Vanguard Traditional IRA - question about how it works

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
Ruprecht
Posts: 545
Joined: Fri Aug 17, 2007 10:34 pm
Location: a very nice cardboard box
Contact:

Vanguard Traditional IRA - question about how it works

Post by Ruprecht »

I've had a 403(b) with Vanguard now for a couple of years. I just opened my first Traditional IRA, with Vanguard. I started by putting the minimum required $3,000 into Prime Money Market for now, just to get the account open, until I decide what allocation I want.

I'm used to my 403(b) account, where money is automatically invested, and transfers are very easy.

This Traditional IRA seems a bit more restrictive. To add a new fund, I have to meet a minimum initial investment, which is $3,000 for most of the funds I would consider. To transfer to another fund, I have to "add a new fund" which means I have to meet the $3,000 initial investment for that fund.

I guess what I'm asking is:

1. is this how it is supposed to work, or is there something wrong with my account? Just thought I'd ask, but I'm assuming my account is functioning correctly.

2. Since I can only invest $5,000 annually in this IRA, it seems like this means that for my first year at least, I'll only be able to have one fund, since I won't be able to have two funds with $3,000 initial investments each. Or am I interpreting this incorrectly?

3. Could I, for example, transfer my current investment of $3,000 from Prime Money Market to Total Stock Market, then later this year invest the rest of my $5,000 limit in either of these two funds? Or would I have to invest the next $2,000 in the fund where I currently have money invested? In other words, once I've "added a fund", is that fund then wide open for me to invest in it forever, or will that fund cease to be open for me after I transfer money out of it?


I know I can ask all this of Vanguard, but I tend to get quicker and more informative answers here.

Thanks for any ideas.
livesoft
Posts: 73523
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft »

1. Yes, this is how it works.

2. Yes, you will likely be able to have only one fund with just $3K to $5K in it the first year.

3. If you put $3K into your Total STock market and left your prime money market at $0 for too long, I think you will have to add the $2K directly to the Total Stock rather than the prime money market. If you had dipped below $3K for a while, but not gone to $0 for a while things might be different. Call Vanguard and find out.

The solution of course is to purchase a fund of funds like a Target Retirement or a Life Strategy or a balanced fund while your IRA is small. Then in a few years when the IRA is bigger, you may wish to divide into the appropriate funds.

Another solution is to ditch Vanguard and go with ETFs at a no-cost broker.

Finally, you can also just go with one fund like TotalStockMarket for quite a while. You are really not gonna retire on $5,000 or $10,000 anyways, so you have many years to go. For us, most of our IRAs are filled with just one fund since they are not large anyways. We get our diversification elsewhere.
Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Post by Default User BR »

livesoft wrote:Finally, you can also just go with one fund like TotalStockMarket for quite a while. You are really not gonna retire on $5,000 or $10,000 anyways, so you have many years to go. For us, most of our IRAs are filled with just one fund since they are not large anyways. We get our diversification elsewhere.
Also, you should be considering your entire portfolio as one. That means the IRA needs to work in concert with the 403(b). Most likely, there's some aspect of your desired allocation that's unavailable in that, and should be considered for the IRA.

It would be better to do a full portfolio analysis.




Brian
muddlehead
Posts: 276
Joined: Mon Sep 22, 2008 2:03 pm

roth

Post by muddlehead »

any reason why you're choosing a traditional ira over roth? traditional's tax deduction benefit pitiful when compared with ability in a roth to take out dollars tax free down the road.
User avatar
Topic Author
Ruprecht
Posts: 545
Joined: Fri Aug 17, 2007 10:34 pm
Location: a very nice cardboard box
Contact:

Re: roth

Post by Ruprecht »

muddlehead wrote:any reason why you're choosing a traditional ira over roth? traditional's tax deduction benefit pitiful when compared with ability in a roth to take out dollars tax free down the road.
My annual income now exceeds the limit for a Roth. Which is good, of course. Previously I worked over ten years making much, much less than the income limit for a Roth, but at that time I couldn't spare a single dollar for investing. Food, clothing, and shelter took precedence until just recently, so I'm just getting started with saving. Still don't have any extra to invest beyond what I'm putting in my tax-deferred accounts.

Thanks to all for the information.
Post Reply