This year, savvy investors are prompted to add another crucial task to their personal finance checklist: making a Roth IRA contribution. In 2024, the contribution limit stands at $7,000, with an additional $1,000 catch-up contribution permitted for those age 50 and older.
“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.
A Roth IRA offers the distinct advantage of tax-free growth on dividends, capital gains and income within the account. Withdrawals can be made without penalty and tax-free after age 59 1/2, provided the account has been open for at least five years.
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This feature sets the Roth IRA apart from other retirement savings vehicles like the 401(k) and a traditional IRA, offering unique benefits for long-term financial planning.
“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,” explains Tiana Patillo, financial advisor manager at Vanguard.
To be eligible for a Roth IRA, individuals must meet specific modified adjusted gross income (MAGI) thresholds; for 2024, single filers earning less than $146,000 and joint filers earning less than $230,000 can qualify for the full contribution.
For those who qualify for a Roth IRA, selecting the right funds to hold within it is crucial. Some funds are particularly well suited for a Roth due to their higher growth potential or lower tax efficiency.
“Generally, investors should allocate funds that are less tax-efficient in a Roth IRA,” advises Lauren Wybar, senior wealth advisor at Vanguard. “For example, taxable bonds and real estate investment trusts, or REITs, make regular income payments, and actively managed stock funds are more likely to distribute taxable capital gains.”
Here are seven of the best mutual funds and exchange-traded funds, or ETFs, to hold in a Roth IRA:
| Fund | Expense ratio |
| Vanguard Total World Stock ETF (ticker: VT) | 0.07% |
| Avantis All Equity Markets Value ETF (AVGV) | 0.26% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 0.69% |
| Invesco Zacks Multi-Asset Income ETF (CVY) | 1.06% |
| Fidelity Real Estate Index Fund (FSRNX) | 0.07% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 0.49% |
| Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) | 0.59% |
Vanguard Total World Stock ETF (VT)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” Patillo says. One of the most reliable ways investors can compound an investment long term is by betting on the continued growth of the global stock market via VT. This low-cost Vanguard ETF charges a 0.07% expense ratio and tracks the FTSE Global All Cap Index.
VT’s current portfolio spans over 9,800 market-capitalization-weighted small-, mid- and large-cap stocks from all 11 market sectors. It features approximately 60% in U.S. stocks, 30% in international developed-market stocks and 10% in emerging-market stocks. For investors who prefer a mutual fund, the Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) provides identical exposure.
Avantis All Equity Markets Value ETF (AVGV)
Investors can potentially outperform passive market-cap-weighted index ETFs like VT via a factor ETF like AVGV, which targets smaller, undervalued companies with robust profitability. “These companies have a high discount rate embedded in their market price, and a high discount rate generally drives higher expected returns for investors,” says Ted Randall, senior portfolio manager at Avantis Investors.
AVGV uses an “ETF of ETFs” structure to wrap six other Avantis ETFs spanning U.S. large-cap value, international large-cap value, U.S. small-cap value, international small-cap value, emerging-market value and U.S. mid-cap value stocks. Its current 0.26% expense ratio is inclusive of all underlying ETF fees and is quite reasonable given the ETF’s complexity and actively managed strategy.
Fidelity Blue Chip Growth Fund (FBGRX)
“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 longstanding growth fund to consider is FBGRX.
FBGRX is actively managed, which means that Fidelity will rely on its own proprietary research and models to select its portfolio as opposed to following an index. The current portfolio heavily emphasizes blue-chip growth stocks like Nvidia Corp. (NVDA), Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN). FBGRX charges a high 0.69% expense ratio but has managed to beat its benchmark since 1987.
[The 7 Best Vanguard Funds for Retirement]
Invesco Zacks Multi-Asset Income ETF (CVY)
“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.” An ETF that ticks most of these boxes is CVY.
Designed for income investors, CVY’s current portfolio consists of dividend stocks, REITs, master limited partnerships (MLPs), closed-end funds and preferred shares. The result is an above-average 30-day SEC yield of 4.7%, paid on a quarterly basis. By buying CVY, investors can obtain a simple one-ticker income-oriented exposure as opposed to creating their own via multiple different funds.
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.”
Fidelity’s REIT mutual fund, FSRNX, is one of the most affordable and accessible options on the market thanks to a 0.07% expense ratio and no minimum required investment. It passively tracks the MSCI US IMI Real Estate 25/25 Index and provides exposure to notable REITs such as Prologis Inc. (PLD), American Tower Corp. (AMT), Equinix Inc. (EQIX) and Crown Castle Inc. (CCI).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
Income from bond funds tends to already be fairly tax inefficient, and this is exacerbated when the yields are particularly high, as in the case of high-yield “junk” bonds. Thus, a fund like HYG is best held inside of a Roth IRA, where its high distribution is tax-sheltered. Currently, this fund manages to generate a high 7.3% 30-day SEC yield while also paying monthly distributions.
However, prospective investors need to understand that HYG’s high yield is not low-risk by any means. The ETF manages to achieve a high yield because its portfolio consists of non-investment-grade-rated bonds at a substantially higher risk of default. Therefore, the higher yield is paid to compensate investors for the greater credit risk. HYG charges a 0.49% expense ratio.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
For inflation protection, many investors turn to commodity funds. A great example is PDBC, which holds a portfolio of futures contracts. Currently, these include energy, precious metals, industrial metals and agriculture commodities. During the high-inflation environment of 2022, PDBC provided investors with valuable diversification, returning 19.2% by year-end. The ETF charges a 0.59% expense ratio.
However, PDBC is best held inside of a Roth IRA, as it currently spits out a large year-end distribution every December that is categorized as ordinary income. In 2022, that distribution amounted to around $1.93 per share. Outside of a Roth IRA, this distribution is subject to taxation, which can eat into net returns. Therefore, holding this ETF in a Roth IRA can help investors keep more money in their pocket.
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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com
Update 02/20/24: This story was previously published at an earlier date and has been updated with new information.
