How to start Vanguard IRA with $3,000 min per fund and $5,500 max contributions

[bikebum]

I want to start a roth IRA with Vanguard. They require $3,000 minimum investment for each new fund. The contribution limit for IRAs is $5,500 per year. Does this mean if I want my IRA to consist of multiple funds, I can only invest in one fund the first year and then can only add one each year after to stay within contribution limits? I know it is common to have multiple funds in an IRA; how is this usually started?

I could pick one of the Life Strategy Funds which consist of four funds, but then I would not have control over the allocation.

Any help is appreciated!

[Stache In Training]

If you're rolling over a roth from somewhere else, you may have more than the 5,500 contribution amount.  Therefore you can obviously go into more than one fund. 

However, if you don't, and this is your first time investing in an IRA, then obviously that is a bit harder.  However, I think you're misunderstanding a fine line.  An IRA is just a holding tank for funds.  You can have the same exact funds in an IRA as you could in a taxed account.  It's just that you're earmarking the holdings as "for retirement" for tax purposes.

So what does this mean?  Well it means that Vanguard isn't actually requiring a 3,000 minimum on funds in your IRA.  Instead, that's just what the fund is requiring.  So therefore, you just have to find funds that don't have the 3,000 minimum.

Take for instance the S&P 500 index fund.  It's available in a regular mutual fund "casing" (for lack of a better word) which does in fact have a 3,000 minimum, referred to as investor shares (VFINX).  However, it's also available in an ETF "casing" (VOO), which does not have a minimum.  So you could invest into it as an ETF until you reach the 3,000 mark, and bump it up to the investor shares, which will then bump you up automatically to the admiral shares version when you get above 10,000.  Not all funds have a lower/no minimum version, so you may be limited at first, but that will get you started. 

At least that's how I understand it.  Other mustachians, if this is not the case, please correct me.

[Recon]

I am by no means an expert on this stuff, but I opened an IRA recently with Vanguard with a $1000 minimum.  It was in VFORX, which is the Target Retirement 2040 fund, so I'm guessing some or all of the target retirement funds have a lower minimum.  I know you want to control asset allocation, so that kind of fund might not be ideal for you (I think that particular one is 80/20 equities/bonds all wrapped up in one package), but just saying that some funds do have lower minimums.

[bikebum]

Thanks guys.

I understand that the IRA is just a holding tank and the same funds can be part of a taxable account; but I am also starting a 457 plan through work and I want to max out all my tax-advantaged options before starting a taxable account. I didn't see any ETF's on the fund list of their IRA webpage. I also didn't see much to choose from with less than a $3,000 minimum.

I would like my IRA to consist of the Total Stock, Total International Stock, Total Bond, and Total International Bond Index Funds. What's the best way to get there? Do one each year? Or pick a Life Strategy or Target Retirement Fund to start (which I think is those four funds set to a specific allocation, although looks like the Total Bond is a little different) and then move to the four funds when I have enough to meet the minimums? Would this last option go against the principle that you should "stay the course," or would that be more like a re-balance since it's the same four funds?

[neoptolemus412]

Thanks guys.

I would like my IRA to consist of the Total Stock, Total International Stock, Total Bond, and Total International Bond Index Funds. What's the best way to get there? Do one each year? Or pick a Life Strategy or Target Retirement Fund to start (which I think is those four funds set to a specific allocation, although looks like the Total Bond is a little different) and then move to the four funds when I have enough to meet the minimums? Would this last option go against the principle that you should "stay the course," or would that be more like a re-balance since it's the same four funds?

The Vanguard Target Retirement Trusts (TRT) set an asset allocation for you.  They invest in the funds you mentioned with later years more weighted towards stocks.  You pay an overall average of the fees with less work as you make 1 investment decision.  TRTs attempt to make one's asset allocation easy.  Also, you only have to meet the minimum for the TRT fund, whereas investing individually means 4 different minimums. 

The total bond is the entire bond market.  VG has tons of large bond funds, but this one hits short-term, intermediate, longterm, Treasury, corp., MBS, ect. in one fund. 

If you don't have enough to meet the minimums for all 4 funds, the TRTs are an easier option.  However, read the asset allocation/risk before investing.  The later funds are weighted very heavy in stocks.  I believe it's better to start with a simple index fund to get your feet wet rather than a TRT as they have more risk than you realize. 

[D-T]

I just started my Vanguard account and was disappointed to find out about the individual fund minimums. I didn't have anything to roll over so I just started with the targeted retirement account for now and will make the change to the four funds/asset allocation I want in 2015.

The targeted fund was similar although different asset allocation from what I wanted.  So it works for me for now until I have enough in the account to get what I want.

[matchewed]

I recommend starting with the Total Stock. Once you have enough in that to meet minimums for the other funds I would branch out from there. You could plan this out by essentially setting up an AA which changes given the amount in your funds.
<10k 100% Total Stock Market
10k-20k 70/30 Total Stock/International Stock
20k-30k 60/30/10 Total Stock/International Stock/US Bond

It keeps it simple and when we're talking about starting out the biggest part is that you do start. The little details can be focused on after starting.

[Will]

The Vanguard STAR fund has a minimum of $1000.  So you could open it as that, when the balance gets to $3000 you could transfer to another fund (the Total Stock, perhaps), and when it gets to $6000 you could split off $3000 to Total Bond or whatever and just keep following this until you get all the funds allocated as you desire.

[GreenGuava]

If you have the funds or a TR/LS fund, but not enough to make your full asset allocation, pick the TR/LS fund that most closely matches the allocation you desire.

If you have a workplace plan, consider determining what you want your total allocation to be and using the better (or least bad) funds in the workplace plan and make up the rest in the Roth IRA.  I can help with that if you'd like, but I'll need more info (desired allocation, workplace fund options, balance in each account).

[JR]

Add a brokerage account to your Vanguard Roth IRA and buy the Vanguard ETF versions of the funds you want. There is no minimum investment amount (just enough to buy 1 share) and the fund fees are even lower. Vanguard also does not charge a commission to purchase Vanguard ETFs through your Vanguard brokerage IRA.

[bikebum]

GreenGuava, thanks for offering to help. I am choosing to use CalPERS for my 457 since they have the lowest fees. Here are the available CalPERS funds and fees:

The Short-Term Investment Fund   0.50%
PIMCO Short-Term Bond Fund   0.55%
CalPERS Treasury Inflation Protected Securities Fund   0.55%
CalPERS Total Return Bond Fund   0.55%
CalPERS S&P 500 Equity Index Fund   0.35%
Turner Active Large Cap Equity Growth Fund   0.90%
AllianceBernstein Active Large Cap Equity Value Fund   0.90%
CalPERS Small & Mid Cap Equity Index Fund   0.40%
The Boston Company Small/Mid Value Fund   0.98%
The Boston Company Small/Mid Growth Fund   0.98%
CalPERS International Index Fund   0.40%
Pyramis Select International Alpha Fund   0.94%

Target Retirement and Target Risk funds are also available at 0.64%

I would like to start with an 80/20 stocks/bonds allocation, with around 15-20% of the stocks as international. I am starting both accounts and I plan to contribute the max to each, which is 17.5k for the 457 and 5.5k for the roth IRA for 2013.

I am very good with numbers so I can do the math, but I would appreciate some help deciding which funds to go with. Here are some things I've been thinking about:

1. I want a simple and flexible plan.

2. It might be good to put more of the 457 money in the lower fee options, although I've ran some scenarios and it would only save around 0.05% or less in fees.

3. The 457 plan does not have minimum amounts for funds, so they are all available right away. And it is easy to setup and change which funds the contributions go to.

4. Should I get the allocation I want in each account or just so it is what I want when the two are looked at together? I know the combined allocation is what matters, but it may be easier to manage the funds if they both have it separately. I may end up working somewhere else and not be able to contribute to the 457 someday, although I think I could rollover to a trad IRA.

Considering all this, I am thinking of getting the allocation I want in the 457 with the CalPERS S&P 500 index, small and mid cap index, international index, total bond, maybe the PIMCO bond too, and TIPS. With the Vanguard roth IRA, I can start with Total Stock Index and add the other funds (Total Bond, Total Int. Stock, and Total Int. Bond) when I have enough in the account. Or maybe start the roth with a LS fund and then move to the four funds later.

Thanks for the help!

[bikebum]

Thanks to everyone who replied! Even though I didn't address all the comments, they still help a lot!

[bikebum]

JR, I didn't know you could do that. Is there any downside to it?

[JR]

The only downside is that you can't do automatic investment and can't buy partial shares (you can buy partial ETF shares through dividend reinvestment though).

[GreenGuava]

CalPERS Total Return Bond Fund   0.55%
CalPERS S&P 500 Equity Index Fund   0.35%
CalPERS Small & Mid Cap Equity Index Fund   0.40%
CalPERS International Index Fund   0.40%

These are the only four funds you should be considering in this.  The middle two, in a 4:1 ratio, should be used for your domestic stock;  the other two as your bond and international stock portions. 

I would like to start with an 80/20 stocks/bonds allocation, with around 15-20% of the stocks as international. I am starting both accounts and I plan to contribute the max to each, which is 17.5k for the 457 and 5.5k for the roth IRA for 2013.

Okay.  So, 25% of your 457 into the above-mentioned bond fund, 21% of the 457 into international stocks, 11% into the second (small & mid) stock fund, rest into the S&P 500 index. 

Put 100% of the Roth IRA into Vanguard's total stock market index - VTSMX

1. I want a simple and flexible plan.

2. It might be good to put more of the 457 money in the lower fee options, although I've ran some scenarios and it would only save around 0.05% or less in fees.

Maybe, but that will compound, and it's generally worth avoiding high-fund fees for non financial reasons, also.

3. The 457 plan does not have minimum amounts for funds, so they are all available right away. And it is easy to setup and change which funds the contributions go to.

4. Should I get the allocation I want in each account or just so it is what I want when the two are looked at together? I know the combined allocation is what matters, but it may be easier to manage the funds if they both have it separately. I may end up working somewhere else and not be able to contribute to the 457 someday, although I think I could rollover to a trad IRA.

I'd suggest having your total portfolio the way you want it.  Yes, you can - and, with these ERs, should - roll over to a traditional IRA when you leave your employer.  It's easy to know what to do when you get the funds to a destination:  convert them to the equivalent asset class (bonds -> total bond market, int'l stocks to total international, rest to total domestic).

Plus, as your portfolio grows, it's much easier to get into a new workplace plan, because the new funds are such a small portion of your portfolio at first, so you don't have to worry about upsetting the balance for  a while.

Considering all this, I am thinking of getting the allocation I want in the 457 with the CalPERS S&P 500 index, small and mid cap index, international index, total bond, maybe the PIMCO bond too, and TIPS. With the Vanguard roth IRA, I can start with Total Stock Index and add the other funds (Total Bond, Total Int. Stock, and Total Int. Bond) when I have enough in the account. Or maybe start the roth with a LS fund and then move to the four funds later.

These aren't bad plans.  I've outlined my suggestions above - the idea being that, in December, it will be in your total desired form.  It's also much easier to maintain going forward, because your Roth contributions are probably less frequent than your workplace plan.  Mixing up the bonds I suggested with some TIPS and the PIMCO fund is fine, but it might just cause you more work for little gain.

[bikebum]

Green Guava, thanks for your help. I like your suggestion and I think it is probably better than what I came up with. Do you think the CalPERS funds are much different than their Vanguard equivalents, besides ERs? I guess it doesn't matter too much, since I am limited to those funds, just curious.

Once I get some money in the 457, I will also have the option of a Self Managed Account. It charges a $50 per year fee plus 26 basis points in addition to whatever fees come with the funds you pick. I can't see the list of funds or fees until I get the plan going, so I won't know if it is worth doing until then. The ERs would have to be pretty low for it to be worthwhile.

Anyway, I like the plan you recommended and can adjust later if there are good options through the Self Managed Account. Thanks again for your much appreciated help!

[GreenGuava]

Green Guava, thanks for your help. I like your suggestion and I think it is probably better than what I came up with. Do you think the CalPERS funds are much different than their Vanguard equivalents, besides ERs? I guess it doesn't matter too much, since I am limited to those funds, just curious.

I'd have to see the prospectuses... within the S&P 500 index, there isn't much room to be different.  Within the small one, they could sample differently than total stock market/extended market. 

I really should learn more about CalPERS, since I might end up with it as an option at some point.  I teach in California, but I'm at a private school.

Once I get some money in the 457, I will also have the option of a Self Managed Account. It charges a $50 per year fee plus 26 basis points in addition to whatever fees come with the funds you pick. I can't see the list of funds or fees until I get the plan going, so I won't know if it is worth doing until then. The ERs would have to be pretty low for it to be worthwhile.

True.  They'd have to be ... under .3%, and you're only saving the difference, not .3% total, so I don't think so.  Maybe if you plan to be at this employer for 30+ years.

Anyway, I like the plan you recommended and can adjust later if there are good options through the Self Managed Account. Thanks again for your much appreciated help!

Happy to help.

[wannabfrugal]

Add a brokerage account to your Vanguard Roth IRA and buy the Vanguard ETF versions of the funds you want. There is no minimum investment amount (just enough to buy 1 share) and the fund fees are even lower. Vanguard also does not charge a commission to purchase Vanguard ETFs through your Vanguard brokerage IRA.

+1 to this, it is what I did