How to Choose the Best Roth IRA Funds

You’ve got your Roth IRA opened but now you’re stuck staring at a huge list of acronyms and technical sounding names.  I was in the same spot when I opened my Roth IRA 5 years ago but since then I’ve learned quite a bit about Roth IRA funds and here is how you can choose the best options.

Step 1: Learn What Does NOT Go in a Roth IRA

Roth IRAs are retirement accounts that are deposited into using after-tax money and the future withdrawals are untaxed.  This is contrast to the traditional IRA which is the opposite since money goes in before taxes, and when it comes out you have to pay taxes on the gains.  A Roth is great because no matter what tax bracket you fall into in the future, you know your gains are tax free.

So with that in mind, it makes sense you should avoid investing in funds that advertise themselves as Tax-Exempt.  These funds focus on low turnover rates meaning they don’t buy and sell funds frequently.  This allows them to lock in long term capital gains which are taxed at 15% instead of the regular income tax rate.  Unfortunately these funds can sometimes underperform other funds which don’t have to operate with the same constraints.  

These funds can also focus on holding different types of bonds which are more advantageous for tax purposes but again can be limited by this focus on taxation.

Number One Fund Choice – Target Date Funds

This is what half of my Roth IRA is invested in, VFIFX, 2055.  My Vanguard Roth IRA is set up to automatically deposit money into this account each time I get paid and that money is put 100% into VFIFX.  

This is a good option for people who want to set it and forget it.  This mutual fund will automatically balance it’s risk profile out over time to match what most people have to try to manage on their own.  As you get older the fund will shift more into bonds and hold less into stocks.  Depending on your time frame, you can choose what year you want to retire in.

NOTE: This doesn’t have to be the year you will actually retire.  If you want a more aggressive tilt towards stocks, choose a fund with a later retirement date.  If you want to be more conservative and invest more heavily into bonds, choose a fund with a retirement date that is more near term.

The expense ratio on this fund is only 0.16% which is very low.  Sure, you can hold separate funds and rebalance it every year and maybe drop from 0.16% to 0.08%, but even though a 50% drop sounds large, that’s less than a tenth of a percentage point and for me it isn’t worth the hassle.  For every $10,000 you have invested, it will cost just $16 per year.

Runner Up: Anything Else on Vanguard

If you want to do it yourself and setup a custom mix of funds then your best options are a stock market index such as VTSAX which is the total stock market index and it holds shares in 3,613 companies.  There’s also VTWSX which is the Vanguard total world stock index and has shares from companies around the globe.

For the bond part of your portfolio, VBTLX is the total bond market index fund and is the only choice you need for bonds.

If you’d like to have some real estate in your portfolio then VGSLX is a great option.  For gold or silver bugs, VGPMX is the Vanguard precious metal fund.

But What about Next Year?

We will keep this article updated as time moves on, but in the near future nothing is going to beat a target date retirement fund for 99% of people out there.  This is the simplest option and the most painless.  Your expense ratio is still rock bottom and you can set and forget the entire thing until you’re ready to retire.

If we find something new or better we will be sure to add it to this guide so you always have the best funds in your Roth IRA.