Author Topic: American Funds - Roth IRA Questions  (Read 3638 times)

clarkevii

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American Funds - Roth IRA Questions
« on: October 12, 2014, 04:23:16 PM »
I am relatively new to this site and love it. My wife and I are educator as thanks to a little inspiration from MMM we are now saving over 50% of our income. My question for the forum revolves around Roth IRAs. Currently I have about 10K in my American Funds Roth IRA. I always assumed it was a low cost fund but the sales charge is 5.75%. There are not any fees other than this with the account other than the sales load.

So I have a few questions...

1 - Are the sales charges too high?
2 - Should I just keep the money in American Funds since I paid the sales load? Or can I move my funds from one account to another?
3 - Who do you use and recommend?
« Last Edit: October 12, 2014, 04:28:39 PM by clarkevii »

GardenFun

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Re: American Funds - Roth IRA Questions
« Reply #1 on: October 12, 2014, 04:28:50 PM »
I hate American Funds, specifically due to the loads.  Is it a front load or back load?  What is their on-going yearly expense ratio?

With $10,000, you would be eligible for Vanguard's 500 Index Admiral Shares which have zero loads and an 0.05% expense ratio.  They also have index funds in Small Caps, Mid Caps, International, etc - all of these indexes have significantly lower expense ratios than industry average. 

If it is a front load fund, I would move the money.  If it is a back load, then you need to determine how many years it would take for the load to disappear.  But either way, I wouldn't put more money into this particular IRA.   

clarkevii

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Re: American Funds - Roth IRA Questions
« Reply #2 on: October 12, 2014, 04:37:52 PM »
Thank you. I believe it is front load since the 5.75% fee is paid when you make the purchase. The expense fees are .65%.

Cwadda

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Re: American Funds - Roth IRA Questions
« Reply #3 on: October 12, 2014, 04:46:27 PM »
I faced a similar predicament about a year ago. I had about 5k invested with American Funds and I had already been hit with the front load sales charge. I ended up biting the bullet, politely telling my financial adviser to ____ himself, and moving everything over to Vanguard.

1. Yes, the sales charges are too high and this is a front load. Compare this to Fidelity or Vanguard, where there are zero sales charges. In addition, my annual fee was .70%...which doesn't seem like a lot. Compare this to Vanguard's VTSAX which amounts to .05% (14 times less expensive).

2. Here's a neat tool to answer the question: http://www.moneychimp.com/calculator/compound_interest_calculator.htm
First input 10,000 principal, yearly addition $5185 (note this is the $5500 max minus 5.75% of it)
Years to grow: 30
Interest rate: 6% minus .70% = 5.3%
Future value: ~$430k

Then compare this to 10,000 principal, yearly addition $5500
Years to grow: 30
Interest rate: 6% minus .05% = 5.95%
Future value: ~$513k

3. I would recommend Vanguard (VTSMX into VTSAX) or Fidelity Spartan Series (I believe it's FUSEX).

The process of transferring everything is all said and done in about 2-4 weeks. It's actually not difficult - the companies handle it for you.

Cwadda

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Re: American Funds - Roth IRA Questions
« Reply #4 on: October 12, 2014, 04:51:00 PM »
Thank you. I believe it is front load since the 5.75% fee is paid when you make the purchase. The expense fees are .65%.

And that skimming off the top goes to the people who "manage" the funds and promise "better returns" - which statistically is the opposite. Sorry to crap on other companies right now but these topics get me a bit heated at times.


If you want to watch something interesting on a Sunday night that applies to this topic well, here ya go: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

Watch it with your wife, too if she's interested in the whole MMM shtick.
« Last Edit: October 12, 2014, 04:56:35 PM by Cwadda »

clarkevii

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Re: American Funds - Roth IRA Questions
« Reply #5 on: October 12, 2014, 05:20:47 PM »
Great stuff... Thank you so far.

I am looking into opening a Vanguard account. I am just debating whether or not to leave my money in American Funds since I already paid the sales charge OR roll it into Vanguard.

mitlaura

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Re: American Funds - Roth IRA Questions
« Reply #6 on: October 12, 2014, 05:26:26 PM »
There may also be a charge to roll your IRA. Read through their website or ask the company.

Cwadda

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Re: American Funds - Roth IRA Questions
« Reply #7 on: October 12, 2014, 05:36:36 PM »
Great stuff... Thank you so far.

I am looking into opening a Vanguard account. I am just debating whether or not to leave my money in American Funds since I already paid the sales charge OR roll it into Vanguard.

I guess it comes down to a matter of time and the differences between the funds you're using. Correct me if I'm wrong, but I think GAIOX performed at 20% return when I had it in 2013. VTSAX was at 28%.

I personally felt much more at ease knowing my money wasn't being eaten away by fees over the long run. But I was 18 when I opened the account with the mindset that things would stay there for ~50 years. In that case, the difference between the two is several hundred thousand dollars. If you're going for a 5-10 year deal then the difference is going to be much smaller and it could be worthwhile just leaving the cash with AF.

In response to mitlaura, I wasn't charged to rollover my Roth IRA and the reasoning is that the front load has already been paid and there is no back load.