Today I pulled the trigger and opened a Vanguard ROTH IRA. The contribution deadline for 2013 is April 15th 2014, so if you move quickly you can open one up and fund for last year. After which, you can always fund the current year until that April 15th date every year.
The process itself is quite easy and can be done fully online and should have taken me about 10 minutes to complete, however there were a couple of bumps on the way that I wanted to ask a human about so I didn’t make any mistakes in structuring the account.
Please note, if you decide to fund via Bank Transfer then you need the funds available today and the process creates a time stamp that shows your account open within the deadline, even though it might take a couple of days for the funds to show up on the other end. If you chose to fund via a check then you need to ensure that the letter is postmarked before April 15th (so they told me) but I didn’t trust that method so went for Online Funding.
Vanguard has a great reputation in the market as being the innovator behind Index Funds, these are low cost funds that track the market, and instead of having a Fund Manager actively selecting which stocks go into the fund they reduce costs by buying an entire Index or Sector. During the set up process I called up Vanguard Concierge to help answer a few questions, and I learned some interesting things about Vanguard that I wasn’t aware of, and you should be too. I’ll address them at the end of this article.
Opening a new Vanguard Account to hold the ROTH IRA is very simple:
Decide if you will be using this account to trade Vanguard Funds only, or if you also want to trade non Vanguard funds, ETFs and Equities
If you don’t select both options then you can always add on the Brokerage capabilities later, however if you do want to immediately fund these types of product then you best checking both boxes.
Fees – Vanguard will not charge you a fee if you sign up for Electronic Statements, otherwise there is a $20 annual fee for accounts with a balance under $10,000. Since I will be opening two accounts for $5,000 each I am signing up for the statements, plus I actually prefer them online along with it being better for the Environment.
For the Brokerage side of things, Vanguard charges a fee per trade, the starting rate is $7, but they don’t like a lot of active traders and penalize you for trading too much on lower balanced accounts
You’re not ready to select all of your investments?
Your money has to go somewhere even if you don’t want to invest it right now, for example in my case when I open up accounts for Mrs Saverocity I would check this option, deposit the full amount (only for 2013) into a Money Market Fund which is very stable until we sat down and discussed options on where she would like to allocate the funds. I wouldn’t decide to fund 2014 now, even though I could since I have until April 15th 2015 to make that decision. I may decide that this year I would rather deposit into a Traditional IRA or something else. I think it is likely that I will pick ROTH again, but I don’t think it is necessary to make that decision now.
Ready to Invest and Allocate your funds right now?
I opened up an account for both Mrs Saverocity and Myself today, for my own account I was ready to pick some funds and get going with the investments. This can be quite an aggressive move as you are faced with immediate asset allocation requests which I think is a little intimidating. Therefore if you are not certain where you want to allocate, but do want to set up the ROTH IRA before the deadline of April 15th then select the Prime Money Market Fund and park the money there whilst you consider which funds fit your needs.
Minimum Deposit for a Fund $3,000
Most of the funds on offer are asking for a minimum of $3,000, so if like me this is your first investment in a ROTH and you have the maximum $5,500 to play with this doesn’t leave you a lot of options for diversity (well, other than the fact that you can buy the ENTIRE MARKET with one fund). You are basically limited to picking one fund, or perhaps two, as there are some that allow a $1,000 minimum. I selected Small Cap US and a 2060 Target Date Retirement fund (for the latter, it is balanced between stocks and bonds, and I am no way targeting 2060 for retirement, I just want an aggressive, yet diverse mix to balance up some of the risk in selecting a small cap for my primary fund.
After a few more steps, that is basically it, your account is funded either by check or bank account, as mentioned before I picked bank account because that time-stamps my account opening for today and I don’t have to worry about any issues with the check not arriving or whatnot.
After you set up the account, you will then be prompted to set up online access. I do recommend that you do all this now, and e-sign the forms required by NYSE etc regarding your accounts. An important step here is to sign up for e-delivery too, this will save you the $20 account management fee for balances under $10,000. The nice thing is that this is just Step 2 on the online access setup, so it leads you through this step without having to hunt for E-Delivery.
Some Interesting Facts About Vanguard that I didn’t know
Vanguard is well known as the proponent of Passive Investing methodologies as championed by their Founder and Former CEO John Bogle, when you are told that Vanguard is the ‘best way to invest’ it is probably because people are trying to get you to avoid the heavily loaded mutual funds out there. Vanguard funds are thought of as Passive Funds, and no Load funds by most people (at least by me in any case).
1. Vanguard has 67 Actively Managed Mutual Funds
This isn’t a new thing either, one of their funds the Vanguard Wellington Fund Investor Shares (VWELX) was created in 1929. However it was news to me. I had always heard the anecdotes ‘buy Vanguard Funds, they follow the Bogle principle of Passive Investing.. but apparently they do not, so be careful when picking your fund of choice that you know what you are buying into. The good news is that whilst they are an active fund, the price for ownership remains very low compared to the Industry standard. However it is worth noting that this management expense fee doesn’t include one thing that will impact an Active Fund more than a Passive Fund – Capital Gains Tax. It is assumed that Short Term Capital Gains will be higher when a firm is traded Actively, since they will be liquidating positions more frequently.
2. Vanguard Has Load Fees
Only on a couple of Funds admittedly, but I was very surprised to see a load fee and redemption fee. You can certainly see some that are a lot higher than this in the market with other firms, but I had always thought that this was something that you would never see with Vanguard. Also note that these funds have a higher (than the mean) fee than other Vanguard funds.
3. Vanguard Offers 3 Levels of Service for your Account
- Self Directed Accounts are managed by you, but do have access to support online and on the phone. I spoke today with a very nice and knowledgeable person from their Concierge service who really knew his stuff. This service comes as standard with any account at Vanguard, but don’t expect them to be proactive about contacting you regarding your account. This is more of an advice line.
- An Investment Management Consultation, this will give you a chance to talk with a professional to examine all of your accounts and assets and form an investment plan with their guidance. They charge for this service, and if you have less than 50K invested it will cost $1000, over $50K will be $250 and over $500K with them it is complimentary.
- A Managed Account – this is the highest level of service from them, where you basically hand over control of the account to Vanguard and they allocate accordingly, I tried to learn more about this from Concierge but he was a bit hazy, he mentioned that you might have to relinquish control of the account for a year at least to let these guys run it. Personally that makes me a little uncomfortable. Fees for the service are 0.7% for the first Million, 0.35% for the Second Million and 0.2% for amounts above that. Frankly, that’s too high for me now that firms like Betterment are offering that service for half of those rates.
4. Vanguard Blocks Fund Re-entry for 60 days
In order to keep costs low Vanguard discourages hopping around from fund to fund and in order to enforce that they lock you out of a fund for 60 days after you close the position. So if you are in Total Stock Market, and panic and decide to shift into Bonds then you cannot go back to the Total Stock Market Fund for the 60 day period, after which you can. It is worth noting that you can always exit and sell any position but they restrict you jumping back in, in order to discourage you jumping out. Further to this Vanguard now offers a lot of funds that are very similar in nature, and also ETFs that are very similar and don’t have this restriction. Whilst this may seem like a negtive, the restriction is actually helpful to you if you plan to Capital Loss Harvest in a Taxable Account, as you need to stay out of the same fund for 61 days to be safe – read more about that here Capital Loss Harvesting for the Index Investor
Despite a couple of quirky things as mentioned above, I think Vanguard is the best place to put your money if you are OK with rebalancing and asset allocation yourself (for more on this subject see this post: Portfolio Rebalancing for Passive Investors
Whenever you start setting up new Accounts I would recommend using a Portfolio Analyzer to check your current allocation to ensure that you aren’t paying excessive fees for any other legacy funds you might be holding, and to make sure that you are balanced out properly. Here is a review of the tool from Personal Capital that does a fantastic job of this – you should check it out even if you aren’t ready to open up something new now, as it will give you a snapshot of all your accounts easily, here is my review of their product: