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7 Best Funds to Hold in a Roth IRA

If you’re looking to get ahead in 2025, creating a personal finance checklist is a great place to start.

For the average American, this might include maximizing 401(k) contributions to secure an employer match, paying down high-interest debt like credit cards or even contributing to a health savings account (HSA) if you’re enrolled in a high-deductible health plan.

One priority that might have escaped your notice is contributing to a Roth IRA. This highly versatile individual retirement account offers two standout advantages. Notably, investment earnings — whether from capital gains, dividends or interest — grow completely tax-free. Moreover, Roth IRAs have more flexible withdrawal terms compared to other retirement accounts. Contributions can be taken out anytime, and if you’re 59½ or older and have held the account for at least five years, both contributions and earnings can be withdrawn tax-free.

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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 (RMD), unlike a traditional IRA, which requires distributions at age 73,” says Tiana Patillo, a financial advisor manager at Vanguard.

However, these benefits come with limitations. When Sen. William Roth introduced this account under the Taxpayer Relief Act of 1997, the goal was to help middle-class Americans save for retirement. Therefore, higher-income earners may find their ability to contribute restricted or phased out altogether.

For 2025, to make the full $7,000 contribution ($8,000 if you’re 50 or older), your modified adjusted gross income must be under $150,000 for single filers or under $236,000 for joint filers.

Given the Roth IRA’s tax benefits and contribution limits, it pays to be strategic about what kinds of funds you hold in this account.

“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 (ETFs) to hold in a Roth IRA:

Fund Expense ratio
Vanguard Wellington Fund Investor Shares (ticker: VWELX) 0.26%
Vanguard Wellesley Income Fund Investor Shares (VWINX) 0.23%
Avantis All Equity Markets Value ETF (AVGV) 0.26%
Vanguard S&P 500 ETF (VOO) 0.03%
Fidelity Contrafund (FCNTX) 0.39%
iShares Core U.S. REIT ETF (USRT) 0.08%
Grayscale Bitcoin Mini Trust ETF (BTC) 0.15%

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. These types of investors have a longer time horizon, which provides more time for investments to grow and recover from drawdowns. However, if an investor had to pay taxes throughout this period, their overall returns would be greatly reduced.

Consider the example of VWELX, one of Vanguard’s oldest actively managed balanced funds dating back to 1929. Over the past 10 years, VWELX’s blend of two-thirds stocks, one-third bonds has delivered an 8.4% return. However, if an investor had to pay taxes on distributions and share sales, that return would have been cut to 6.2%. Thus, funds like VWELX should be prioritized for a Roth IRA.

Vanguard Wellesley Income Fund Investor Shares (VWINX)

“Given a Roth IRA has no RMD rule, this is usually the last type of retirement account to take distributions compared to traditional IRAs and taxable brokerage accounts,” says Brandon M. Clark, director of financial planning at the Clark Group Asset Management. “In addition, this account is usually the most advantageous for beneficiaries because they inherit the funds tax-free as well.”

That being said, retirees drawing on their Roth IRAs for income may find a balanced fund like VWINX useful. This Vanguard fund delivers a 4.1% 30-day SEC yield via a blend of one-third value stocks selected for above-average dividends and two-thirds investment-grade bonds. VWINX pays quarterly distributions and has delivered a strong 9.2% annualized total return since its inception in July 1970.

Avantis All Equity Markets Value ETF (AVGV)

Actively managed funds suitable for a Roth IRA also come in ETF variants. A great example is AVGV, which tilts toward small-cap value stocks screened for 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.

“The idea behind AVGV was to provide investors a single fund solution to get value exposure across global equity markets, by investing in regionally-focused value ETFs that we manage,” explains Daniel Ong, senior portfolio manager at Avantis Investors. From its inception in June 2023 through the end of 2024, AVGV has returned 15.8% annualized versus 12.8% for its benchmark, the MSCI ACWI IMI Value.

Vanguard S&P 500 ETF (VOO)

Younger investors more interested in total returns versus income may not find balanced funds suitable. “We typically recommend owning mostly growth-oriented investments, like stocks, to maximize the return potential over time,” Clark explains. “Of course, everyone’s risk tolerance and goals are different, but broad-based ETFs such as VOO can be a good option for maximizing a Roth IRA’s growth long-term.”

This ETF tracks the S&P 500 index for a low 0.03% expense ratio. With dividends reinvested, VOO has returned an annualized 13.1% over the past 10 years. However, if dividends and sale of shares were taxed, that return would have been reduced to just 10.8%. Therefore, if you want to maximize the growth potential of this low-cost ETF, holding it in a Roth IRA might be ideal.

[5 Best S&P 500 Index Funds to Buy Now]

Fidelity Contrafund (FCNTX)

“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 great example is FCNTX, one of Fidelity’s flagship actively managed funds.

Don’t let the name fool you — FCNTX no longer adheres to a contrarian investment style. Managed by William Danoff since 1990, this growth fund has consistently managed to outperform the S&P 500 index over 10-, five- and three-year trailing periods. However, as an actively managed fund, FCNTX has a high 18% portfolio turnover and frequent capital gains distributions, so holding it in a Roth IRA makes sense.

iShares Core U.S. REIT ETF (USRT)

“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 particular, the distributions from REITs are taxed inefficiently as ordinary income.

If you want to include a REIT allocation in your portfolio, it’s probably best to hold them in a Roth IRA. In this account, the distributions can be reinvested at their full potential. A low-cost ETF to consider is USRT, which tracks the FTSE Nareit Equity REITS Index for a 0.08% expense ratio. The portfolio of 133 diversified REITs in this ETF currently generates a 2.8% 30-day SEC yield.

Grayscale Bitcoin Mini Trust ETF (BTC)

“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.”

Thanks to the various spot Bitcoin ETFs, Bitcoin ownership is more affordable than ever. For example, BTC from Grayscale charges a 0.15% sponsor fee, making it competitive with some broad market index funds. This ETF owns actual Bitcoin in cold storage with its custodian, Coinbase Custody Trust Co., making it physically backed, unlike the Bitcoin futures ETFs of the past.

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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com

Update 01/13/25: This story was previously published at an earlier date and has been updated with new information.

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