7 Best Funds to Hold in a Roth IRA

Here’s what the experts have to say when it comes to picking funds for a Roth IRA.

Outside of a 401(k), the next-best account to grow a nest egg over time is the Roth IRA. For those who qualify, investing in a Roth IRA can lead to significantly higher net returns compared to a regular taxable brokerage account thanks to a unique array of advantages.

“A Roth IRA is an account that you can contribute after-tax contributions to, with investment returns, income and dividends growing tax-deferred,” says Scott Krase, wealth manager at Connor & Gallagher OneSource.

With a Roth IRA, investors can withdraw investment earnings tax-free after age 59 ½ as long as the account has been open five years, while contributions can be withdrawn anytime without penalty.

The main benefit of a Roth IRA is the ability to draw on tax-free withdrawals once an investor retires. By growing a portfolio that is sheltered from taxes in this account, investors can reap the benefits of a tax-free income stream to augment Social Security benefits in retirement.

“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, financial advisor manager at Vanguard.

However, not all investors will qualify for a Roth IRA, with the cutoff determined by your income level. “Modified annual gross income, or MAGI, limits on Roth IRA contributions for the 2023 tax year are $153,000 for single filers and $228,000 for married couples filing jointly,” Krase says.

Investors also need to be aware of annual limits on contributions to a Roth IRA, as over-contributing can lead to tax consequences. “For 2023, the contribution limit for most investors is $6,500, or $7,500 if you are 50 or older,” Krase says.

That being said, investors above this threshold can still access a Roth IRA by using a “backdoor” strategy. “If your income is too high for a Roth IRA, you could use a ‘backdoor strategy’ by placing your contribution in a traditional IRA, which has no income limits,” Patillo says. “Then, you’d move the money into a Roth IRA using a Roth conversion.”

The self-directed nature of a Roth IRA also allows for much greater flexibility when it comes to investment selection. Unlike a 401(k) that may have a limited lineup of funds, investors can mix and match individual stocks, mutual funds and exchange-traded funds, or ETFs, in a Roth IRA. That being said, there are some assets that are best kept in this account.

“Generally, investors should allocate funds that are inherently less tax efficient in a Roth IRA,” says Lauren Wybar, senior wealth advisor at Vanguard. “For example, taxable bonds and real estate investment trusts make regular income payments, and actively managed stock funds are more likely to distribute taxable capital gains. By holding these investments in a Roth IRA, investors can avoid immediate tax burdens.”

Vanguard Total World Stock ETF (VT)
“Roth IRAs are especially beneficial for younger investors because there is greater saving potential due to that tax-free compounding,” Patillo says. For a higher-risk, yet very diversified, long-term buy-and-hold, consider VT. This ETF tracks the FTSE Global All Cap Index, which provides exposure to over 9,500 U.S., international-developed and emerging-market stocks.

VT’s diversification extends across nearly the entire world’s investable market, covering stocks from all 11 market sectors, both growth and value, and small-, mid- and large-cap sizes. By investing in VT, investors are betting on the continued growth of the global economy, which is less risky than focusing on a single country or sector. The ETF charges a 0.07% expense ratio, which works out to $7 annually per $10,000 invested.

Fidelity Freedom Index 2050 Fund Investor Class (FIPFX)
“The type of assets held in your Roth IRA should be based on your risk tolerance, time horizon for needing the funds, and your goals for retirement,” Krase says. These factors are dynamic, as they will change over time as investors age and enter new periods in their life. For an all-in-one fund that adapts as you grow older, consider FIPFX, a target-date fund from Fidelity.

FIPFX is intended for investors looking to retire around 2050, and currently features a portfolio of roughly 90% in stocks and 10% in bonds. As investors age and 2050 nears, the fund will increase its bond allocation to become more conservative. This makes FIPFX a great hands-off fund to put a Roth IRA on autopilot. The fund charges a 0.12% expense ratio.

Vanguard LifeStrategy Growth Fund (VASGX)
Another hands-off alternative to target-date funds that can help investors put their Roth IRA on autopilot is Vanguard’s lineup of LifeStrategy funds. These funds feature a static asset allocation, composed of different percentages of stocks and bonds tailored to varying risk tolerances. For growth-oriented younger investors, the fund to consider is VASGX.

Currently, VASGX targets an allocation of 80% in stocks and 20% in bonds, both of which are diversified internationally. Periodically, VASGX will rebalance its portfolio back to this allocation to keep within its target risk tolerance. However, it will not become more conservative over the years as it is not a target-date fund. VASGX charges a 0.14% expense ratio.

Avantis All Equity Markets ETF (AVGE)
“You’ll want to hold assets in a Roth that are expected to outperform your other holdings over the long term,” says Allen Mueller, director of financial planning at 7 Saturdays Financial. To hold these assets, investors can buy actively managed funds like AVGE that utilize a factor investing approach. This means the fund will try to identify stocks with certain characteristics found by research to outperform.

In the case of AVGE, the ETF tilts toward stocks with a small market cap size and with metrics that indicate possible undervaluation. AVGE uses an “ETFs of ETFs” approach, holding 10 other Avantis ETFs that provide globally diversified stock and bond exposure with a moderate small-cap value tilt. The ETF charges a 0.23% expense ratio, which is inclusive of the fees of all its underlying ETFs.

Schwab U.S. Dividend Equity ETF (SCHD)
“High-yield funds that pay out dividends at a higher rate than a vanilla index fund are great candidates for a Roth IRA,” says Kaleb Paddock, founder and certified financial planner at Ten Talents Financial Planning LLC. “In a taxable account, these funds can incur a significant tax drag on their yield.” An example of a highly popular and effective dividend ETF is SCHD, which pays a 30-day SEC yield of 3.6%.

SCHD differs from the average high-dividend ETF in many ways. This ETF requires all holdings to possess a minimum of 10 consecutive years of dividend payments. It also ranks stocks based on a composite score that calculates a stock’s free cash flow to total debt, return on equity, dividend yield and five-year dividend growth rate to ensure quality. Finally, it charges a low 0.06% expense ratio.

iShares Core U.S. REIT ETF (USRT)
“In a Roth IRA, real estate investment trust, or REIT, funds are great holdings for taking advantage of the comparatively high tax-free distributions,” Paddock says. “In addition, you also benefit from price appreciation given the historically strong returns REIT investing and the real estate sector have provided.”

For a straightforward and low-cost REIT ETF, consider USRT.

This ETF is part of iShares’ “Core” lineup, which mostly boast low fees and high diversification. By tracking the FTSE Nareit Equity REITS Index, USRT provides broad exposure to 138 U.S. REITs weighted by their market cap. Current top holdings include Prologis Inc. (PLD), Equinix Inc. (EQIX) and Public Storage (PSA). USRT charges a 0.08% expense ratio and pays a 3.4% 30-day SEC yield.

Vanguard Total Corporate Bond ETF (VTC)
Some bond funds tend to be very tax efficient due to the nature of their underlying holdings. For example, funds that hold municipal bonds or U.S. Treasurys can be exempted from federal, and/or state, taxation. On the other hand, corporate bonds issued by companies do not enjoy the same concessions. As a result, their comparatively higher yields are usually subjected to a higher tax drag.

That being said, holding tax-inefficient corporate bond funds in a Roth IRA allows investors to enjoy their higher yields without worrying about taxation. A great low-cost pick here is VTC, which combines three other Vanguard short-, intermediate- and long-term corporate bond ETFs to provide broad diversification. The ETF holds more than 7,200 bonds and charges a 0.04% expense ratio, the lowest on this list.