What the heck did I do? Confusion on Vanguard IRA

[MJseast]

I can't figure out what I did and the Vanguard reps I called aren't explaining in a way I can understand. Maybe someone here can help.

 I had my IRA in Waddell & Reed Ivy Funds and made the switch to Vanguard last year. After everything was settled, I noticed that there was ~$3400 in the Vanguard Traditional IRA account that was marked as "Vanguard Federal Money Market Fund   (Settlement fund)". I didn't understand why that didn't just go into one of the Ivy funds (yes, I know I need to get those moved to something else; that's another question I have for another thread) so I called Vanguard and asked about it. Basically my understanding of the conversation was that I could use that settlement amount to contribute to my IRA as part of my $5500 for the 2018 year (I may have misunderstood). I assumed that it would be part of my annual limit of $5500, so my plan was to contribute that amount to a Vanguard Fund (I chose the Vanguard Target Retirement 2035 Fund Investor Shares  ). That's all fine and good, but now I see that it didn't count towards my $5500 I have $0 contributed for 2018.

So what happened? Where did that $3400 come from in the IRA transfer and what did I actually do with it? Was that $3400 Settlement account really already part of my IRA and I just transferred it over to something else? Or was it cash that I could have contributed for 2018 and I did it wrong? Did I create some kind of taxable event by doing whatever it is I really did? I'm so confused and reading the Vanguard site is just confusing me more.

Help? Thanks!

Thanks.

[wenchsenior]

I can't figure out what I did and the Vanguard reps I called aren't explaining in a way I can understand. Maybe someone here can help.

 I had my IRA in Waddell & Reed Ivy Funds and made the switch to Vanguard last year. After everything was settled, I noticed that there was ~$3400 in the Vanguard Traditional IRA account that was marked as "Vanguard Federal Money Market Fund   (Settlement fund)". I didn't understand why that didn't just go into one of the Ivy funds (yes, I know I need to get those moved to something else; that's another question I have for another thread) so I called Vanguard and asked about it. Basically my understanding of the conversation was that I could use that settlement amount to contribute to my IRA as part of my $5500 for the 2018 year (I may have misunderstood). I assumed that it would be part of my annual limit of $5500, so my plan was to contribute that amount to a Vanguard Fund (I chose the Vanguard Target Retirement 2035 Fund Investor Shares  ). That's all fine and good, but now I see that it didn't count towards my $5500 I have $0 contributed for 2018.

So what happened? Where did that $3400 come from in the IRA transfer and what did I actually do with it? Was that $3400 Settlement account really already part of my IRA and I just transferred it over to something else? Or was it cash that I could have contributed for 2018 and I did it wrong? Did I create some kind of taxable event by doing whatever it is I really did? I'm so confused and reading the Vanguard site is just confusing me more.

Help? Thanks!

Thanks.

I'm finding your question somewhat confusing.  But generally speaking, contributing to a Vanguard IRA is a two step process.  Once the IRA is established, you send in money and it sits in the money market settlement fund until you officially contribute, which is another separate step.  It sounds like you didn't take the second step (which can be done on the VG website) to 'contribute for X year' to your IRA, during which they ask you where the money for the contribution will come from, and you will pick 'money market settlement fund'.

[Cromacster]

If the money is in the settlement fund within the IRA account, it's already in the IRA.  Or it's money that has already been contributed for the given year.

It might have been cash from when you switched.  Or it could be assets that couldn't be transferred to vangaurd as is so they sold whatever you had and transferred it in cash.

[appleshampooid]

Or it could be assets that couldn't be transferred to vangaurd as is so they sold whatever you had and transferred it in cash.

This is my guess.

OP, did all the funds you owned in the old account show up in the new account? If some were missing, probably they got liquidated. Investing those funds wouldn't count against your contribution limit, since the funds were already in the IRA.

[secondcor521]

I can't figure out what I did and the Vanguard reps I called aren't explaining in a way I can understand. Maybe someone here can help.

 I had my IRA in Waddell & Reed Ivy Funds and made the switch to Vanguard last year. After everything was settled, I noticed that there was ~$3400 in the Vanguard Traditional IRA account that was marked as "Vanguard Federal Money Market Fund   (Settlement fund)". I didn't understand why that didn't just go into one of the Ivy funds (yes, I know I need to get those moved to something else; that's another question I have for another thread) so I called Vanguard and asked about it. Basically my understanding of the conversation was that I could use that settlement amount to contribute to my IRA as part of my $5500 for the 2018 year (I may have misunderstood). I assumed that it would be part of my annual limit of $5500, so my plan was to contribute that amount to a Vanguard Fund (I chose the Vanguard Target Retirement 2035 Fund Investor Shares  ). That's all fine and good, but now I see that it didn't count towards my $5500 I have $0 contributed for 2018.

So what happened? Where did that $3400 come from in the IRA transfer and what did I actually do with it? Was that $3400 Settlement account really already part of my IRA and I just transferred it over to something else? Or was it cash that I could have contributed for 2018 and I did it wrong? Did I create some kind of taxable event by doing whatever it is I really did? I'm so confused and reading the Vanguard site is just confusing me more.

Help? Thanks!

Thanks.

I don't know why you have $3400 in the Vanguard money market fund.  @Cromacster giave two reasonable ideas.  One way to figure it out is to look at your last W&R statement and your first Vanguard statement and match things up until you find a $3400 discrepancy.

The money market fund is inside and a part of your IRA.  You can think of it as a savings account with $3400 in cash in it.  It doesn't count towards your contribution limit for this year because it was already in your IRA.

It sounds like you used the $3400 inside your IRA to purchase shares of a Vanguard target date fund.  This did not create a taxable event.  Purchases and sales inside IRAs do not create taxable events.

You can still contribute, assuming you have enough earned income and are not over the IRS income limits, $5500 to your IRA for 2018.  You have until the tax filing deadline (~4/15/19) to contribute.

...

What @wenchsenior wrote is misleading.  Contributing to an IRA simply means moving money from outside the IRA into the IRA.  Once the money is inside the IRA, it can be used to purchase investments inside the IRA.  You have made an IRA contribution (and can take the associated tax deduction and credit, if applicable) even if you don't purchase an investment inside the IRA.  You do, most likely, want to invest the money inside the IRA, of course - but from an IRS point of view, the contribution is only moving the money into the IRA, not what you do with it once it's in there.

Also, I have been able to do all of this in one step from the Vanguard website many times - I can go into my IRA, say I want to make a contribution for 2018, I want to buy such-and-such mutual fund, and I want the money to come from my checking account or savings account at another bank.  It's all done in one step, not the two steps @wenchsenior describes.  (Vanguard does have two different styles of accounts and it could work differently for that reason.)

Finally, if you're not sure what you're doing and are confused, I would do whatever it takes to learn and be confident of what you're doing before you do it.  So far it seems like you haven't made any serious errors, but if you keep going the way you're going, it's quite possible that you'll make a mistake that could cost you thousands in taxes and penalties, or not achieving FIRE when you want.  Asking questions until you get it is a good approach, but do it before you take action, not after - some things can't be undone, and some things have time limits or deadlines.

[MJseast]

Thank you all. This was very helpful. And much more helpful than trying to talk to the Vanguard reps :).

Yes, it looks like what happened was that the $3400 was for a Waddell fund that couldn't be bought in Vanguard. My big mistake was not realizing that it was still part of the IRA account. I thought that the rep was telling me I could use that settlement amount to contribute to the IRA for the year, but it's likely he was just explaining that I could put into a fund instead of leaving it in the settlement account. That just spun me off into a lot of confusion.

So I'm going to go ahead and contribute my $5500 for the year. Next step is to research how to exchange all of my Ivy funds to something else. I'll call Vanguard to start but won't make a move until I really understand it! :)

Thanks again!

[wenchsenior]

I can't figure out what I did and the Vanguard reps I called aren't explaining in a way I can understand. Maybe someone here can help.

 I had my IRA in Waddell & Reed Ivy Funds and made the switch to Vanguard last year. After everything was settled, I noticed that there was ~$3400 in the Vanguard Traditional IRA account that was marked as "Vanguard Federal Money Market Fund   (Settlement fund)". I didn't understand why that didn't just go into one of the Ivy funds (yes, I know I need to get those moved to something else; that's another question I have for another thread) so I called Vanguard and asked about it. Basically my understanding of the conversation was that I could use that settlement amount to contribute to my IRA as part of my $5500 for the 2018 year (I may have misunderstood). I assumed that it would be part of my annual limit of $5500, so my plan was to contribute that amount to a Vanguard Fund (I chose the Vanguard Target Retirement 2035 Fund Investor Shares  ). That's all fine and good, but now I see that it didn't count towards my $5500 I have $0 contributed for 2018.

So what happened? Where did that $3400 come from in the IRA transfer and what did I actually do with it? Was that $3400 Settlement account really already part of my IRA and I just transferred it over to something else? Or was it cash that I could have contributed for 2018 and I did it wrong? Did I create some kind of taxable event by doing whatever it is I really did? I'm so confused and reading the Vanguard site is just confusing me more.

Help? Thanks!

Thanks.

I don't know why you have $3400 in the Vanguard money market fund.  @Cromacster giave two reasonable ideas.  One way to figure it out is to look at your last W&R statement and your first Vanguard statement and match things up until you find a $3400 discrepancy.

The money market fund is inside and a part of your IRA.  You can think of it as a savings account with $3400 in cash in it.  It doesn't count towards your contribution limit for this year because it was already in your IRA.

It sounds like you used the $3400 inside your IRA to purchase shares of a Vanguard target date fund.  This did not create a taxable event.  Purchases and sales inside IRAs do not create taxable events.

You can still contribute, assuming you have enough earned income and are not over the IRS income limits, $5500 to your IRA for 2018.  You have until the tax filing deadline (~4/15/19) to contribute.

...

What @wenchsenior wrote is misleading.  Contributing to an IRA simply means moving money from outside the IRA into the IRA.  Once the money is inside the IRA, it can be used to purchase investments inside the IRA.  You have made an IRA contribution (and can take the associated tax deduction and credit, if applicable) even if you don't purchase an investment inside the IRA.  You do, most likely, want to invest the money inside the IRA, of course - but from an IRS point of view, the contribution is only moving the money into the IRA, not what you do with it once it's in there.

Also, I have been able to do all of this in one step from the Vanguard website many times - I can go into my IRA, say I want to make a contribution for 2018, I want to buy such-and-such mutual fund, and I want the money to come from my checking account or savings account at another bank.  It's all done in one step, not the two steps @wenchsenior describes.  (Vanguard does have two different styles of accounts and it could work differently for that reason.)

Finally, if you're not sure what you're doing and are confused, I would do whatever it takes to learn and be confident of what you're doing before you do it.  So far it seems like you haven't made any serious errors, but if you keep going the way you're going, it's quite possible that you'll make a mistake that could cost you thousands in taxes and penalties, or not achieving FIRE when you want.  Asking questions until you get it is a good approach, but do it before you take action, not after - some things can't be undone, and some things have time limits or deadlines.

Yes, you are clearer than I was.  I was using 'contribute' (poorly) to refer to the option on the drop-down menu VG gives me, that allows me to purchase desired funds within the IRA, using money in the settlement fund. 

Though it does in fact take two steps (at least in my VG account) to actually purchase the desired funds within the account. VG does not allow me to directly purchase a particular fund within the IRA by sending a check.  Instead, when I opt to contribute to the IRA by check, they always first direct my contribution to the settlement fund, where it is 'held' for a period of time before I can  go back in and purchase the desired funds within the IRA.  I'm not sure why they do this, and I think it might be a recent thing...I vaguely remember one-step IRA contributions from the first few years after I had my IRA set up.  Weird.

[secondcor521]

Though it does in fact take two steps (at least in my VG account) to actually purchase the desired funds within the account. VG does not allow me to directly purchase a particular fund within the IRA by sending a check.  Instead, when I opt to contribute to the IRA by check, they always first direct my contribution to the settlement fund, where it is 'held' for a period of time before I can  go back in and purchase the desired funds within the IRA.  I'm not sure why they do this, and I think it might be a recent thing...I vaguely remember one-step IRA contributions from the first few years after I had my IRA set up.  Weird.

I think it is so Vanguard can make sure that your check clears so they know the funds are actually available.  This might be due to either a federal law or regulation about investments.

What I have done is connected my bank checking account electronically to my Vanguard account.  That way Vanguard can automatically transfer the money for the purchase out of the account via ACH and make the purchase all in one step.  Even then the process takes a day or two as they have to wait for the ACH transfer to happen before they can buy the investment.  If the money is already at Vanguard in a settlement fund, I think they can do purchases same day.

I'm a long term buy and hold low cost indexer, so a day or two one way or another doesn't matter much to me.

[Proud Foot]

Thank you all. This was very helpful. And much more helpful than trying to talk to the Vanguard reps :).

Yes, it looks like what happened was that the $3400 was for a Waddell fund that couldn't be bought in Vanguard. My big mistake was not realizing that it was still part of the IRA account. I thought that the rep was telling me I could use that settlement amount to contribute to the IRA for the year, but it's likely he was just explaining that I could put into a fund instead of leaving it in the settlement account. That just spun me off into a lot of confusion.

So I'm going to go ahead and contribute my $5500 for the year. Next step is to research how to exchange all of my Ivy funds to something else. I'll call Vanguard to start but won't make a move until I really understand it! :)

Thanks again!

It is really easy to exchange the Ivy funds to a Vanguard fund and you don't have to call them to do it. After you log in to your Vanguard account you can click on the "Holdings" tab to see what you hold. Right under your account name and number you will see "Transact" with a down arrow next to it. If you click the arrow it will give you your transaction options. From there you can select "Exchange (sell to buy Vanguard funds)". This will take you to a page where you will be able to select which holdings you want to sell (Ivy Funds) on the left hand side and after you have those selected, you will be able to use the box on the right hand side to select the Vanguard fund(s) you want to purchase.

[MJseast]

Thank you for replying @Proud Foot . Unfortunately, I tried that and can't get it to work.

When I select an IVY fund (ICEIX) to exchange, the dropdown box for "What do you want to buy?" only lists the Settlement Fund. If I try to add a Vanguard symbol (VTSAX) in the text box,  I get the message:"The fund being purchased must be from the same fund family and in the same share class as the fund being redeemed." I've tried this with multiple IVY accounts to exchange and multiple Vanguard symbols and still get the same message.

[Proud Foot]

I will be honest that I have never used the exchange funds to make a transaction with a non vanguard fund. From your description it seems like this may only be possible if exchanging between Vanguard Funds? You might just need to do a straight sell and then once the sell is completed do a separate buy transaction to purchase the new funds you want invested in.

[MJseast]

I will be honest that I have never used the exchange funds to make a transaction with a non vanguard fund. From your description it seems like this may only be possible if exchanging between Vanguard Funds? You might just need to do a straight sell and then once the sell is completed do a separate buy transaction to purchase the new funds you want invested in.

Yes, you're correct. I just talked to them. Apparently there's a charge for selling non-Vanguard funds (it was $20 for each one), but I think it'll be well worth it to not have the higher expense ratios. So I initiated the sale, which won't be official until close tomorrow. And then I will buy Vanguard (probably VTSAX) on Thursday.

Thanks!