One of the most successful stock pickers of the modern era is set to retire at the end of 2026: William Danoff, the longtime lead manager of Fidelity Contrafund (ticker: FCNTX).
Danoff has been at the helm for more than 35 years, and while Fidelity appointed two co-managers last April, he has remained the fund’s primary decision-maker.
Over the trailing 10-year period ending Dec. 31, Fidelity reports that FCNTX compounded at an annualized 16.9%, handily outperforming the S&P 500’s 14.8%. However, that headline figure reflects performance before taxes.
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As an actively managed mutual fund, FCNTX has a higher-than-average portfolio turnover rate of about 20% annually as of June 2025. Turnover refers to how frequently securities are bought and sold, and for mutual funds, higher turnover often leads to sizable year-end capital gains distributions.
After accounting for taxes on those distributions, Fidelity estimates that FCNTX’s 10-year annualized return would have fallen to roughly 15.1%, significantly narrowing its advantage over the S&P 500.
This illustrates why tax location matters. Tax-sheltered accounts, such as Roth IRAs, are often better suited for actively managed funds, where capital gains, interest income and dividends can compound internally without triggering annual tax bills.
A Roth IRA offers particularly attractive treatment. Contributions can be withdrawn at any time without taxes or penalties, and once the account has been open for at least five years and you reach age 59½, investment earnings can also be withdrawn tax-free.
That said, not everyone qualifies. For 2026, Roth IRA contributions begin to phase out for single filers and heads of household with incomes between $153,000 and $168,000, and for married couples filing jointly between $242,000 and $252,000. Eligible investors under the phase-out limit can contribute up to $7,500, with an additional $1,100 catch-up contribution for those age 50 and older.
Because Roth IRA space is limited, it makes sense to prioritize funds that benefit the most from tax sheltering. Actively managed mutual funds are one example, but so are funds that generate high levels of tax-inefficient income on a frequent basis.
“Generally, investors should allocate funds that are less tax-efficient in a Roth IRA,” says Lauren Wybar, a wealth advisor executive at Vanguard. “Taxable bonds, real estate investment trusts (REITs) and actively managed stock funds tend to generate more ordinary income and capital gains, which are better sheltered in a Roth IRA.”
Here are seven of the best funds to hold in a Roth IRA:
| Fund | Expense ratio |
| Vanguard Primecap Fund Investor Shares (VPMCX) | 0.35% |
| Vanguard Wellesley Income Fund Investor Shares (VWINX) | 0.22% |
| Fidelity Blue Chip Growth Fund (FBGRX) | 0.61% |
| Fidelity Capital & Income Fund (FAGIX) | 0.90% |
| Schwab Global Real Estate Fund (SWASX) | 0.72% |
| Schwab Small-Cap Equity Fund (SWSCX) | 1.08% |
| T. Rowe Price Dividend Growth Fund (PRDGX) | 0.64% |
Vanguard Primecap Fund Investor Shares (VPMCX)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” says Tiana Patillo, a financial advisor manager at Vanguard. A good candidate for younger investors is VPMCX, one of Vanguard’s relatively few actively managed equity funds. VPMCX has a 0.35% expense ratio and a $3,000 minimum investment.
VPMCX is particularly well suited for a Roth IRA because of its sizable year-end capital gains distributions. In strong performance years, the fund may be forced to distribute significant realized gains to shareholders. For example, in December, VPMCX paid a long-term capital gains distribution of more than $27 per share. Inside a Roth IRA, however, those tax consequences are eliminated.
Vanguard Wellesley Income Fund Investor Shares (VWINX)
“Roth IRAs are an attractive 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,” Patillo explains. For retirees using a Roth IRA for income, a more conservative fund like VWINX may be more appealing.
This actively managed Vanguard fund maintains a defensive allocation of roughly one-third equities and two-thirds bonds, resulting in significantly lower volatility than all-equity portfolios. The heavy bond weighting also supports a higher income profile, with a 3.6% 30-day SEC yield. However, that’s largely taxed as ordinary income due to the high bond exposure, making VWINX fairly tax-inefficient.
Fidelity Blue Chip Growth Fund (FBGRX)
“We typically recommend owning mostly growth-oriented investments, like stocks, to maximize the return potential over time,” says Brandon Clark, director of financial planning at the Clark Group Asset Management. Building on that idea, another strong candidate for long-term compounding, assuming a high risk tolerance, is FBGRX, another one of Fidelity’s standout actively managed funds.
FBGRX has been managed by Sonu Kalra since July 2009 and focuses on large-cap companies with durable growth characteristics. Over the past 10 years, the fund has delivered a 20.6% annualized return, outpacing the Russell 1000 Growth Index’s 18.6%. However, like FCNTX, FBGRX carries a relatively high annual turnover rate of 34%, which historically resulted in sizable year-end capital gains distributions.
Fidelity Capital & Income Fund (FAGIX)
“Given a Roth IRA has no RMD rule, this is usually the last type of retirement account to take distributions (from) compared to traditional IRAs and taxable brokerage accounts,” Clark says. “In addition, this account is usually the most advantageous for beneficiaries because they inherit the funds tax-free as well.” If income is the priority, FAGIX may be appealing despite a high 0.9% expense ratio.
FAGIX is an actively managed mix of stocks and bonds with a heavy emphasis on the latter, particularly lower-credit-quality corporate bonds. This portfolio mix helps support a higher 4.2% 30-day SEC yield with monthly distributions. That yield, however, is largely taxed as ordinary income at both the federal and state level, making it inefficient in a taxable account, but well suited for a Roth IRA.
[Read: 9 of the Best Bond ETFs to Buy Now.]
Schwab Global Real Estate Fund (SWASX)
REITS tend to be relatively tax-inefficient because most of their distributions are classified as ordinary income rather than qualified dividends. As a result, investors who want real estate exposure are generally better off holding REIT-focused funds inside a tax-sheltered account like a Roth IRA. A good example is SWASX, an actively managed REIT mutual fund with a global focus.
Currently, SWASX holds 117 securities and pays a 2.8% 30-day SEC yield. One important consideration, however, is its very high portfolio turnover rate of 85.9% annually. That level of trading can lead to frequent short- and long-term capital gains distributions, on top of the ongoing tax drag from its regular income payouts. SWASX charges a 0.72% expense ratio and has no minimum required investment.
Schwab Small-Cap Equity Fund (SWSCX)
Investors with a high risk tolerance who are looking to potentially outperform the broader market may find factor-focused funds like SWSCX appealing. These strategies use either index rules or active management to target characteristics that have historically delivered excess returns. In the case of SWSCX, the focus is on the size factor, investing in the smallest 10% of the U.S. equity market.
The stated objective of SWSCX is to outperform the Russell 2000 index, and it has done so across the trailing 15-, 10-, five-, three- and one-year periods. That outperformance, however, comes with very high portfolio turnover, averaging about 109% annually. Such frequent trading can generate sizable taxable capital gains distributions. Thus, SWSCX is best prioritized for a Roth IRA.
T. Rowe Price Dividend Growth Fund (PRDGX)
Dividend growth strategies are a textbook example of compounding. A fund owns companies that steadily raise their dividends, those dividends are reinvested into more shares and the growing income stream snowballs on itself over time. The problem is that in a taxable account, every dividend distribution is taxed, which slows the process. These funds should be prioritized for a Roth IRA.
PRDGX is an actively managed dividend growth fund that screens for companies with a strong history of paying dividends and the financial capacity to increase them over time. Over the past 10 years, the fund has delivered a 14% annualized return after its 0.64% expense ratio. That figure is before taxes, reinforcing why holding PRDGX inside a Roth IRA can meaningfully improve long-term outcomes.
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7 Best Funds to Hold in a Roth IRA originally appeared on usnews.com
Update 02/10/26: This story was published at an earlier date and has been updated with new information.
