Best Mutual Funds for a Roth IRA

Roth IRAs are among the most popular tools for saving for retirement. A Roth IRA is a type of investment account rather than an investment itself. You can hold other investments in the account and, in exchange, garner tax benefits. While the money you put in the account is taxed normally upon deposit, those funds grow over time and can be withdrawn tax-free in retirement. Choosing the right investments to put in your Roth IRA can help you grow your retirement nest egg. Mutual funds can be good ways for hands-off investors to easily create a diversified portfolio and let someone else do the management for them.

Key Takeaways

Roth IRAs let investments grow tax-free.
Withdrawals are restricted until you turn 59 ½.
Mutual funds allow you to buy one security that gives you exposure to dozens or even hundreds of different stocks and bonds at once, making diversification easy.
Because of their tax benefits, Roth IRAs are a good place to hold tax-inefficient investments.

Roth IRA Investing Strategies

Using a Roth IRA to invest is very similar to investing in other accounts. You want to build a diversified portfolio that has the best chance of gaining value over time. You can adjust the risk-and-reward profile of your investments based on your preference and how long you have until retirement. However, there are some key differences. One is that investors using a Roth IRA are saving for retirement. That means they typically have longer time horizons than most investors, leaving them free to invest in more volatile securities that may offer higher long-term earning potential. Another is that Roth IRA investors don’t have to think about the tax efficiency of their investments. Some investments such as REITs or mutual funds that generate a lot of capital gains can cause investors to owe a lot in tax each year.1 Investments sitting in a Roth IRA aren’t taxed, so you don’t have to worry about paying tax on these events. That’s also true of other tax-advantaged accounts, such as 401(k)s and traditional IRAs.

5 Best Mutual Funds for Your Roth in 2022

The Balance examined several mutual funds to build this list of the six best mutual funds for your Roth IRA. We considered factors including their expense ratio, historical returns, and the quality of the fund’s management.

Vanguard Target Retirement 2060 Fund (VTTSX)

Expense ratio: 0.08%
Assets under management (AUM as of March 30, 2022): $14.9 billion
Five-year return (as of March 30, 2022): 10.88%
10-year return (as of March 30, 2022): 10.27%

Target-date retirement funds (TDFs) are the ideal choices for investors who want a set-it-and-forget-it option for retirement investing. While we list the 2060 fund here, any of Vanguard’s target-date funds are a solid choice. With a target-date fund, you invest in one with the date closest to when you plan to retire. Typical advice for investors is to hold higher-risk, higher-reward investments while the investors are young, and to slowly transition into a more conservative portfolio as they age. This fund gives investors exposure to domestic and international bonds at a low cost—just 0.08%, equivalent to 80 cents for every $1,000 you invested. It has produced solid returns since it began in 2012, returning 10.64% annually, on average.2 These funds do that for you automatically. At the time of publication, Vanguard’s Target Retirement 2060 fund has a roughly 89/10/1 split between stocks, bonds, and short-term reserves, reflecting the long period until its investors plan to retire. The 2025 fund, by contrast, has a 55/43/1 split, which is much more conservative.3

Fidelity Real Estate Index Fund (FSRNX)

Expense ratio: 0.07%
Assets under management (AUM as of March 30, 2022): $2.99 billion
Five-year return (as of March 30, 2022): 5.62%
10-year return (as of March 30, 2022): 8.32%

Real estate investment trusts (REITs) are a type of investment that, as the name suggests, own real estate. This can include commercial and residential properties. REITs give investors a way to diversify their real estate holdings, but they have a major drawback: They have to distribute most of the income they receive to investors, making them highly tax-inefficient. Holding REITs in a tax-advantaged account such as a Roth IRA eliminates this negative, letting investors get all the benefits of REITs without the primary drawback.1 Fidelity’s Real Estate Index fund owns a variety of REITs and other real estate investments. It has a low expense ratio of 0.07%, equivalent to 70 cents for every $1,000 invested, and has produced notable returns of 5.62% and 8.32% over the previous five- and 10-year periods.4

PIMCO Income Fund

Expense ratio: 0.50%
Assets under management (AUM as of March 30, 2022): $139.4 billion
Five-year return (as of March 30, 2022): 3.60%
10-year return (as of March 30, 2022): 5.95%

Once you retire, you won’t want to pull all your money out of your Roth IRA right away. You can leave funds in the account to keep growing tax-free and draw money from it when you need the extra cash later on. Investors looking for a low-risk way to generate cash flow might be interested in the PIMCO Income Fund, which focuses on producing a high, steady amount of income by investing in a variety of bonds. At the time of publication, it produced a yield of 3.12% and made dividend payments monthly, making it ideal for those who need regular income from their Roth IRA. The fund has a higher expense ratio than others on our list at 0.50%, equivalent to $5 for every $1,000 invested. It also has lower five- and 10-year returns but does so with a lower-risk portfolio, which means less volatility.5

Vanguard Explorer Fund (VEXPX)

Expense ratio: 0.40%
Assets under management (AUM as of March 30, 2022): $21.8 billion
Five-year return (as of March 30, 2022): 19.16%
10-year return (as of March 30, 2022): 16.10%

The Vanguard Explorer fund is an actively managed mutual fund that focuses on small and medium-sized businesses that have the potential to grow. However, small- and mid-capitalization stocks also tend to be more volatile and risky than larger businesses. What makes this a strong choice for investors using a Roth IRA is that most retirement investors have a long investment horizon. While this fund may see major volatility in the short term, it has higher long-term potential returns from which patient investors can benefit. As an actively managed fund, it has a higher expense ratio—0.40.%—than one that is passively managed, equivalent to $4 for every $1,000 invested. But it’s produced strong five- and 10-year returns of 19.16% and 16.10%, respectively.6

Fidelity Blue Chip Growth Fund

Expense ratio: 0.79%
Assets under management (AUM as of March 30, 2022): $51.8 billion
Five-year return (as of March 30, 2022): 29.58%
10-year return (as of March 30, 2022): 22.23%

The Fidelity Blue Chip Growth Fund looks to invest primarily in blue-chip businesses, those that are very large and well-established. However, it focuses specifically on blue chips that are well-priced or otherwise poised to experience above-average returns overall. By focusing on blue-chip companies, the fund aims to limit volatility while still producing strong returns. Historically, this fund has produced standout returns, averaging 29.58% over the past five years and 22.23% over the past 10. However, its active management leads to higher fees, with the fund charging an expense ratio of 0.79%, which is equivalent to $7.90 for every $1,000 invested.7

The Bottom Line

Roth IRAs are great investment accounts for people who want to save for retirement. The ability to have your investments grow tax-free means you can focus on building a portfolio with the best returns without worrying about taxes later. Using a mutual fund in your Roth IRA makes your life a bit easier by letting you have someone else manage your money for you. Choosing the right fund for your needs will help you reach your retirement goals.

Frequently Asked Questions (FAQs)

How do mutual funds work?

Mutual funds work by letting investors buy shares in a single entity—the fund—to get exposure to all the securities owned by that fund. This means investors can easily diversify their portfolios. In exchange for this service, mutual funds charge a fee called an expense ratio.

How do I avoid capital gains tax on mutual funds?

You can avoid capital gains taxes on mutual funds by holding them in a tax-advantaged account such as a Roth IRA. You can reduce taxes on mutual funds held in a taxable account by making sure you hold the shares for at least a year. This makes the proceeds from sales subject to the lower long-term capital gains tax rate instead of the higher short-term gains rate.8

How do I purchase mutual funds for my Roth IRA?

You can purchase mutual funds for your Roth IRA by working with your broker. Most brokers make it easy to open a Roth IRA brokerage account and simple to submit orders to buy funds.