November 21, 2022

When you open a Roth IRA, choosing an ETF can be the biggest decision you make. There are a lot of options out there, but which ones are right for you? Because there are so many different ETFs available today, we thought it would be helpful to compare some of the top ones to help you decide which are the best ETFs for Roth IRA investments. 

What Does ETF Mean?

An ETF, or exchange-traded fund, is a type of investment that tracks market indexes like the S&P 500. This type of investment can be used to create a diversified portfolio, and it is also the fastest-growing segment of the investment community.

This is an investment vehicle that trades like a stock on an exchange and invests in a basket of assets, such as stocks or bonds. You can buy ETFs just like you would buy any other type of stock or bond on the market.

ETFs are generally bought and sold through a broker, although some investors buy them directly from the issuer. Either way, they are traded throughout the day just like stocks, with both buyers and sellers posting their bids and offers. The price you pay for an ETF will depend on how many shares are being traded at that moment and whether you are buying or selling. They allow you to invest in sectors or niches that may not be available through traditional mutual funds or stocks like small-cap stocks or emerging markets bonds.

Examples of Good ETFs For a Roth IRA

The best ETFs for a Roth IRA are ones that will keep your money growing over time and won’t take too much out of your pocket. There are many ETFs to choose from. But some are more suited for a Roth IRA than others.

Here are some examples of good ETFs for a Roth IRA:

S&P 500 Index ETFs

One of the most popular types of investment is buying an index fund that tracks an entire stock market index, like the S&P 500 or Nasdaq 100. This is one of the easiest ways to get broad exposure to U.S. stocks without having to pick individual stocks yourself.

Two good choices here are iShares Core S&P 500 ETF (IVV) and Vanguard Total Stock Market Index Fund Investor Shares (VTI). Both track different versions of this benchmark index, but they are both solid choices for diversifying your portfolio. You will need to have a brokerage account for this. 

Growth Stock ETFs

A growth stock ETF is an index fund that owns stocks from companies that have been growing consistently over time. These companies may not be household names, but they are often high-quality companies with strong management teams and bright futures. 

These funds tend to perform well over time because they invest in companies with strong fundamentals, but they also have the potential for big gains if those companies do well. The Vanguard S&P 500 ETF (VOO) is a good example of this type of fund. It has gained more than 140% over the past five years!

Dividend ETFs

Dividend ETFs are one of the best forms of investing for your retirement because these funds provide regular income. Dividends aren’t guaranteed, but if you invest in a good dividend ETF and the company pays out dividends, then you will receive a steady stream of income during retirement.

The Vanguard Dividend Appreciation ETF (VIG) is one of the most popular dividend funds available today. It tracks the performance of the MSCI US Prime Market Dividend Aristocrats Index, which consists entirely of companies that have increased their dividend payments for at least 25 years in a row.

Bond ETFs

If you’re looking for safe income in retirement, bond ETFs are an excellent choice. These funds invest in bonds issued by governments and corporations around the world and offer returns that are stable but lower than emerging market stocks or a mutual fund. They tend to perform well during market downturns because investors flock to them as a safe haven when stocks fall, boosting their prices and giving them solid returns over time.

A good example is the Vanguard Total Bond Market Index Fund (VBMFX), which has an expense ratio of 0.05% and charges no capital gains taxes on its distributions. This fund invests in all kinds of bonds, including U.S., international and municipal bonds—so it’s a great choice for long-term investors who want a steady stream of income without worrying about losing their principal investment.

Frequently Asked Questions (FAQs)

When Can You Withdraw From a Roth IRA?

You can withdraw from your Roth IRA at any time after age 59½, but there are some exceptions:

Withdrawals before age 59½ are subject to an early withdrawal penalty of 10% on the earnings portion of your withdrawal. This penalty drops to 5% if you are over age 59½ and still working full-time or part-time, or if you are disabled (as certified by Social Security).

If you have taken out money from the plan within five years of opening it (or within 60 days after closing it), then all withdrawals will be subject to ordinary income tax rates plus an additional 10%.

How Much Can I Contribute to My Roth IRA?

The maximum amount of money that you can contribute to a Roth IRA is $6,000 per year if you are under 50 years old. If you are 50 or older, then you can contribute up to $7,000 per year. The contribution limit is the same for both Traditional IRAs and Roth IRAs.

The limits on contributions don’t apply to rollovers from 401(k)s or other employer plans into Roth IRAs—those rollovers are considered “basis,” and they aren’t counted against your annual limit on donations. Read more on our website about retirement accounts to suit your needs. 

How Old Do You Have to Be to Open a Roth IRA?

To invest in a Roth IRA, you must be at least 18 years old. You will also need earned income of at least $2,000 before taxes during the year; this may include wages from part-time work or self-employment income. 

If you don’t meet these requirements but are still interested in investing in an IRA or Roth IRA, consider opening one with your parents or grandparents as beneficiaries (who must be at least age 59½).

You can open a Roth IRA at nearly any brokerage firm or bank. The first step is to choose a financial institution that offers Roth IRAs. Then, you will need to fill out an application and provide some basic personal information.

When Can I Contribute to My Roth IRA For the Current Tax Year?

You can contribute to a Roth IRA for the current tax year until April 15 of the following year. However, there are some limitations:

The contribution must be made by the deadline. If it is not, you will have to wait until January 1 of the next year before making another contribution.

If the amount of money that you earn is too high, you cannot contribute at all. Roth IRA income limits for the 2022 tax year are $144,000 ($153,000 in 2023) for single filers and $214,000 ($228,000 in 2023) for married couples filing jointly. You can withdraw your Roth IRA contributions at any time without paying taxes.

How to Invest in ETFs

ETFs are a popular way to invest in the stock market. They are also one of the simplest ways to do so. ETFs are essentially baskets of stocks that trade on a stock exchange. Once you buy an ETF, you own a piece of each company that is in that fund’s basket. 

There are thousands of different ETFs available today, so picking one can be overwhelming if you aren’t sure which one is right for your needs. Here are some important tips on selecting an ETF:

1. Find Which ETF You Want to Buy

The first step to investing in ETFs is to find which ones you want to buy. The most obvious place to start is with ETFs that are based on your favorite indexes, like the S&P 500. These funds often have very low expense ratios and track the index quite well.

When looking at a particular fund, it is important to pay attention to its expense ratio and its holdings. Some funds might have an expense ratio of 0.12 percent, while others might have an expense ratio of 0.40 percent—that is a huge difference!

Another thing to check is what percentage of the fund is invested in each holding, or what’s known as its “stock weighting.” For example, if a fund has 60 percent of its assets in financial stocks and 40 percent invested in technology stocks, then it would have a “stock weighting” of 1:1 (60:40). You can use this information as part of your overall strategy when choosing which ETFs you want to buy.

2. Figure Out How Much You Can Invest

The answer depends on where you are in your life and how much you have saved. If this is your first time investing, it is best to start small—with an amount that won’t hurt too much if the market goes down.

If you are investing on your own, this will be a straightforward calculation: just multiply your current savings by the amount of money that you want to invest. But if you are getting help from an advisor, they will help you figure out what percentage of your portfolio should go into ETFs and how much they will cost. This is important because fees can eat away at your returns over time. 

ETFs can be bought in increments as small as $10 per trade. You will pay a commission fee for each trade (the price varies depending on the stock exchange), but the fees are generally lower than those charged by mutual funds. Some brokerages offer commission-free trades on certain ETFs or waive commissions when certain conditions are met (such as holding over a certain amount of assets).

What happens if I lose money?

If things go wrong and your investments lose money, don’t panic! It happens! But remember that stocks tend to rise over time—the average annual return for all U.S. stocks since 1926 has been about 10%, including dividends paid by companies whose stocks are held by mutual funds and ETFs.

3. Place the Order With Your Broker

ETFs are a great way to diversify your portfolio and get exposure to a variety of different investments without having to buy each one separately. ETFs trade on an exchange like stocks, which means that you can buy them just like stocks. And if you already have an account with a brokerage firm, then all you need is a little help from your broker.

First, find out if your brokerage firm offers any commission-free ETFs. If so, then you are in luck! These funds will help keep your costs down while still giving you access to all the benefits of investing in ETFs. If not, then ask about commission-free trades or lower commissions on certain ETFs.

Next, talk with your broker about what kinds of funds they offer and how much they cost per share (some funds may be more expensive than others). Then decide which ones meet your needs and goals best—and make sure they fit within your budget!

Finally, place an order to buy shares of the fund(s) that interest you most! Be sure to ask questions about how often dividends are paid out and what happens when dividends change over time.

In Conclusion 

If you are thinking about using an ETF to hold the money in your Roth IRA, but you are not sure which one to choose, we hope our overview will give you a little extra guidance. You might also want to think about using a basket of ETFs and stocks to create a more diversified portfolio. But as always, make sure you have a firm grasp on all the relevant costs and tax implications before making any investment decisions—fees can add up quickly, and taxes can change how much your investments grow over time.

For more financial resources and tools, check them out here. 

About the Author Tiffany Aliche

Tiffany “The Budgetnista” Aliche, is an award-winning teacher of financial education, America’s favorite, personal financial educator, and author of the New York Times Bestselling book, Get Good with Money. The Budgetnista is also an Amazon #1 bestselling author of The One Week Budget and the Live Richer Challenge series and most recently, a children's book, Happy Birthday Mali More.

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