How to Choose the Best ETFs for a Roth IRA

We provide steps for finding and selecting the best ETFs for a Roth IRA.

kent
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Research Lead
Reviewed by: Lisa Barr
,
Edited by: Lisa Barr

The key benefits of ETFs, such as simplicity, diversification, low costs and tax–efficiency, make them good investments for Roth IRAs and other retirement savings plans. However, determining the best ETFs for a Roth IRA depends on the investor’s financial goals and tolerance for risk. 

ETFs and Roth IRAs: How to Fund Your Retirement 

Together, ETFs and Roth IRAs can make good tools for retirement planning. An ETF is a type of investment fund that trades like a stock on an exchange and is designed to track the performance of a benchmark index, such as the S&P 500. A Roth IRA is an individual retirement account that offers tax-free growth.  

Best Types of ETFs for Roth IRAs 

The best types of ETFs for Roth IRAs will depend on an investor’s goals, risk tolerance and time horizon. Investors should also consider factors for choosing the best ETFs for long-term investing, such as expense ratios, diversification and tax efficiency, when selecting ETFs for your Roth IRA. 

Types of ETFs that can be good for Roth IRAs include: 

  • Broad market index ETFs: These ETFs track major market indexes, such as the S&P 500 or the total stock market. They provide broad exposure to a range of companies and can be a good way to invest in the stock market as a whole. 
  • Sector ETFs: If you have a particular interest in a specific industry or sector, such as technology or healthcare, you may consider sector-specific ETFs. These ETFs invest in companies within a specific industry, providing targeted exposure. 
  • Fixed income ETFs: Bond ETFs can provide exposure to fixed income securities such as U.S. Treasuries, corporate bonds or municipal bonds. They can be a good way to diversify your portfolio and provide income. 
  • International ETFs: International ETFs can provide exposure to companies outside of the U.S., which can provide additional diversification benefits. They may also offer opportunities for growth in emerging markets. 
  • Dividend ETFs: Dividend ETFs invest in companies that pay dividends, which can provide a source of income for investors. They can be a good choice for investors looking for a steady stream of income. 
  • ESG ETFs: ESG ETFs invest in companies that prioritize sustainability and ethical business practices. These ETFs can be a good choice for socially conscious investors. 

Roth IRA Requirements 

A Roth IRA is an individual retirement account that allows individuals to contribute after-tax dollars and potentially earn tax-free growth on their investments. There are several requirements that individuals must meet to be eligible to contribute to a Roth IRA and to take advantage of its tax benefits. 

The basic Roth IRA requirements are: 

  • Earned income: To make Roth IRA contributions, an individual must have earned income, such as wages, salaries, tips, commissions or self-employment income. Passive income, such as interest, dividends and capital gains, does not count as earned income for Roth IRA purposes. The amount that an individual can contribute to a Roth IRA in a given year cannot exceed their earned income for that year or the annual contribution limit, whichever is less. 
  • Income limits: As of 2023, individuals with a modified adjusted gross income (MAGI) of $153,000 or less (or $228,000 or less for married couples filing jointly) can contribute up to the annual limit. Contributions are gradually phased out for individuals and married couples with incomes above those limits.  
  • Contribution limits: As of 2023, the annual contribution limit for individuals under age 50 is $6,500, while those age 50 and older can make an additional catch-up contribution of $1,000, bringing their total annual contribution limit to $7,500. 
  • Withdrawals: While contributions can be withdrawn at any time without penalty, earnings on those contributions can only be withdrawn tax-free and penalty-free after the account has been open for at least five years and the account owner is at least 59½ years old. There are certain exceptions to this rule, such as for first-time homebuyers or for qualified higher education expenses. 

Steps for Choosing the Best ETFs for Roth IRAs 

Choosing the best ETFs for a Roth IRA requires careful consideration of several factors, including your investment goals, risk tolerance and investment time horizon. Here are some steps you can follow to select the best ETFs for your Roth IRA: 

  1. Determine your investment goals: Before choosing an ETF, you should define your investment goals. Do you want to generate income or growth? Are you willing to take on more risk for potentially higher returns, or do you prefer a more conservative approach? In how many years do you expect to retire? 
  2. Consider your risk tolerance: ETFs come in different flavors, with some focused on growth, others on value and still others on income. Each of these comes with varying levels of risk, so you need to choose an ETF that aligns with your risk tolerance. 
  3. Look for low expense ratios: One of the biggest advantages of investing in ETFs is that they typically have lower expense ratios than mutual funds. Look for ETFs with expense ratios below 0.5% to keep your costs low. 
  4. Diversify your portfolio: Diversification is key to minimizing risk in your portfolio. Look for ETFs that provide a range of securities to spread risk within their respective asset class, which may include stocks, bonds, real estate or commodities.  
  5. Consider your other accounts: If you have other account types, such as a taxable brokerage account, you can benefit by holding tax-efficient ETFs, such as growth ETFs, in those accounts, and ETFs that generate more taxes, such as bond ETFs and dividend ETFs, in the Roth IRA.  
  6. Research the ETFs: Before investing in an ETF, do your research to understand how it fits into your overall investment strategy. Look at the ETF's historical performance, management team and holdings to ensure it aligns with your investment goals. A good place to start research is with an ETF screener

Bottom Line 

The benefits of ETFs, such as diversification and low costs, make them good choices for Roth IRAs and other retirement accounts. The best ETFs for a Roth IRA will depend on an investor’s unique circumstances and investment goals. When researching ETFs, an investor should review certain qualities of the fund, such as its expense ratio and historical performance. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.