What should I put in my Roth IRA if TDF's are "bad?"

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zayd13
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What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 2:00 pm

Hi,

I've been hearing from different sources (research and people) that a target date retirement fund isn't the greatest fund to have your Roth IRA. I just opened a Roth IRA and have maxed it out at 80% VFFVX (2055 tdf) and 20% (VGSTX) STAR fund. I'm still young, 26, and will likely be able to put about 3k more into my IRA annually, as I am trying to put in as much as I can at this stage in my life.

What are your suggestions, or, what are the typical mutual funds that are held in a Roth IRA for ppl my age and an average installment of ~3k per year? Should I really get rid of my tdf in favor of a set of mutual funds instead? I'm trying to hear various informed opinions. Thanks in advance for your help!

livesoft
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by livesoft » Sat Jul 25, 2015 2:19 pm

My children have Target Retirement funds in their Roth IRAs. I think one should put a TDF in their Roth IRA unless they have other non-TDF investments.
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terran
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by terran » Sat Jul 25, 2015 2:20 pm

There's nothing wrong with target date funds. All my and my wife's retirement assets are in them. They're basically the 3 or 4-fund portfolio everyone here recommends with a little more aggressive asset allocation than some people recommend (a little more stocks than bonds) and without the need to rebalance. Ask these people why they think a target date fund is bad for a Roth (or any other tax advantaged account)..

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by Clever_Username » Sat Jul 25, 2015 2:26 pm

zayd13 wrote:I've been hearing from different sources (research and people) that a target date retirement fund isn't the greatest fund to have your Roth IRA. I just opened a Roth IRA and have maxed it out at 80% VFFVX (2055 tdf) and 20% (VGSTX) STAR fund. I'm still young, 26, and will likely be able to put about 3k more into my IRA annually, as I am trying to put in as much as I can at this stage in my life.

What are your suggestions, or, what are the typical mutual funds that are held in a Roth IRA for ppl my age and an average installment of ~3k per year? Should I really get rid of my tdf in favor of a set of mutual funds instead? I'm trying to hear various informed opinions. Thanks in advance for your help!



First, congratulations on getting started. It may seem like a sacrifice at this point -- and it is -- but you'll be much better many years from now for having done this.

Second, VFFVX (Vanguard's 2055 TDF) is a fantastic fund. My younger sister's IRAs are invested completely in this fund. I have also recommended it to many friends.

There are issues with some other fund families' TDFs -- some use it as a dumping ground for poorly performing funds or to add assets to other ones. Vanguard's matches the popular Three Fund Portfolio and charges you the same as it would if you held the underlying assets on their own. It's a great deal.

My only suggestion would be that you should be 100% TDF or manage yourself -- not some combination. I'd suggest moving 100% VFFVX in your Roth IRA instead of having any STAR fund. STAR isn't a bad fund on its own, but having a TDF and a separate asset allocation defeats some of the benefits of the TDF (because your asset allocation is no longer the one you aimed for).
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 2:31 pm

Thanks a lot for your encouragement and advice. So would you suggest selling off my VGSTX and putting those funds all into the VFVVX next year?

livesoft
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by livesoft » Sat Jul 25, 2015 2:33 pm

zayd13 wrote:Thanks a lot for your encouragement and advice. So would you suggest selling off my VGSTX and putting those funds all into the VFVVX next year?

I would exchange from VGSTX to VFVVX as soon as possible. Why wait?

Next year's contribution can go into VFVVX, too. That is, unless you have some other investment accounts with lots of money in them.
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zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 2:37 pm

livesoft wrote:
zayd13 wrote:Thanks a lot for your encouragement and advice. So would you suggest selling off my VGSTX and putting those funds all into the VFVVX next year?

I would exchange from VGSTX to VFVVX as soon as possible. Why wait?

Next year's contribution can go into VFVVX, too. That is, unless you have some other investment accounts with lots of money in them.



Will I incur any tax penalties or other disadvantages by completely selling off VGSTX and putting that into VFVVX? Would anyone else on here support this? Jw

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by 22twain » Sat Jul 25, 2015 2:45 pm

zayd13 wrote:Will I incur any tax penalties or other disadvantages by completely selling off VGSTX and putting that into VFVVX?


Inside an IRA or other tax-deferred account such as a 401(k) or 403(b), there are no taxes involved when you sell one fund and re-invest the proceeds in another one.

zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 2:48 pm

Are there any problems with having nothing BUT a tdf (VFFVX) in your Roth IRA?

zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 2:50 pm

22twain wrote:
zayd13 wrote:Will I incur any tax penalties or other disadvantages by completely selling off VGSTX and putting that into VFVVX?


Inside an IRA or other tax-deferred account such as a 401(k) or 403(b), there are no taxes involved when you sell one fund and re-invest the proceeds in another one.


Ok, I figured that was the case but glad this is clarified now. I guess was also afraid that I could exceed the $5500 limit if VGSTX plus the remaining VFFVX exceeded that.

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Taylor Larimore
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Vanguard Target Funds

Post by Taylor Larimore » Sat Jul 25, 2015 2:50 pm

zayd13 wrote:I've been hearing from different sources (research and people) that a target date retirement fund isn't the greatest fund to have your Roth IRA.

zayd13:

Most brokers, advisers and the media do not like Target Funds. It eliminates their income.

I personally, think Vanguard Target Fund are excellent (in retirement accounts) for many investors:

* Designed by Vanguard Experts

* Choice of 12 different stock/bond ratios.

* Low cost.

* Very diversified with over 15,000 individual world-wide securities for lower risk.

* Automatic rebalancing.

* Automatically become more conservative with age.

* All indexed with its many advantages

* No worry about underperforming the market.

* Guaranteed to outperform the majority of investors.

* Virtually no maintenance.

* The investor has more time for other things.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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grabiner
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by grabiner » Sat Jul 25, 2015 3:39 pm

zayd13 wrote:Are there any problems with having nothing BUT a tdf (VFFVX) in your Roth IRA?


There are no problems, and, in fact, this is the best way to use target-date funds. The purpose of a target-date fund is to keep the right allocation automatically; if you mix target and non-target funds, you have to do just as much work to manage your allocation as if you didn't use the target funds at all.

Therefore, if you have a decent target-date option in your 401(k), it makes sense to put both the 401(k) and IRA in target-date funds even if the providers don't match. A US Government Thrift Savings Plan in Lifecycle 2040 and a Roth IRA in Vanguard Target Retirement 2040 is a fine, extremely simple portfolio.
David Grabiner

terran
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by terran » Sat Jul 25, 2015 4:59 pm

grabiner wrote:
zayd13 wrote:Are there any problems with having nothing BUT a tdf (VFFVX) in your Roth IRA?


There are no problems, and, in fact, this is the best way to use target-date funds. The purpose of a target-date fund is to keep the right allocation automatically; if you mix target and non-target funds, you have to do just as much work to manage your allocation as if you didn't use the target funds at all.


To take this a step further: The time when you might want to consider moving away from target date funds is if/when you run out of space in tax advantaged accounts (exceed the annual contribution limits) and need to start investing in a taxable account. At that point come back and learn about how to get your desired asset allocation in the most tax efficient way, but until then target date away!

zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 5:24 pm

Great. And actually, I currently have 3k of VTSMX as the only holding in a taxable account. Seeing that it is an index fund I thought it'd be the best core holding. My next step after contributing to my Roth next year is actually to figure out what other mutual funds I should have in my taxable account in addition to Vtsmx

zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 5:27 pm

So I guess my next and final question is - and pardon me if it's a dumb one - but how /what is the best way to go about transferring everything i have from VGSTX to VFFVX without going over the 5500$ threshold . Do I do an "exchange" on Vanguard's site and then do I do cash or shares? Sorry if this is a dumb question, but as I stated I'm still learning a lot about investing and have only started a few months ago. Appreciate it a lot.

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by LAlearning » Sat Jul 25, 2015 5:29 pm

the limit is for yearly contribution. once you contribute, Vanguard does not care where you allocate the money or how much you move around.
I know nothing!

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by Duckie » Sat Jul 25, 2015 5:35 pm

zayd13 wrote:I currently have 3k of VTSMX as the only holding in a taxable account. Seeing that it is an index fund I thought it'd be the best core holding. My next step after contributing to my Roth next year is actually to figure out what other mutual funds I should have in my taxable account in addition to Vtsmx

The best options in a taxable account for retirement purposes are Total Stock Market and Total International Stock. However, since you are not maxing your Roth IRA you should not be adding to a taxable account for retirement. Is the $3K for retirement? Do you have an employer plan like a 401k?

[H]ow /what is the best way to go about transferring everything i have from VGSTX to VFFVX without going over the 5500$ threshold . Do I do an "exchange" on Vanguard's site and then do I do cash or shares?

If the VGSTX in inside the Roth IRA just exchange 100% to VFFVX (if that's what you want). The $5.5K limit refers to contributions. Selling VGSTX and buying VFFVX isn't contributing more to the Roth IRA, it's just moving things around inside it.

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by retiredjg » Sat Jul 25, 2015 5:37 pm

zayd13 wrote:I've been hearing from different sources (research and people) that a target date retirement fund isn't the greatest fund to have your Roth IRA.

Hogwash. The only time this is true is if the fund itself is poor and there are a lot of those out there. Vanguard is not one of them.

There are times when you can build a better portfolio by using individual funds instead of target funds. That depends on a whole lot of things that we don't know about your situation (other accounts, size of portfolio, etc.) This is not anywhere near saying the target funds are bad. They are not bad - but sometimes something else might be a little bit better. And sometimes not.

zayd13
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by zayd13 » Sat Jul 25, 2015 6:00 pm

Duckie wrote:
zayd13 wrote:I currently have 3k of VTSMX as the only holding in a taxable account. Seeing that it is an index fund I thought it'd be the best core holding. My next step after contributing to my Roth next year is actually to figure out what other mutual funds I should have in my taxable account in addition to Vtsmx

The best options in a taxable account for retirement purposes are Total Stock Market and Total International Stock. However, since you are not maxing your Roth IRA you should not be adding to a taxable account for retirement. Is the $3K for retirement? Do you have an employer plan like a 401k?

[H]ow /what is the best way to go about transferring everything i have from VGSTX to VFFVX without going over the 5500$ threshold . Do I do an "exchange" on Vanguard's site and then do I do cash or shares?

If the VGSTX in inside the Roth IRA just exchange 100% to VFFVX (if that's what you want). The $5.5K limit refers to contributions. Selling VGSTX and buying VFFVX isn't contributing more to the Roth IRA, it's just moving things around inside it.




I did max out my Roth IRA for 2015, this is why I put 3k in a taxable account and purchased VTSMX with it. I also acquired VTSMX in a taxable account because I wanted to grow money outside of a retirement account for general purposes in the future and know that an index fund would be my best option.

Good to know I can exchange all of my VGSTX for more VFFVX without any penalties if the total value is more than $5500. Glad to know it's based on contribution

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by sawhorse » Mon Jul 27, 2015 4:54 pm

Target date funds are fine. Sometimes they are the only good option for people who have low balances. I encourage you to look at the specific allocations rather than just the year in the fund name. Allocations for the same target year vary quite a bit by company. Vanguard is on the riskier side while the TSP is much more conservative. Choose a fund with your desired allocation even if the year in the fund name isn't actually the year you plan to retire.

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by Silence Dogood » Mon Jul 27, 2015 5:41 pm

Vanguard Target Retirement 2055 (VFFVX) is a great fund!

In fact, 100% of my Roth IRA is invested in this fund. :D

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by Domer03 » Mon Jul 27, 2015 5:52 pm

What ER% would you guys consider too high for a Roth IRA or 401k? My roth is with the 2045 Vanguard fund at .18% and the 401k is with TR Price at .76% (( is this too high ))????

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by David Jay » Mon Jul 27, 2015 6:17 pm

Domer03 wrote:What ER% would you guys consider too high for a Roth IRA or 401k? My roth is with the 2045 Vanguard fund at .18% and the 401k is with TR Price at .76% (( is this too high ))????


There is no single answer. If you have a 401K and there is a company match, you should put enough money into the 401K each year to get the entire match. If the lowest ER index funds are .7 or .8, then that is the best you can do.

For IRA accounts, I think most bogleheads would want to see index funds ERs below 0.2%. A half a percent doesn't sound like much but over the decades it adds up (do you know how the X^Y key works on your old high school TI-30?).
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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by Domer03 » Mon Jul 27, 2015 6:23 pm

the 401k would have more value ( up to 18k a year) compared to 5.5k in a roth. My 401k is the one that is .78%... Not sure if that is too high or should I try something different

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Re: What should I put in my Roth IRA if TDF's are "bad?"

Post by retiredjg » Tue Jul 28, 2015 6:19 am

Domer03 wrote:the 401k would have more value ( up to 18k a year) compared to 5.5k in a roth. My 401k is the one that is .78%... Not sure if that is too high or should I try something different

It depends on what else is available in the 401k.

If you could get other funds for less, you should use them and then make adjustments in the Roth iRA if necessary. This is one of the situations where using a target fund in the Roth might not be the best choice - because you need that space to build around the 401k to achieve an overall lower cost portfolio.

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