Best ETFs for Roth IRAs

Types of ETFs That Work Best for Roth IRAs

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The best exchange-traded funds (ETFs) for your Roth IRA will include funds that are designed for long-term investment. ETFs and other investments held in individual retirement accounts (IRAs) grow tax deferred, and certain fund types are ideal for this qualified retirement plan.

Learn more about the best ETFs for your Roth IRA.

Key Takeaways

  • Some of the best ETFs for a Roth IRA include growth and income funds.
  • You'll want to achieve a diverse mix of ETFs in your Roth IRA.
  • Watch an ETF's expense ratio if you're considering using it. Lower is better because it lets you keep more of your money.
  • Consider your financial goals and your risk tolerance when you're choosing where to invest.

What Are the Best ETFs for a Roth IRA?

You probably have more than one investment account if you're saving for retirement. Popular and common account types include IRAs, 401(k)s, and individual or joint brokerage accounts. These accounts receive a different tax treatment, so they can each be used for different financial goals.

The best funds for investing in an IRA or a 401(k) are long-term investments, such as stock mutual funds and ETFs. Investments aren't taxed while they're held in an IRA or 401(k). That means you should hold funds in your IRA or 401(k) that generate taxable income.

Roth IRAs are a little different. These are funded with after-tax dollars. You pay tax on your income before it goes into your Roth account. The money grows tax-free once it's in your Roth account. Any money you take out when you retire will also be tax-free.

The earnings portion of your withdrawals from a Roth IRA may be taxed if the account is less than five years old. You may also have to pay a penalty if you take out any money your Roth has earned before you reach age 59½.

Certain types of ETFs are a smart choice for Roth IRAs.

Growth ETFs

IRAs are retirement accounts, so you may have years or decades before you need the money. You'll want to get the most benefit from your investments by letting them grow over time. ETFs that invest in stocks have a lot of growth potential. You may want to choose an ETF that invests primarily in growth stocks for your Roth IRA.

Income ETFs

If you want to buy funds that create income, such as dividend ETFs or bond ETFs, an IRA is an ideal account to hold these funds. Dividends from stocks and interest from bonds can be taxed as ordinary income in a regular brokerage account. You don't have to pay this tax if you hold these investments in a Roth IRA.

It's smart to hold tax-efficient funds in a brokerage account if you have one. They'll either produce few dividends or little interest, or income that may be partially or fully exempt from taxes, such as municipal bond interest.

Try to avoid holding high-yield ETFs in a regular brokerage account.

Examples of Good ETFs for a Roth IRA

You should have a diverse mix of ETFs in your retirement accounts. There's not one particular type of ETF that should be held only and always in a Roth IRA. Try to hold a range of ETFs of different types. This is especially important if the IRA is your only long-term savings vehicle. A variety of investments will protect your long-term savings.

Here are some specific examples of ETFs that can work well in a Roth IRA or other retirement account.

S&P 500 Index ETFs

Funds that passively track the S&P 500 index make good core holdings in Roth IRAs. One good ETF to do this is the iShares Core S&P 500 ETF (IVV). It has an expense ratio of 0.03%. Another good choice is the SPDR S&P 500 ETF Trust (SPY), which has an expense ratio of 0.0945%.

If a fund has a lower expense ratio, it means you get to keep more of its earnings, but the ratio can fluctuate over time. These ratios were reported in March 2022.

Growth Stock ETFs

You may want to choose a growth stock ETF if you're an investor who doesn't mind some risk if it comes with the chance of higher returns. One good choice is the Invesco QQQ (QQQ), which invests in most technology stocks in the NASDAQ index. It has an expense ratio of 0.20%.

Another is the Vanguard Growth ETF (VUG), which tracks the CRSP US Large Cap Growth Index. Its expense ratio is 0.04%.

Dividend ETFs

Dividends can be taxed as ordinary income in a taxable brokerage account, so it's best to hold them in an IRA. One of the best dividend ETFs is the Vanguard High Dividend Yield ETF (VYM), which tracks the FTSE High Dividend Yield Index. It has an expense ratio of 0.06%.

Another good choice is the iShares Core High Dividend Growth (DGRO), which tracks the Morningstar Dividend Growth Index. Its expenses are 0.08%.

Bond ETFs

As with dividends, interest from bonds and bond funds is taxed as ordinary income. Investments held in Roth IRAs are not taxed, so bond funds can be good ETF investments. A total bond index ETF like the iShares Core U.S. Aggregate Bond (AGG) is a good choice for broad market exposure. Its expenses are 0.04%. Another good Bond ETF is the iShares iBoxx $ High Yield Corporate Bond (HYG). Expenses for HYG are 0.48%.

You should first pick funds that match your financial goals and your risk tolerance when you're choosing where to invest. After that, look at the account type.

Holding a diverse portfolio of ETFs allows you to protect your money and to weather changes in the market. The tax treatment or investment type is a secondary consideration in most cases.

Frequently Asked Questions (FAQs)

How do you open a Roth IRA?

The process of opening a Roth IRA is similar to opening a brokerage account. You'll pick a financial institution where you want to open an IRA, offer basic personal information about yourself, and link an existing bank account to fund your IRA.

When can you withdraw from a Roth IRA?

You can withdraw any amount from your Roth IRA penalty-free if you're at least 59½ years old and your first contribution to your Roth IRA was made at least five years ago. You can also avoid penalty taxes, regardless of age, if you have a permanent disability or if you use the withdrawal to buy, build, or repair your first home. The contributions you made to your Roth IRA are after-tax, so they can be withdrawn at any time without incurring a penalty.

How much can I contribute to my Roth IRA?

You can contribute up to $6,000 each year to your Roth IRA in tax years 2021 and 2022, plus a "catch-up" contribution of an additional $1,000 for a total of $7,000 if you're age 50 or older. But there's a phaseout range that's adjusted each year for inflation. The phaseout range starts at $129,000 for single filers and $204,000 for those who are married and file jointly in 2022. You can't contribute at all if your modified adjusted gross income is $144,000 or $214,000, respectively.

How old do you have to be to open a Roth IRA?

Minors can't open a Roth IRA. You must be either 18 or 21, depending on the state in which you live. But anyone who earns income can contribute to a Roth IRA, even if they're a teenager. Teenagers who want to contribute to a Roth IRA need the help of a trusted adult who can open a custodial Roth IRA for them. The teen will gain control of the custodial account when they reach the age of majority, and it becomes a normal Roth IRA.

When can I contribute to my Roth IRA for the current tax year?

You can contribute to your Roth IRA under a given tax year's contribution limits until tax day for the year in question. This is usually April 15 of the year following the close tax year.

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