Help Opening Vanguard Traditional IRA

[FIT_Goat]

This might be stupid, but it's also literally my first time investing (aside from my horrible 403b through work).

I would like to open a new Traditional IRA with Vanguard.  I qualify for these contribution to be tax deductible.  I have $11,000 ready, and would put $5,500 towards 2016 and $5,500 towards 2017.  I bailed out of the process right before completing it and funding the accounts.  I was confused about some things.

First, should I reinvest the dividends?  I'm assuming that I should, but worry that the default it to not do that.  Would those put me over the $5,500 limit?  Is that why it's not the default?

Second, it seems to default to a mutual fund.  I was hoping that I could select from their index funds.  Are they the same thing?  Do I not get a choice of which fund my money goes into because it's an IRA?  Can I switch which fund I invest in later?  Something in the mutual fund disclaimer seemed to be saying that they had a 99.5% requirement to have the money in government bonds (or something).  Is that true?  Does that mean I won't be investing in the stock market?

If I can choose, which funds are good/best?  I, obviously, am not asking you to predict which funds will perform best in the future.  That's impossible.  Just to point me towards the ones with the lowest costs and that have a good mix of stocks.

I am sure that I sound like an ignoramus.  I'm sorry if these are obvious questions.  I just don't even know where to begin.  I know only enough to know that I don't know what I am doing.  I just want to get this money out of checking, where it earns basically nothing (0.18%), and working for me.

[Full Beard]

Yes, you should choose to reinvest your dividends and they don't count towards the $5,500 contribution limit.  You should be able to invest in any Vanguard fund within the IRA.  I don't know how old you are but I would probably recommend a balanced lifecycle fund based on the year you plan to retire. 

If you're just starting out here is a good link http://jlcollinsnh.com/stock-series/

[FIT_Goat]

I am 36, and not extremely worried about risk.  I have a pension plan, through my state.  I'm considering changing careers in the next 2-3 years, which won't make a huge difference in pay, but it will double my pension and allow me to start pulling from it at any time after I hit 55.

Thanks for the link.  I'll check it out.

[MDM]

This might be stupid, but it's also literally my first time investing (aside from my horrible 403b through work).  Things will get easier after you do it once. :)
...
First, should I reinvest the dividends?  I'm assuming that I should, but worry that the default it to not do that.  Probably. 
Would those put me over the $5,500 limit? No.
Is that why it's not the default? Some people like to put dividends into the money market account, then use that money to adjust their asset allocation by buying some mixture of funds, rather than having the dividends buy 100% of that fund.  Some people also worry about Tax Loss Harvesting, and how purchases due to dividend reinvestment will affect that.  If you aren't one of those people, just reinvest.

Second, it seems to default to a mutual fund.  I was hoping that I could select from their index funds.  Are they the same thing?  Yes
Do I not get a choice of which fund my money goes into because it's an IRA?  You do get a choice.
Can I switch which fund I invest in later?  Yes
Something in the mutual fund disclaimer seemed to be saying that they had a 99.5% requirement to have the money in government bonds (or something).  Is that true?  Does that mean I won't be investing in the stock market? Not sure what you were looking at here.

If I can choose, which funds are good/best?  I, obviously, am not asking you to predict which funds will perform best in the future.  That's impossible.  Just to point me towards the ones with the lowest costs and that have a good mix of stocks. See Three-fund portfolio - Bogleheads for some ideas.

I am sure that I sound like an ignoramus.  I'm sorry if these are obvious questions.  I just don't even know where to begin.  I know only enough to know that I don't know what I am doing.  I just want to get this money out of checking, where it earns basically nothing (0.18%), and working for me. See the comment to the first statement. ;)  Good luck!

[FIT_Goat]

Thanks for not making me feel like a complete idiot.  I know these are probably obvious questions to many people here, but everyone has to start somewhere.

[MustacheAndaHalf]

Just wanted to separate two things: ignorance is not stupidity.  A smart kid goes to class - they're ignorant and the class helps them learn.  Being willing to learn is more significant in investing, anyways.

At the very top level you have taxable and retirement accounts.  Your 403(b) is a retirement account, and so is a Traditional IRA account.  The account is just a tax classification, and a restriction on mixing with other accounts.

Within a Traditional IRA you can pick funds.  Starting out, I'd suggest a target retirement fund.  So if you're thinking of retirement in 20 years, you'd pick either 2035 or 2040 target date retirement fund.  You just put all the $11,000 there and the fund diversifies it for you - across US, international, and bonds.

I'd start with the target retirement fund because it's an easy decision, and uses index funds.  For example, here's a link to Vanguard's Target 2040 fund (search "2040 vanguard target" if you don't like clicking links).
https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT#tab=2

The "portfolio" tab shows 53% Vanguard Total Stock Market and 35% Total International.  Both of those are index funds that are as diverse as possible.  Although it looks like "just" two funds, those two funds hold the stock of thousands of companies from around the world.

[NoStacheOhio]

The fund disclosure you were looking at is probably for the core position when you first transfer money into the account, probably a cash-equivalent fund. Once the money is transferred, you can invest in whatever fund you like. Gains and dividends don't count against your annual contribution limits. The $5,500 only applies to new money you're adding to the account.

[Spork]

With Vanguard: if at any point in time you don't understand something or it doesn't make sense -- just call them.  it doesn't appear to be a typical call center with people that don't know what they are doing.  The person that answers the phone has done this before (whatever it is) and can make it happen.  They're extremely helpful.

[Aggie1999]

I have a question about dividends and basis that might help the OP and myself. When taking basis into account, does it really matter if dividends are re-invested into the same fund or are temporarily sent as cash to the money market account and then used to purchase other funds? Seems like it works out the same. You just end up with your new "basis addition" (I know, not the right word) in either the original funds or the new funds. Is this correct?

[MDM]

I have a question about dividends and basis that might help the OP and myself. When taking basis into account, does it really matter if dividends are re-invested into the same fund or are temporarily sent as cash to the money market account and then used to purchase other funds? Seems like it works out the same. You just end up with your new "basis addition" (I know, not the right word) in either the original funds or the new funds. Is this correct?

Yes.

[FIT_Goat]

Alright.  I am going to go ahead with it.  This is the part I was talking about regarding the 99.5% thing.  It is part of the "signing" page when you first open an account.  It's in one of the PDF's you agree to have read/downloaded.  I opened that and started skimming it last night.  I've downloaded them, now, for deeper reading later.

"Vanguard Federal Money Market Fund Summary Prospectus"

Principal Investment Policies
The Fund invests primarily in high-quality, short-term money market instruments.
Under normal circumstances, at least 80% of the Fund’s assets are invested in
securities issued by the U.S. government and its agencies and instrumentalities.
Although these securities are high-quality, most of the securities held by the Fund are
neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of
the U.S. government. To be considered high quality, a security must be determined by
Vanguard to present minimal credit risk based in part on a consideration of maturity,
portfolio diversification, portfolio liquidity, and credit quality. The Fund maintains a
dollar-weighted average maturity of 60 days or less and a dollar-weighted average life
of 120 days or less.

Under the new money market reforms, government money market funds are required
to invest at least 99.5% of their total assets in cash, government securities, and/or
repurchase agreements that are collateralized solely by government securities or cash
(collectively, government securities). The Fund generally invests 100% of its assets in
government securities and therefore will satisfy the 99.5% requirement for
designation as a government money market fund.

Note:  I opened the account, and the last page lets you select how you want the money invested and says it will be stored in the money market account until you select a fund.  So, I was just being paranoid.

[MDM]

I opened the account, and the last page lets you select how you want the money invested and says it will be stored in the money market account until you select a fund.

Good for you!

It's "obvious"...in hindsight....

[FIT_Goat]

I opened the account, and the last page lets you select how you want the money invested and says it will be stored in the money market account until you select a fund.

Good for you!

It's "obvious"...in hindsight....

Yep.  Now, I think I have to wait for my confirmation with my bank and the actual funds to transfer from my savings to their accounts before I can select things.  That can take up to 7 days.  So, that leaves me some time.  I am looking at various funds.  I like the 2040 fund, for the mix of international and US funds, while keeping 90% of it in stocks (at the present moment).  I can always move it later, if that balance doesn't make sense.  I'm still going to look at the rest of the fund options they recommend as IRA choices, to see if there is a better one.

I am working at pursuing a career in firefighting.  Not a huge leap in pay from teaching, but it does have a better pension (twice as high, same state pension as teaching so I keep my years, and 'early' retirement starting at 55) and provides more time to spend with my family.  It also fulfills my desire to help others and contribute to my community.  I'm already a volunteer firefighter in my free time, so it's something I would do even if I was already retired.  This will never put my on the RE path.  At least not as early as some here, but it makes the most sense for me.  I am doing my best to be FI, even if I am still planning on working until near a more traditional retirement age.  And, more importantly, I want to set myself up so that I have options if things change in the future.  I want to have some "FU Money" just in case.

[lemonverbena]

I just opened our first Vanguard account last week as well and found the process/the website confusing at first. After you enter the small amount of money they deposit in your bank account in the blank fields, you'll see the $5,500 (or whatever you contributed) listed, but I don't think it allows you to pick the type of funds you want to buy until they move that $5,500 to the "Settlement Fund". This takes a few more days. So check back later and when the money is listed under Settlement Funds, then you should be able to click "buy" and enter the code (like VTSMX) you want into a blank field.
Hope this helps! it was those extra couple days of waiting that threw me off.