Best ETFs for Roth IRAs

Types of ETFs That Are Best for Roth IRAs

Older woman paying bills on laptop

Jose Luis Pelaez Inc / Getty Images

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

Learn more about the best ETFs for your Roth IRA.

What Are the Best Types of ETFs For a Roth IRA?

If you are saving for retirement, you probably have more than one investment account. Popular and common account types include IRAs, 401(k)s, and individual or joint brokerage accounts.

Since these accounts receive different tax treatment, they can each be used for different financial goals. It's important to know which investment types are best for each kind of account.

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

Roth IRAs are a little different. These are funded with after-tax dollars, which means you pay tax on your income before it goes in your Roth account.

Once it's in your Roth account, the money grows tax-free. Any money you take out when you retire will also be tax-free.

Your withdrawals from a Roth IRA may be taxed if the account 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 are age 59 1/2.

There are certain types of ETFs that are a smart choice for Roth IRAs.

Growth ETFs

Since IRAs are retirement accounts, you may have years or decades before you need the money. You'll want to get the most benefit from your how your investments can 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. If you hold these investments in a Roth IRA, you don't have to pay this tax.

If you have a brokerage account, it's smart to hold tax-efficient funds there. These funds will produce few dividends or little interest.

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

Best ETFs for a Roth IRA

You should have a diverse mix of ETFs in your retirement accounts. There is 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 in your retirement account. 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 specific examples of ETFs that can work well in a Roth IRA or other retirement account.

If a fund has a lower expense ratio, that means you get to keep more of its earnings.

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 iShares Core S&P 500 ETF (IVV). It has an expense ratio of just 0.03%. Another good choice is SPDR S&P 500 ETF Trust (SPY), which has expenses of 0.09%.

Growth Stock ETFs

If you're an investor who doesn't mind some risk if it comes with the chance of higher returns, you may choose a growth stock ETF.

One good choice is Invesco QQQ (QQQ), which invests in most technology stocks in the NASDAQ index. It has an expense ratio of 0.20%.

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

Dividend ETFs

Since dividends can be taxed as ordinary income in a taxable brokerage account, it's best to hold them in an IRA.

One of the best dividend ETFs is 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 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. Since investments held in Roth IRAs are not taxed, bond funds can be good ETF investments.

For broad market exposure, a total bond index ETF like iShares Core U.S. Aggregate Bond (AGG) is a good choice. Its expenses are 0.04%.

Another good Bond ETF is iShares iBoxx $ High Yield Corporate Bond (HYG). Expenses for HYG are 0.49%.

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

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

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.