of funds, in particular those expected to achieve high growth or generate significant income.
Thus, selecting the right funds to hold in your Roth IRA becomes a strategic decision, one that can significantly impact the efficiency and growth of your retirement savings. This, coupled with the account’s flexibility, can significantly boost your retirement earnings.
“Roth IRAs are an attractive financial savings vehicle because investors can contribute to them regardless of age and take advantage of tax-free income in retirement, with no required minimum distribution, unlike a traditional IRA, which requires distributions at age 73,” says Tiana Patillo, financial advisor manager at Vanguard.
Here are seven of the best mutual funds and exchange-traded funds, or ETFs, to hold in a Roth IRA, according to experts:
| Mutual Fund or ETF | Expense Ratio |
| Vanguard Total Stock Market Index Fund Admiral Shares (ticker: VTSAX) | 0.04% |
| Vanguard Wellington Fund Investor Shares (VWELX) | 0.25% |
| Fidelity Real Estate Index Fund (FSRNX) | 0.07% |
| Schwab U.S. Large-Cap Growth ETF (SCHG) | 0.04% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 0.06% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% |
| Avantis All Equity Markets Value ETF (AVGV) | 0.26% |
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” Patillo says. When it comes to long-term compounding potential, few investments have been able to match the returns of VTSAX, which tracks the CRSP US Total Market Index. Over the trailing 10 years as of Nov. 31, this mutual fund has returned an annualized 11.1%.
VTSAX’s index is broad, tracking more than 3,700 U.S. stocks. As a market-cap-weighted index fund, VTI’s portfolio ranks companies based on their size, which ensures that over the long-term, the winners naturally migrate to the top. This helps investors passively capture the small proportion of outperforming companies that drive the bulk of returns with low turnover. The fund charges a 0.04% expense ratio.
Vanguard Wellington Fund Investor Shares (VWELX)
“Generally, investors should allocate funds that are less tax-efficient in a Roth IRA,” says Lauren Wybar, senior wealth advisor at Vanguard. “For example, taxable bonds and real estate investment trusts make regular income payments, and actively managed stock funds are more likely to distribute taxable capital gains. The higher turnover and tax rates incurred by these investments make them ideal for a Roth IRA.”
Despite its reputation for low-cost index funds, Vanguard actually has a fairly robust lineup of actively managed funds as well. A standout example is VWELX, which was founded in 1929. This fund allocates around two-thirds to U.S. stocks, and one-third to U.S. bonds, which are selected for quality. VWELX charges a 0.25% expense ratio and requires a $3,000 minimum investment.
Fidelity Real Estate Index Fund (FSRNX)
“In a Roth IRA, REIT funds are great holdings for taking advantage of the comparatively high tax-free distributions,” says Kaleb Paddock, founder and certified financial planner at Ten Talents Financial Planning. “In addition, you also benefit from price appreciation given the historically strong returns REIT investing and the real estate sector have provided.”
For a low-cost REIT index mutual fund, Fidelity offers FSRNX. This fund tracks the MSCI US IMI Real Estate 25/25 Index, which is composed mostly of REITs from multiple sectors, but also real estate service companies. Beginner investors may find this fund especially affordable and accessible given its low 0.07% expense ratio, no minimum required investment and lack of transaction fees on Fidelity’s platform.
[SEE: 9 of the Best Bond ETFs to Buy Now.]
Schwab U.S. Large-Cap Growth ETF (SCHG)
“If you are younger and retirement is still years away, consider allocating a good portion toward mutual funds or ETFs that focus on growth,” says Jim Penna, senior manager of retirement services at VectorVest Inc. “Historically, these investments have potential for higher growth over time that you will generally pay no taxes on when held in a Roth IRA.”
A great example is SCHG, which tracks the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. For a low 0.04% expense ratio, investors gain exposure to around 250 growth stocks such as Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and Nvidia Corp. (NVDA). While tax-efficient with a 0.4% 30-day SEC yield, holding SCHG in a Roth IRA can help investors avoid capital gains tax.
Schwab U.S. Dividend Equity ETF (SCHD)
“To take advantage of the tax benefits, it is generally better to hold investments in your Roth IRA that would otherwise generate taxable income,” Penna says. “For example, stocks that pay dividends or generate capital gains, real estate investment trusts, or REITs, known for favorable dividend payouts, and high-yield bond funds also fit into this category.”
A great example is SCHD, which tracks the Dow Jones U.S. Dividend 100 Index. Currently, this ETF pays a fairly high 3.7% 30-day SEC yield, which can incur a substantial drag in a taxable account. Its index screens for dividend quality by checking for consecutive years of dividend payments, free cash flow to total debt, return on equity and five-year dividend growth rate. SCHD charges a 0.06% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
For retired investors, the Roth IRA can be a great vehicle for drawing on a steady stream of tax-free retirement income to supplement 401(k) withdrawals and Social Security benefits. To unlock greater income potential in a Roth IRA, investors can opt for a derivative income fund such as JEPI, which uses more complex options selling strategies to produce higher-than-average yields.
This actively managed ETF starts by selecting a portfolio of blue-chip U.S. stocks designed to deliver the bulk of the S&P 500’s returns, with less volatility. Then, JEPI buys equity-linked notes which provide it with exposure to the risk and returns of a covered call strategy, essentially sacrificing some future return for immediate income. The ETF charges a 0.35% expense ratio and pays an 8.7% 30-day SEC yield.
Avantis All Equity Markets Value ETF (AVGV)
For a shot at beating the market long-term, investors can try a factor investing approach, which targets metrics proven by research to drive higher returns. “Academic research shows that companies trading at low price multiples with good profitability are expected to outperform, and that this performance premium is greater within small caps,” says Ted Randall, senior portfolio manager at Avantis Investors.
A great example is AVGV, which holds five other Avantis ETFs that provide actively managed, rules-based exposure to global large-cap and small-cap value stocks with robust profitability. “This combination implies these companies have a high discount rate embedded in their market price, and a high discount rate generally drives higher expected returns for investors,” Randall says. AVGV charges a 0.26% expense ratio.
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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com
Update 12/13/23: This story was previously published at an earlier date and has been updated with new information.
