Roth IRA: Begin With ETF's or Wait Until 3k?
Roth IRA: Begin With ETF's or Wait Until 3k?
Hello all,
Helping my wife get started with her Roth IRA and would appreciate some thoughts on the following:
Since we file Married Filing Separately for reasons relating to the PSLF Program for her student loans, we are both ineligible for direct Roth contributions and therefore she will be making Backdoor Roth contributions via a Traditional Non-Deductible IRA (all through Vanguard). The issue we're on the fence over is whether she should begin making the contributions/conversions immediately on a monthly basis in ETF's or wait until she has $3,000 ready and invest in a lump sum into Investor Shares of a fund.
My personal feeling is to invest monthly via ETF's to start (and then convert to Investor Shares once she reaches 3k) because I don't like the idea of investment money not being put to work immediately. If done monthly, it would be about $400 or so. Granted, that's not a ton of money to be worried about, but I'd rather the money be in the market as opposed to waiting roughly 7 months until $3,000 is accrued and eligible for Investor Shares. To me that is a "waste" of 7 months of investment time. In my mind it's akin to regular paycheck deductions into the 401k on our fairly modest salaries - it's not a huge sum of money each time, but the money is put to work immediately.
For us the decision doesn't come to down to whether we feel like devoting the extra time each month making the contribution/conversion and remaining diligent about it. We are fine with that. And it isn't a worry about the Step Transaction Doctrine - from what I can tell and have read in other threads here, Congressional tax writers have stated recently that the backdoor strategy is perfectly fine and that immediate (next day) conversions are fine too. So this is really a question about opportunity cost, I suppose. Making only one or two lump Roth IRA contributions/conversions a year is certainly easier and simpler than one per month, but what's the downside to not putting smaller amounts of money to work each and every month? Especially if this is a strategy we will be implementing for the next 20-25 years.
Lastly, since ETF's trade on the open market and their price fluctuates constantly like a traditional stock, are they any riskier than investing in a standard index fund? Put another way - do ETF's require more mindfulness and a more watchful eye than investing in an index fund, or can they still be viewed as passive investments where we'd primarily just need to be concerned with re-balancing occasionally to maintain our AA? To me that's a benefit of fund investing - it's not exactly "set it and forget it", but it's close. I don't need to agonize about it in the way I would if I was investing in individual stocks. So would ETF's of Total Stock Market and Total Bond Market, for example, require the same kind of maintenance we would give to individual stocks by virtue of the fact that they trade like individual stocks?
Appreciate everyone's thoughts.
Helping my wife get started with her Roth IRA and would appreciate some thoughts on the following:
Since we file Married Filing Separately for reasons relating to the PSLF Program for her student loans, we are both ineligible for direct Roth contributions and therefore she will be making Backdoor Roth contributions via a Traditional Non-Deductible IRA (all through Vanguard). The issue we're on the fence over is whether she should begin making the contributions/conversions immediately on a monthly basis in ETF's or wait until she has $3,000 ready and invest in a lump sum into Investor Shares of a fund.
My personal feeling is to invest monthly via ETF's to start (and then convert to Investor Shares once she reaches 3k) because I don't like the idea of investment money not being put to work immediately. If done monthly, it would be about $400 or so. Granted, that's not a ton of money to be worried about, but I'd rather the money be in the market as opposed to waiting roughly 7 months until $3,000 is accrued and eligible for Investor Shares. To me that is a "waste" of 7 months of investment time. In my mind it's akin to regular paycheck deductions into the 401k on our fairly modest salaries - it's not a huge sum of money each time, but the money is put to work immediately.
For us the decision doesn't come to down to whether we feel like devoting the extra time each month making the contribution/conversion and remaining diligent about it. We are fine with that. And it isn't a worry about the Step Transaction Doctrine - from what I can tell and have read in other threads here, Congressional tax writers have stated recently that the backdoor strategy is perfectly fine and that immediate (next day) conversions are fine too. So this is really a question about opportunity cost, I suppose. Making only one or two lump Roth IRA contributions/conversions a year is certainly easier and simpler than one per month, but what's the downside to not putting smaller amounts of money to work each and every month? Especially if this is a strategy we will be implementing for the next 20-25 years.
Lastly, since ETF's trade on the open market and their price fluctuates constantly like a traditional stock, are they any riskier than investing in a standard index fund? Put another way - do ETF's require more mindfulness and a more watchful eye than investing in an index fund, or can they still be viewed as passive investments where we'd primarily just need to be concerned with re-balancing occasionally to maintain our AA? To me that's a benefit of fund investing - it's not exactly "set it and forget it", but it's close. I don't need to agonize about it in the way I would if I was investing in individual stocks. So would ETF's of Total Stock Market and Total Bond Market, for example, require the same kind of maintenance we would give to individual stocks by virtue of the fact that they trade like individual stocks?
Appreciate everyone's thoughts.
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
Why not just hit the $1k threshold and invest in a Vanguard Target Date Fund (which has a $1k minimum investment)?
Amateur investors are not cool-headed logicians.
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
You can usually start investing with a smaller amount when it is in an IRA, at least that is the case at Fidelity and Schwab. Does Vanguard not allow for that? You may need to call them to get it set up. ETFs are not worth the trouble in an IRA.
“There may be times when we are powerless to prevent injustice, but there must never be a time when we fail to protest.” - Elie Wiesel
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
Hadn’t thought of that! That’s definitely another way to go until she reaches a higher threshold, at which point I think we’d prefer choosing our own mix. But that’s an excellent idea, thank you.
- Epsilon Delta
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Re: Roth IRA: Begin With ETF's or Wait Until 3k?
What you are talking about is small stuff.
Don't sweat the small stuff. The danger of sweating the small stuff is not paying attention to important things.
Don't sweat the small stuff. The danger of sweating the small stuff is not paying attention to important things.
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
That was exactly my thought and the main reason I am conflicted - I too was thinking that ETF’s in an IRA aren’t worth the hassle. Then again I’m less educated about ETF investing than I am about funds.
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
Seems right - for those who have their entire portfolio in tax-advantaged accounts, a cheap target-date fund is the best approach.
As Rick Ferri's signature block so eloquently states: "The Education of an Index Investor: starts in darkness, finds enlightenment, complicates everything to find optimal, back to simplicity."
Amateur investors are not cool-headed logicians.
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
Vanguard web page has a ETF Q & A. I am not sure how to post link. I would review that as you can't convert Vanguard ETFs back to conventional Vanguard mutual funds. I.E. convert VTI to VTSMX. However the reverse is allowable to convert mutual funds to ETFs.
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
If it's in a Roth, it's not taxable anyway, so "converting" would be selling the ETF and buying the fund with no tax liability.ETadvisor wrote: ↑Sat May 19, 2018 2:16 pm Vanguard web page has a ETF Q & A. I am not sure how to post link. I would review that as you can't convert Vanguard ETFs back to conventional Vanguard mutual funds. I.E. convert VTI to VTSMX. However the reverse is allowable to convert mutual funds to ETFs.
- ruralavalon
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Re: Roth IRA: Begin With ETF's or Wait Until 3k?
This or Vanguard STAR Fund (VGTSX) which also has an initial minimum investment of just $1k.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
Another option is to use Schwab which has $100 minimums.
https://www.schwab.com/public/schwab/in ... ndex_funds
https://www.schwab.com/public/schwab/in ... ndex_funds
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Re: Roth IRA: Begin With ETF's or Wait Until 3k?
I'm still learning, so maybe I'm missing something. With Vanguard, aren't a lot of the ETFs the same as the MFs but with a better expense ratio if you aren't able to hit the Admiral level? I'm not understanding the downside for using the ETFs in a Roth IRA, so I'm thinking I'm missing something.
- oldcomputerguy
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Re: Roth IRA: Begin With ETF's or Wait Until 3k?
There's nothing that says you can't simply contribute the cash to your IRA and leave it there in the settlement fund until you accumulate enough to buy whatever investment you want. The important thing starting out is to save. Your gains in your account at this point will come much more from savings rate than account return.
There is only one success - to be able to spend your life in your own way. (Christopher Morley)
- ruralavalon
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Re: Roth IRA: Begin With ETF's or Wait Until 3k?
Vanguard fund Investor Shares do have higher expense ratios than the ETF shares, by around 0.10% on the most popular funds. On a $3k investment that extra 0.10% costs just $3 per year, so there is almost no practical effect to using the ETF as a way to begin.WhatsUpButtercup wrote: ↑Sun May 20, 2018 9:03 am I'm still learning, so maybe I'm missing something. With Vanguard, aren't a lot of the ETFs the same as the MFs but with a better expense ratio if you aren't able to hit the Admiral level? I'm not understanding the downside for using the ETFs in a Roth IRA, so I'm thinking I'm missing something.
As oldcomputerguy points out, the greatest effect on portfolio growth in the beginning comes from your savings rate, so as you start out concentrate on contributing as much as you can instead of focusing on small differences in expense ratios.
My own personal preference is traditional mutual funds rather than ETFs (Exchange Traded Funds). I have no need for intra-day trading.
In my opinion mutual funds are easier to use and have simpler trading mechanics. With regular mutual funds you can buy or sell fractional shares, you can easily set up automatic investment, and you can easily set up automatic reinvestment of dividends and gains. You can place an order for a transaction anytime 24/7, rather than just when an exchange is open. You don't need to use limit orders. Wiki article, Wiki article, "ETFs vs Mutual Funds".
The choice of fund or ETF is largely a matter of personal preference.
Last edited by ruralavalon on Sun May 20, 2018 9:43 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Roth IRA: Begin With ETF's or Wait Until 3k?
ETF's are perfectly fine to use and free to trade at Vanguard. Just be sure to make the trade during peak trading hours to get high volume and low bid/ask spread which is rarely a problem with VTI, VXUS, and BND.
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Three-fund_portfolio
- oldcomputerguy
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Re: Roth IRA: Begin With ETF's or Wait Until 3k?
The only downside I know of in using ETFs is that it's difficult to do automated hands-off investing with ETFs compared to mutual funds. But as far as I know there's nothing that says you can't purchase an ETF in a Roth IRA with a manually-entered order.WhatsUpButtercup wrote: ↑Sun May 20, 2018 9:03 am I'm still learning, so maybe I'm missing something. With Vanguard, aren't a lot of the ETFs the same as the MFs but with a better expense ratio if you aren't able to hit the Admiral level? I'm not understanding the downside for using the ETFs in a Roth IRA, so I'm thinking I'm missing something.
There is only one success - to be able to spend your life in your own way. (Christopher Morley)