7 Best Funds for Roth IRA Investments

Introduction:

As Roth IRAs near their 28th anniversary in January, the benefits of this tax-advantaged retirement account, introduced by the Taxpayer Relief Act of 1997 and named for Sen. William Roth, continue to attract investors. For 2024, eligible individuals can contribute up to $7,000—or $8,000 if they’re age 50 or older, thanks to the “catch-up” provision. However, rather than waiting for January, it's wise to review and maximize your 2024 contributions before year-end.

Roth IRAs allow investments to grow tax-free, whether gains come from dividends, interest, or capital growth. For those aged 59½ or older, with accounts active for at least five years, withdrawals are also tax-free, making Roth IRAs a powerful retirement savings tool. Unlike traditional IRAs, which require distributions starting at age 73, Roth IRAs have no required minimum distributions, adding flexibility.

Summary 

Who Can Contribute to a Roth IRA?

Asset Location Strategy for Tax Efficiency

Top Funds to Hold in a Roth IRA

1. Vanguard Wellington Fund Investor Shares (VWELX) 

2. Vanguard 500 Index Fund Admiral Shares (VFIAX) 

3. Fidelity Contrafund (FCNTX) 

4. iShares Core U.S. REIT ETF (USRT) 

5. Grayscale Bitcoin Mini Trust ETF (BTC) 

6. Avantis All Equity Markets Value ETF (AVGV) 

7. Amplify CWP Enhanced Dividend Income ETF (DIVO) 

Who Can Contribute to a Roth IRA?

Roth IRAs come with income eligibility limits. For single filers, the modified adjusted gross income (MAGI) limit is $146,000, while for married couples filing jointly, it is $230,000.

 Asset Location Strategy for Tax Efficiency

Experts often recommend an “asset location" approach, placing investments with high growth or income potential in Roth IRAs to take full advantage of the account's tax-free benefits. This strategy maximizes the account's efficiency and potential for compound growth.

 Top Funds to Hold in a Roth IRA

Below are seven funds that experts recommend for Roth IRAs, combining growth potential, income generation, and tax efficiency.

1. Vanguard Wellington Fund Investor Shares (VWELX)

  – Expense Ratio: 0.26%

  – Fund Type: Balanced Active Fund

  – 10-Year Annualized Return: 8.3%

  – Ideal For: Roth IRAs due to potential high capital gains

   VWELX, a balanced fund with a history dating back to 1929, invests two-thirds in stocks and one-third in bonds. Its high turnover creates large annual capital gains distributions, making it an excellent fit for Roth IRAs to avoid tax drag and maximize compounding.

2. Vanguard 500 Index Fund Admiral Shares (VFIAX)

   – Expense Ratio: 0.04%

   – Fund Type: Index Fund

   – 10-Year Annualized Return: 13%

   VFIAX is a low-cost S&P 500 index fund with a solid 13% annualized return over the past decade. By holding this fund in a Roth IRA, investors can keep more of their returns tax-free, especially beneficial for young investors aiming for maximum long-term growth.

3. Fidelity Contrafund (FCNTX)

   – Expense Ratio: 0.39%

   – Fund Type: Growth Fund

   Managed by William Danoff, FCNTX focuses on large-cap growth and has outperformed the S&P 500 across various periods. With an 18% turnover, it generates substantial capital gains, making it ideal for a Roth IRA to sidestep annual tax liabilities on these distributions.

4. iShares Core U.S. REIT ETF (USRT)

   – Expense Ratio: 0.08%

   – Fund Type: REIT ETF

   – Yield: 2.9% (30-day SEC yield)

   USRT, a REIT ETF, is ideal for Roth IRAs, as dividends from REITs are taxed as ordinary income. Holding USRT in a Roth IRA allows investors to retain the full dividend yield tax-free.

5. Grayscale Bitcoin Mini Trust ETF (BTC)

   – Expense Ratio: 0.15%

   – Fund Type:Bitcoin ETF

   BTC offers a way to gain exposure to Bitcoin’s high-growth potential. Though volatile, holding BTC in a Roth IRA allows investors to capture future capital gains tax-free, making it an appealing, though risky, option for aggressive investors.

6. Avantis All Equity Markets Value ETF (AVGV)

   – Expense Ratio: 0.26% (after fee waiver)

   – Fund Type: Factor-Based ETF

   AVGV invests in a mix of large-, mid-, and small-cap value stocks globally. With its factor-tilted portfolio, AVGV seeks to capitalize on the higher returns often seen in small-cap value stocks, and it’s globally diversified, making it suitable for a Roth IRA’s tax-free growth potential.

7. Amplify CWP Enhanced Dividend Income ETF (DIVO)

   – Expense Ratio: 0.56%

   – Fund Type: Covered Call Dividend Fund

   – Yield: 4.9%

   DIVO combines blue-chip dividend stocks with covered call strategies to generate consistent income while managing volatility. This makes it an attractive option for those using Roth IRAs to generate cash flow in retirement without needing to sell shares.

As the new year approaches, now is an ideal time to review your Roth IRA investments to ensure you’re maximizing tax benefits and growth potential. These recommended funds offer a mix of growth, income, and tax efficiency, helping to make the most of Roth IRA advantages over the long term.

FAQ

Q.1. What is the contribution limit for Roth IRAs in 2024?  

A.1. The contribution limit for Roth IRAs in 2024 is $7,000. If you’re age 50 or older, you can make an additional “catch-up” contribution of $1,000, bringing the total to $8,000.

Q.2. Who is eligible to contribute to a Roth IRA?

A.2. Eligibility is based on income. For single filers, the modified adjusted gross income (MAGI) limit is $146,000. For married couples filing jointly, the MAGI limit is $230,000. Those earning above these limits may have reduced or no contribution eligibility.

Q.3. Can I withdraw from my Roth IRA tax-free?  

A.3. Yes, Roth IRAs allow for tax-free withdrawals if you are at least 59½ years old and have held the account for at least five years. Withdrawals before meeting these criteria may incur taxes and penalties.

Q.4. Why are certain funds better suited for Roth IRAs?  

A.4. Funds that generate regular income or large capital gains, like REITs, actively managed funds, and high-growth stocks, are typically better suited for Roth IRAs. The tax-free nature of Roth IRAs allows investors to retain all gains without tax drag.

Q.5. Can I hold high-risk investments like Bitcoin in a Roth IRA?  

A.5. Yes, Roth IRAs can hold high-risk investments, including Bitcoin ETFs, through a self-directed Roth IRA. However, due to Bitcoin's volatility, these are recommended for investors with a higher risk tolerance.

Conclusion

Roth IRAs offer a unique combination of tax-free growth, flexibility, and no required minimum distributions, making them an essential component of a well-rounded retirement strategy. By focusing on investments like high-growth funds, REITs, and income-generating ETFs, you can fully leverage the Roth IRA’s tax advantages. As 2024 comes to a close, taking the time to review and optimize your Roth IRA contributions can help secure a more prosperous, tax-efficient retirement. Prioritize investments that align with your long-term financial goals to maximize the potential of your Roth IRA.

Important Note: Please Read Before You Invest

We’re just sharing some helpful tips, but remember, investing comes with risks. We can’t promise that these tips will always work or that you’ll make money. Everyone’s financial situation is different, so it’s smart to do your research or talk to a financial advisor before you invest. Using these tips, you agree that you’re responsible for your investment decisions and results.