Learn more about the best ETFs for your Roth IRA.
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. 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, a Roth 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.
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. The iShares Core S&P 500 ETF (IVV) is one example. It has an expense ratio of 0.03%, which is low. Another example is the SPDR S&P 500 ETF Trust (SPY), which has an expense ratio of 0.0945%.
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 example 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 U.S. Large Cap Growth Index. Its expense ratio is 0.04%.
Dividend ETFs
Dividends can be taxed as ordinary income in a taxable brokerage account. Holding them in an IRA could help you save on the taxes you’ll pay on the dividends. One well-regarded dividend ETF 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 example is the iShares Core High Dividend Growth (DGRO), which tracks the Morningstar Dividend Growth Index. Its expense ratio is 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 when withdrawn, so bond ETFs can be good investments. A total bond index ETF like the iShares Core U.S. Aggregate Bond (AGG) is an example of a fund with broad market exposure. Its expense ratio is 0.04%. Another example of a bond ETF is the iShares iBoxx $ High Yield Corporate Bond (HYG). The expense ratio for HYG is 0.48%. Holding a diverse portfolio of ETFs allows you to protect your money and weather changes in the market. The tax treatment or investment type is a secondary consideration in most cases.
