The state of retirement security for many Americans is becoming increasingly concerning. For example, Social Security is now projected to only be able to pay out 76% of scheduled benefits starting in 2037 due to depletion of its trust fund reserves.
This means that relying solely on Social Security may no longer be feasible for a secure financial future, and individuals will have to shore up their retirement nest egg elsewhere, usually with 401(k) contributions. However, even this may fall short for some.
“Northwestern Mutual recently released a survey that highlighted the gap that many Americans believe they face when saving for their retirements,” says Chris Kline, chief operating officer and co-founder of Bitcoin IRA. “In fact, the survey found that the typical worker believes they’ll need $1.46 million to retire comfortably — a jump of 53% from their savings target in 2020.”
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Given these challenges, it’s crucial for individuals to explore additional avenues for retirement savings. One such option is the Roth IRA, a tax-advantaged retirement account that offers significant benefits.
“A Roth IRA is an account that you can contribute after-tax contributions to, with investment returns, income and dividends growing tax-deferred,” explains Scott Krase, a wealth manager at Connor & Gallagher OneSource.
Importantly, contributions to a Roth IRA grow tax-free, and withdrawals after age 59 1/2 are tax-free as well, provided the account has been open for at least five years.
“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, a financial advisor manager at Vanguard.
For 2024, the contribution limit is $7,000, with an additional $1,000 allowed for those 50 and older as a catch-up contribution. To be eligible, individuals must have a modified adjusted gross income of less than $146,000, or $230,000 for joint filers.
While the Roth IRA is able to hold a variety of qualified investments, it’s important for investors to be strategic with asset selection given its tax-free nature and annual contribution limit.
“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, 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 Wellington Fund Investor Shares (ticker: VWELX) | 0.26% |
| Vanguard Dividend Appreciation ETF (VIG) | 0.06% |
| Avantis All Equity Markets Value ETF (AVGV) | 0.26% |
| PIMCO StocksPLUS Long Duration Fund (PSLDX) | 0.59% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 0.48% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 0.56% |
| iShares Bitcoin Trust (IBIT) | 0.25% |
Vanguard Wellington Fund Investor Shares (VWELX)
Actively managed mutual funds with higher turnover tend to be better suited for a Roth IRA given the increased possibility of large capital gains distributions. For example, VWELX’s 10-year annualized net returns after taxes on distributions and sales of shares amounts to just 6%. Without these sources of drag, the 10-year annualized return for this fund is much higher at 8.2%.
Thus, VWELX is an ideal long-term Roth IRA fund candidate. This actively managed, balanced mutual fund dates back to 1929. It currently features a portfolio of two-thirds in dividend value stocks and one-third in investment-grade bonds. However, investors should note that it is pricier than the usual Vanguard funds, with a 0.26% expense ratio, and also requires a $3,000 minimum investment.
Vanguard Dividend Appreciation ETF (VIG)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” Patillo says. To put this in play, investors can use a dividend growth ETF like VIG, which tracks the S&P U.S. Dividend Growers Index. By reinvesting a steadily growing quarterly dividend into more shares on a regular basis, investors can snowball their investment over time.
The stocks in VIG are screened for at least 10 consecutive years of dividend growth. In addition, the top 25% highest yielding stocks are eliminated to ensure quality. While its 1.8% 30-day SEC yield isn’t going to turn heads, it is still above the average yield of the S&P 500 index. As an ETF, the minimum investment in VIG is simply the price of one share, which is around $184. VIG charges a 0.06% expense ratio.
Avantis All Equity Markets Value ETF (AVGV)
Another way to maximize growth in a Roth IRA is by using actively managed funds that target smaller, undervalued stocks. “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. For an all-in-one solution, Avantis offers AVGV.
For a 0.26% expense ratio, AVGV provides fund-of-funds exposure to six underlying Avantis ETFs, tracking U.S. large-cap value, international large-cap value, U.S. small-cap value, emerging market all-cap value, international small-cap value and U.S. mid-cap value stocks. Periodically, Avantis portfolio managers will rebalance AVGV’s allocations to ensure its composition remains close to the global stock market.
PIMCO StocksPLUS Long Duration Fund (PSLDX)
If available with your Roth IRA provider, a leveraged fund like PSLDX could be another way to beat the market long term. This actively managed fund uses derivatives like futures and swaps to deliver exposure to both the S&P 500 and long-term bonds. In general, PSLDX will target two-times notional leverage with a position of 100% in stocks and 100% in bonds.
Historically, PSLDX has strongly outperformed the market. However, the unique market conditions of 2022, which saw bonds positively correlated with stocks, caused it to suffer a steep drawdown, necessitating a reverse split of its shares. In addition, this fund is very tax inefficient, with a 6.9% distribution yield, making it best suited for a Roth IRA. Currently, PSLDX charges a 0.59% expense ratio.
[READ: 7 Best Actively Managed ETFs]
Fidelity Blue Chip Growth Fund (FBGRX)
“If you are younger and retirement is still years away, consider allocating a good portion toward funds 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 watch for this role is FBGRX.
Over the past 10 years, this actively managed growth mutual fund has strongly outperformed its benchmark, the Russell 1000 Growth Index. During this period, FBGRX returned an annualized 17.3% compared to 16% for the index. By holding this fund in a Roth IRA, investors can avoid paying taxes on its capital gains distributions. FBGRX charges a 0.48% expense ratio.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
“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 fit into this category.” A fund that would meet this criteria is DIVO.
DIVO starts with an actively managed portfolio of roughly 30 blue-chip U.S. stocks selected for quality and dividends. Then, its manager is able to tactically sell covered call options on individual stocks to generate income. Historically, this strategy has worked very well, with DIVO earning a five-star Morningstar rating in its peer category. Currently, this ETF pays a 4.9% distribution yield and features monthly payouts.
iShares Bitcoin Trust (IBIT)
“Acting as a tax-free piggy bank, Americans can use Roth IRAs to invest in high-growth assets while maximizing their tax savings in the future,” Kline says. “It’s one of the reasons Bitcoin — whether via ETFs or direct custody in self-directed IRAs — is becoming a popular choice to diversify within retirement accounts.” When it comes to Bitcoin ETFs, one of the most popular options right now is IBIT.
As a “spot” Bitcoin ETF, IBIT tracks the CME CF Bitcoin Reference Rate — New York Variant by directly holding Bitcoin in custody. Since its debut on Jan. 5, investors have poured over $18 billion into this ETF. While it is extremely liquid and easy to trade with a 30-day median bid-ask spread of 0.03%, prospective investors should be aware that as with Bitcoin, IBIT is highly volatile.
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Update 05/20/24: This story was previously published at an earlier date and has been updated with new information.
