Confused about Vanguard Funds

[bryanth]

Hey, so I thought I had a good understanding about basic laidback investing, but I'm a bit confused. I funded VFINX last year to begin some easy investments, and I thought this was just a mutual fund that I could technically put $100k+ in at one time. Today I was looking into opening a Roth IRA and one of the funds is the VFINX. Now from my understanding, ROTH has a max amount, for me it's $5k to put in... So what am I missing? If I were to do a roth version of this fund, would Vanguard split the two in my account view? Or did I actually start the Roth last year unknowingly?

[johnintaiwan]

A Roth IRA is a tax sheltered (right word?) account. It is not an investment. You put money into your Roth (not sure what the max is). Then you use that money to invest in just about anything including VFINX. The shares you buy with the money in your Roth account are treated differently when it comes to taxes. Everything else is just the same. The VFINX shares you bought last year and the VFINX shares you buy in your Roth are exactly the same.

In short, a Roth is not a fund but an account you can use to buy investments just like any other investing account. The differences are the amount you can put into it each year and the was it is treated for tax purposes.

I hope that make sense. if not someone else should be able to give a better explanation.

[bryanth]

Thank you for that explanation John. That definitely explains things a bit better. Now with that, you mention that shares are treated differently when it comes to taxes. Say I max this year and invest in the VFINX, which I already own, and have it set up to reinvest. Everytime I receive dividends, it auto buys new shares. How is it broken down categorically/visibly in my account so that when I do cash out in 40 years etc, it takes into account the separate buyins of regular investing vs. Roth?

[Gin1984]

Thank you for that explanation John. That definitely explains things a bit better. Now with that, you mention that shares are treated differently when it comes to taxes. Say I max this year and invest in the VFINX, which I already own, and have it set up to reinvest. Everytime I receive dividends, it auto buys new shares. How is it broken down categorically/visibly in my account so that when I do cash out in 40 years etc, it takes into account the separate buyins of regular investing vs. Roth?

They are two separate accounts.  So X shares of VFINX in your taxable account and Y shares in your Roth, they then gain from those original numbers are not combined at anytime.

[randymarsh]

Your Roth IRA and regular brokerage account are separate accounts, so when it comes time to withdraw you'll sell shares from whichever account you pick. You can sort of think of like having a checking and savings account at the same bank. They're completely separate.

If they're from the Roth then there's no tax implication. If they're from the taxable brokerage account, Vanguard will send you a tax form every year listing your gains and other information you need to report on your tax forms.

[SDREMNGR]

Vanguard keeps track of your basis.  Go to your transactions history or basis records.

[bryanth]

Alright, this definitely clears everything up. Thanks!

[bryanth]

So I went ahead and opened up a Roth account with Vanguard, planning to move my one regular taxable fund directly over to the Roth to jumpstart the $5,500 and was denied "You can't buy into the same fund you're selling within the same account."

Obviously a wash sale. Now the question is what is the most logical solution? Is there a way around this, or put that into another fund in my roth? Or just leave that account separate and fund the $5500 from my checking account?

[Cyrano]

So I went ahead and opened up a Roth account with Vanguard, planning to move my one regular taxable fund directly over to the Roth to jumpstart the $5,500 and was denied "You can't buy into the same fund you're selling within the same account."

Obviously a wash sale. Now the question is what is the most logical solution? Is there a way around this, or put that into another fund in my roth? Or just leave that account separate and fund the $5500 from my checking account?

Double check that you really are doing what you think you are doing. The error message in the one VG would have given you if you tried to rebuy the same fund in the taxable account.

If you really are doing it right and still get the error, exchange the $5500 into the Vanguard money market fund, and after that transaction settles, fund your Roth from the money market.