Uncle Sam offers several tax-sheltered accounts to help you keep more of your hard-earned money.
For example, through work, you likely contribute to a 401(k) plan, which allows you to defer taxes on contributions and earnings until retirement.
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If you have a high-deductible health care plan, you might also take advantage of a health savings account, or HSA, (HSA) which offers a triple tax advantage: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are tax-free.
Rounding out this trio is arguably the most versatile option of all — the Roth IRA.
Introduced under the Taxpayer Relief Act of 1997 and named after Sen. William Roth, this account allows investment earnings — whether from capital gains, dividends or interest income — to grow completely tax-free. Withdrawals are also more flexible than other retirement accounts, provided you’re at least 59 1/2 years old and 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.
These benefits, however, come with certain restrictions. For one, if you earn too much, you may not qualify to make a full contribution — or any contribution at all. This limitation is meant to preserve the Roth IRA’s purpose as a middle-class tax shelter for working Americans.
In 2024, to make the full $7,000 contribution, single filers must have a modified adjusted gross income of less than $146,000, while married couples can earn up to $230,000. If you’re 50 or older, you can contribute an additional $1,000 in catch-up contributions.
Given the limited contribution room and significant tax advantages, it’s important to be strategic about what investments you hold in your Roth IRA. Remember, if you experience a capital loss in a speculative investment, you can’t claim it as you would in a taxable brokerage account. Conversely, holding cash in a Roth IRA is a missed opportunity, as it wastes the account’s growth potential.
“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 funds to hold in a Roth IRA, according to experts:
| Fund | Expense ratio |
| Vanguard Wellesley Income Fund Investor Shares (ticker: VWINX) | 0.23% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 0.56% |
| Vanguard Wellington Fund Investor Shares (VWELX) | 0.26% |
| Avantis Moderate Allocation ETF (AVMA) | 0.21% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 0.47% |
| Schwab U.S. REIT ETF (SCHH) | 0.07% |
| iShares Bitcoin Trust ETF (IBIT) | 0.25%* |
*Technically, the fee is slightly lower right now. The first $5 billion of assets have a fee of 0.12% until Jan. 11, 2025. With $54 billion in assets, the blended rate is currently around 0.24%.
Vanguard Wellesley Income Fund Investor Shares (VWINX)
Retirees eligible for tax-free Roth IRA withdrawals can use VWINX as an all-in-one income solution. When held in a taxable account, the combination of capital gains distributions and income from this fund make it fairly tax-inefficient. But in a Roth IRA, these disadvantages are negated, allowing investors to benefit fully from VWINX’s high 3.8% 30-day SEC yield, with distributions paid on a quarterly basis.
VWINX is an actively managed, conservative multi-asset fund that’s designed to deliver consistent income and preservation of capital. Currently, the fund allocates one-third of its holdings to value stocks with above-average dividends, while reserving the other two-thirds for investment-grade corporate bonds, Treasurys and mortgage-backed securities. VWINX charges a 0.23% expense ratio.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
VWINX isn’t the only option for tax-free passive income in a Roth IRA. If you want to avoid its $3,000 minimum investment, consider using an exchange-traded fund, or ETF, like DIVO instead, which trades at around $42 a share. This ETF combines a high-conviction portfolio of 20 to 30 blue-chip dividend growth stocks with covered call writing to deliver a 4.8% distribution yield, along with monthly payouts.
“By blending dividend-paying stocks with tactical covered call strategies, DIVO seeks to boost income while managing volatility, making it an attractive option for Roth IRA holders looking to optimize tax-free growth and consistent cash flow,” says Christian Magoon, founder and CEO of Amplify ETFs. Morningstar gives this ETF a “5-Star” rating in the “derivative income” category, signifying impressive risk-adjusted returns.
Vanguard Wellington Fund Investor Shares (VWELX)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” Patillo says. For example, consider VWELX, a longstanding Vanguard fund dating back to 1929. Over the past 10 years, VWELX delivered a decent 8.5% compound annual growth rate before taxes. But after taxes on distributions and capital gains, its 10-year return falls to 6.3%.
VWELX is therefore an example of an actively managed fund best suited for a Roth IRA. In this account, investors can compound VWELX at full potential. This fund is basically a more aggressive version of VWINX, with two-thirds in stocks and one-third in bonds. Since its inception in 1929, VWELX has delivered an 8.4% annualized total return despite numerous market calamities and corrections.
Avantis Moderate Allocation ETF (AVMA)
Balanced mutual funds like VWELX have ETF alternatives, too. For a shot at beating the market, consider AVMA, which tilts toward 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.
AVMA uses a “fund of funds” structure to hold 10 other Avantis ETFs. Generally, 70% of this ETF will be allocated toward global equities with a small-cap and value emphasis, while the remaining 30% goes toward investment-grade and short-term bonds. Avantis will periodically rebalance the ETF’s allocation on your behalf. AVMA charges a 0.21% expense ratio, which is inclusive of all underlying ETF fees.
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 pay no taxes on when held in a Roth IRA.” One of the best growth funds to consider is FBGRX.
This actively managed fund debuted in 1987. It selects blue-chip stocks, which Fidelity defines as “well-known, well-established and well-capitalized.” Over the past 10 years, FBGRX has compounded at an annualized 17.9%, beating the Russell 1000 Growth Index’s return of 16.6%. However, its high 22% turnover leads to large capital gains distributions, making it best suited for a Roth IRA.
Schwab U.S. REIT ETF (SCHH)
“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.” For broad REIT exposure, consider SCHH, which charges a reasonable 0.07% expense ratio.
This ETF tracks the Dow Jones Equity All REIT Capped Index, a benchmark of 120 REITs, excluding mortgage and hybrid REITs. In one ticker, investors get residential, health care, warehouse, cell tower, data center, office, retail and hospitality REITs. The ETF pays a high 3.7% 30-day SEC yield. However, SCHH is best held inside a Roth IRA, as its distribution is almost entirely taxed as ordinary income.
iShares Bitcoin Trust ETF (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.”
Bitcoin exposure inside a Roth IRA is now easier than ever thanks to spot Bitcoin ETFs like IBIT. This ETF has experienced tremendous growth and now sits at nearly $54 billion in assets under management.
It tracks the CME CF Bitcoin Reference Rate — New York Variant index and charges a 0.25% sponsor fee. However, that’s being waived to 0.12% on the first $5 billion in AUM until Jan. 11, 2025.
[READ: What’s the Best Treasury ETF? 7 Options for Investors]
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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com
Update 12/12/24: This story was previously published at an earlier date and has been updated with new information.
