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Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 9:32 am
by Artninjatheo
Okay, so this may sound like a stupid question but I can't find a clear answer on the internet or through Vanguards website. But earlier this year I opened up a Roth IRA through Vanguard, and contributed $1000 when I opened, and have been slowly contributing more throughout the year. Whenever I contribute, I just hit the button that says "Contribute to IRA" and it shows the yearly limit and etc.

So I assumed that how a Roth IRA works was basically that I invest into a Roth IRA account and I get a consistent rate of interest yearly on which the gains were tax free (after retirement). So I never payed too much attention to the account other than just depositing my money into it. But after recently making a brokerage account through Vanguard as well, I notice in my separate Roth "brokerage" account, my money that I deposited for the Roth IRA is sitting in a money market account :confused . Does this mean that basically my money hasn't been doing anything this whole time?!! Am I supposed to buy funds or stocks with the money in that money market account through my Roth brokerage account? This is where I'm confused at! If anyone can shed light on this for me I would greatly appreciate it :beer

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 10:49 am
by Caduceus
Hello, welcome! :beer

No, these are not stupid questions at all. I remember the first time I set up an IRA.

Think of the Roth IRA like a bucket. Whatever you put in this bucket is protected from taxation. But you still have to decide what you put in the bucket. By default, when you contribute to a Roth IRA by hitting the "contribute" button, the broker will put your money in money market funds or cash equivalents, until you decide what to do with it. You will get some interest on these money market funds; if you check your transaction history, most likely you'll see a few cents in interest or something like that.

But at some point, you will want to invest these funds in something else. Those can be stock ETFs, or bond ETFs, for example. Meanwhile, if you haven't decided yet, its perfectly OK to have your money sitting in money market funds. The most important thing is to get your contributions into that bucket; once they are there, you have all the time in the world to decide how to invest them.

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 10:53 am
by dwickenh
Artninjatheo wrote:
Tue Nov 14, 2017 9:32 am
Okay, so this may sound like a stupid question but I can't find a clear answer on the internet or through Vanguards website. But earlier this year I opened up a Roth IRA through Vanguard, and contributed $1000 when I opened, and have been slowly contributing more throughout the year. Whenever I contribute, I just hit the button that says "Contribute to IRA" and it shows the yearly limit and etc.

So I assumed that how a Roth IRA works was basically that I invest into a Roth IRA account and I get a consistent rate of interest yearly on which the gains were tax free (after retirement). So I never payed too much attention to the account other than just depositing my money into it. But after recently making a brokerage account through Vanguard as well, I notice in my separate Roth "brokerage" account, my money that I deposited for the Roth IRA is sitting in a money market account :confused . Does this mean that basically my money hasn't been doing anything this whole time?!! Am I supposed to buy funds or stocks with the money in that money market account through my Roth brokerage account? This is where I'm confused at! If anyone can shed light on this for me I would greatly appreciate it :beer
The Roth account is simply a egg carton waiting for a diversified number of eggs called investments. You have contributed money to one egg(the money market account). It does pay around 1% interest, but is not the likely place to leave your money for future growth. You need to do some reading to learn about the investments you might choose to fill the "egg carton".

https://www.bogleheads.org/wiki/Getting_started

Start with link above and good luck in your investing,

Dan

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 10:57 am
by mouses
Caduceus is right.

What you choose to invest the Roth money in will depend on how much risk you want to take, what your other savings are, etc.

I'm retired, and have savings in taxable, Traditional IRA, and Roth IRA accounts. I'm having to take the Required Minimum Distributions from the Traditional IRAs each year, and for me that is almost all taxable since it happened to be mostly before tax money.

So I keep my more (slightly) risky investments in the Roths, which will be the last accounts I take money out of, because (1) the longer time period means I can tolerate downs better, and (2) the tax protection means the potentially higher gains will not be hit by taxes.

An old teacher of mine: The only stupid question is the one not asked.

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 1:03 pm
by Artninjatheo
Thank you guys for the awesome responses, it cleared up a lot for me!

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 1:18 pm
by David Jay
If you don't know where to invest the money, put it in a Target Retirement fund for now. It has a low ($1000) minimum and is completely diversified (US stocks, Intl Stocks, US Bonds, Intl Bonds). The number (i.e. TR2050) is your assumed retirement date - the date when you will begin to withdraw funds.

The funds become more conservative (more bonds, less stocks) as the retirement date approaches. If you want a less volatile fund (less fluctuation, less growth) you can move to an earlier date - say 10-15 years earlier than your actual retirement date.

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 1:50 pm
by clydewolf
Vanguard's STAR fund (VGSTX) is good too:

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 10:57 pm
by overthought
mouses wrote:
Tue Nov 14, 2017 10:57 am
An old teacher of mine: The only stupid question is the one not asked.
Yup. I''ll take a stupid question over a stupid mistake any day.

Re: Confused on how Vanguard Roth IRA works...

Posted: Tue Nov 14, 2017 11:26 pm
by PFInterest
clydewolf wrote:
Tue Nov 14, 2017 1:50 pm
Vanguard's STAR fund (VGSTX) is good too:

https://personal.vanguard.com/us/funds/ ... IntExt=INT
this was true back in the day, no reason to use it anymore as the TDF have 1K minimums now.