With 2024 more than halfway over, another personal finance task you may want to add to your checklist besides 401(k) contributions is maxing out your Roth IRA, if you have one.
While after-tax contributions to this account aren’t tax deductible like a 401(k) and don’t benefit from an employer match, the real power comes later down the line.
Why? Growth within a Roth IRA — whether from income, dividends or capital gains — is tax-free. But unlike a 401(k), you aren’t taxed on withdrawals either, as long as you’re 59 1/2 or older and the account has been open for at least five years.
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“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.
Given the account’s tax-free nature, it’s a good idea to save up the $7,000 to meet 2024’s contribution limit as soon as possible. If you’re 50 or older, there’s another $1,000 you can deposit as a catch-up.
However, the $7,000 limit might not apply to everyone. Depending on your income, it could be less. Your modified adjusted gross income must be less than $146,000, or $230,000 for joint filers, to contribute the full amount. Going over this reduces the limit steadily.
But because of the account’s limited contribution room, you need to be strategic about what you invest in — this is called “asset location.” A Roth IRA is versatile as it can hold a variety of stocks, bonds, mutual funds and exchange-traded funds (ETFs), but some are better suited for it.
Here are seven of the best funds to hold in a Roth IRA, according to experts:
| Fund | Expense ratio |
| Vanguard Ultra-Short Bond ETF (ticker: VUSB) | 0.10% |
| Vanguard 500 Index Fund Admiral Shares (VFIAX) | 0.04% |
| Avantis All Equity Markets Value ETF (AVGV) | 0.26% |
| iShares Bitcoin Trust (IBIT) | 0.25% |
| Fidelity Magellan Fund (FMAGX) | 0.47% |
| Cohen & Steers Quality Income Realty Fund (RQI) | 2.21% |
| Invesco S&P 500 Equal Weight ETF (RSP) | 0.20% |
Vanguard Ultra-Short Bond ETF (VUSB)
“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.” A great example is VUSB, an ETF alternative to money market funds.
VUSB’s portfolio of high-quality, short-term fixed-income securities currently pays a competitive 5.2% 30-day SEC yield. Over the past year, this ETF has returned an annualized total of 5.9%. But after taxes on distributions and sales of shares, the net return would have been cut down to just 3.5%. Hence, this bond ETF is a great candidate for reducing volatility in a Roth IRA, where its potential is unhindered.
Vanguard 500 Index Fund Admiral Shares (VFIAX)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” Patillo says. Even a fairly tax efficient S&P 500 index fund like VFIAX can benefit. Before taxes, the total 10-year annualized return for VFIAX sits at 12.8%. After taxes on distributions and sales of shares, it falls to 10.6%. Over a long period, this can compound quickly.
By holding VFIAX in a Roth IRA, young investors can take advantage of the S&P 500’s full hard-to-beat potential, with the S&P Indices Versus Active (SPIVA) study estimating that 88% of all U.S. large-cap funds underperformed it over the past 15 years. This fund charges a 0.04% expense ratio, or around $4 a year per $10,000 investment. However, it does require a $3,000 minimum investment.
Avantis All Equity Markets Value ETF (AVGV)
Investors fine-tuning their Roth IRAs for potential outperformance can use actively managed funds targeting small-cap stocks and value 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. The firm’s all-in-one offering here is AVGV.
AVGV uses a “fund of funds” structure to hold six other Avantis ETFs tracking U.S. large-cap value, U.S. mid-cap value, U.S. small-cap value, international large-cap value, international small-cap value and emerging market value stocks. Avantis manages the allocation and rebalances it periodically. Its 0.26% expense ratio is reasonable for an actively managed fund and is inclusive of all underlying fund fees.
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,” says Chris Kline, chief operating officer and co-founder of Bitcoin IRA. “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.” A popular Bitcoin ETF is IBIT.
Launched in January, IBIT has seen explosive growth and investor inflows, reaching over $21.8 billion in assets under management, or AUM. This ETF provides exposure to spot, or live, Bitcoin prices during market hours by holding actual Bitcoin in secure custody. It is currently charging a 0.25% sponsor fee, but a waiver to 0.12% is in effect on the first $5 billion in AUM for a 12-month period from launch.
[READ: 7 Best Cryptocurrency ETFs to Buy]
Fidelity Magellan Fund (FMAGX)
“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 pay no taxes on when held in a Roth IRA.” A growth-oriented pick to watch is FMAGX, once managed by Peter Lynch.
This famous Fidelity fund seeks to outperform the S&P 500 via active stock picking with a growth investing focus. Over the past 10 years, FMAGX has returned an annualized 13.3% versus 12.9% for the S&P 500. Fidelity has made this long-standing mutual fund increasingly more affordable and accessible with a 0.47% expense ratio and no minimum investment requirement.
Cohen & Steers Quality Income Realty Fund (RQI)
“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, REITs — known for favorable dividend payouts — and high-yield bond funds fit into this category.” In a Roth IRA, the income from these assets can be reinvested at its full potential.
Closed-end funds that spit out high income are prime candidates for a Roth IRA, especially if they hold tax-inefficient assets like REITs. A great example is RQI, which employs leverage of about 30% on a portfolio of U.S. REITs such as American Tower Corp. (AMT), Prologis Inc. (PLD), Welltower Inc. (WELL) and Simon Property Group Inc. (SPG) to deliver a high 7.9% distribution yield.
Invesco S&P 500 Equal Weight ETF (RSP)
“For a Roth IRA investment that may be well positioned to potential upside capture in a declining interest rate environment, RSP may be worth considering,” says Chris Dahlin, factor and core equity strategist at Invesco. “At each quarterly rebalance, RSP equally weights the constituents in the S&P 500 index, and in doing so, provides greater exposure to more of its smaller companies.”
Thanks to its equal-weight strategy, RSP is much less top-heavy than the usual S&P 500 index fund and provides greater exposure to both mid-cap stocks and value stocks. “As of June 30, the S&P 500 index’s current 25.6 price-to-earnings ratio represents a 21.5% premium to its 10-year average, while RSP’s 19.6 P/E ratio represents a 2.9% discount to its average,” Dahlin notes.
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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com
Update 07/22/24: This story was previously published at an earlier date and has been updated with new information.
