There’s a saying that nothing in life is certain except death and taxes, and when it comes to investing in funds, the latter holds particularly true. With few exceptions, Uncle Sam is going to take a cut of your investment returns, although the way it happens can vary widely.
If you sell shares of a fund at a profit, meaning the market price is higher than your cost basis, you’ll owe capital gains tax. This tax rate can be short term or long term, depending on how long you’ve held the investment.
Received a distribution? Get ready to pay tax on that, too. If it’s a qualified dividend, you might save on taxes, but if it’s ordinary income from most bonds or real estate investment trusts (REITs), expect to pay more depending on your marginal tax rate.
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While you can avoid taxes with smart asset selection — like tax-exempt municipal bond funds or closed-end funds (CEFs) that pay a return of capital, which reduces your cost basis and is not immediately taxable — there’s an easier alternative: asset location.
Asset location involves making use of the various tax-sheltered accounts offered to average investors, allowing you to strategically allocate your investments based on their tax efficiency.
One of the best tools for this strategy is the Roth IRA. With a Roth IRA, any investment gains — whether from distributions or capital gains — remain tax-free.
You can also withdraw contributions at any time without penalty, and if you’re 59½ or older and have held the account for at least five years, you can withdraw both contributions and earnings tax-free — something a traditional 401(k) doesn’t offer.
Of course, a Roth IRA comes with some limitations. The annual contribution limit for 2025 is $7,000, but if you earn too much, your contribution limit could be reduced. The account’s purpose is to serve as a tool for the middle class, not just another tax break for the wealthy.
To make the full $7,000 contribution, your modified adjusted gross income must be below $150,000 for single filers or below $236,000 for joint filers.
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% |
| Vanguard 500 Index Fund Admiral Shares (VFIAX) | 0.04% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% |
| Principal U.S. Mega-Cap ETF (USMC) | 0.12% |
| Grayscale Bitcoin Mini Trust ETF (BTC) | 0.15% |
| BondBloxx CCC Rated USD High Yield Corporate Bond ETF (XCCC) | 0.40% |
Vanguard Wellington Fund Investor Shares (VWELX)
“Generally, investors should allocate funds that are less tax efficient in a Roth IRA,” says Lauren Wybar, a wealth advisor executive at Vanguard. “For example, taxable bonds and REITs make regular income payments, and actively managed stock funds are more likely to distribute taxable capital gains.” A great example of the former is VWELX, one of the longest-running actively managed balanced funds.
Two-thirds of VWELX is allocated to large-cap stocks screened for quality, higher dividend yields and lower valuations. The other third is allocated to investment-grade bonds. Since its inception in 1929, VWELX has delivered a strong 8.3% annualized total return. However, sizable capital gains distributions and ordinary income from the bond component make it less tax efficient and thus better suited for a Roth IRA.
Vanguard Wellesley Income Fund Investor Shares (VWINX)
“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. If you are using a Roth IRA for income, consider VWINX.
VWINX is basically a more conservative version of VWELX. It allocates one-third to value stocks and dividend stocks, and two-thirds to investment-grade bonds. This results in a higher 3.9% 30-day SEC yield. Retirees who want to withdraw this income in its entirety should prioritize holding VWINX in a Roth IRA, where that can be done tax-free if you’re 59½ or older and have had the account for five years.
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. These investors aren’t usually relying on their portfolios for income. Rather, distributions are generally reinvested to increase total return potential. By holding funds in a Roth IRA, investors can reinvest any income received at full potential without tax drag.
For example, Vanguard notes that VFIAX, an S&P 500 index fund, has returned an annualized 12.9% total return over the past 10 years. But if distributions and sale of fund shares were taxed, that figure would drop to 10.8%. Over long periods, this difference can add up to significant lost upside for investors. Thus, even growth-oriented funds like Vanguard S&P 500 ETF (VOO) can benefit from the tax-sheltered nature of a Roth IRA.
JPMorgan Equity Premium Income ETF (JEPI)
“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.”
Retirees looking to generate tax-free income from a Roth IRA may find a covered call ETF like JEPI useful. This ETF starts by selecting a subset of stocks from the S&P 500 screened for lower volatility. Then, it sells out-of-the-money S&P 500 covered call options using equity-linked notes. This caps the ETF’s upside price appreciation but produces a high 7.2% distribution yield. JEPI charges a 0.35% expense ratio.
[What’s the Best Covered Call Strategy for Income?]
Principal U.S. Mega-Cap ETF (USMC)
“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 can be a good option for maximizing a Roth IRA’s growth long term.” For equity exposure, consider USMC, which offers active management at a low 0.12% expense ratio.
This ETF currently has a total of 26 holdings representing some of the largest S&P 500 stocks. It uses a proprietary strategy that combines market-cap weighting plus a ranking system based on financial strength. Historically, this strategy has paid off, with USMC earning a five-star Morningstar rating. This means the fund has historically outperformed the majority of its peers on a risk-adjusted basis.
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.”
The cheapest U.S.-listed spot Bitcoin ETF is currently BTC, which charges a 0.15% expense ratio. For a $10,000 investment, that works out to $15 in fees annually. This ETF holds Bitcoin in cold storage via Coinbase Custody Trust Co. Right now, BTC has $3.2 billion in assets under management, corresponding to 40,248 Bitcoin held in trust. That works out to a ratio of 0.00044307 per share.
BondBloxx CCC Rated USD High Yield Corporate Bond ETF (XCCC)
Fixed-income assets can range from high-quality Treasurys to non-investment-grade junk bonds. In a Roth IRA, owning the latter can provide investors with a sizable stream of tax-sheltered income. “The income from CCC-rated bonds has averaged near 10% annually over the past 20 years, which makes them an attractive investment choice for a Roth IRA,” says Tony Kelly, co-founder of BondBloxx.
XCCC provides exposure to a diversified portfolio of CCC1-through-CCC3-rated junk bonds. These bonds have a higher risk of default but compensate for that via greater yields. Right now, XCCC pays a 10.2% 30-day SEC yield, which in a Roth IRA can be tax-free. The ETF also has fairly low interest-rate sensitivity thanks to a 2.8-year duration. All this comes at a reasonable 0.4% expense ratio.
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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com
Update 03/11/25: This story was previously published at an earlier date and has been updated with new information.
