Author Topic: Rookie Qs and Getting Started with Vanguard  (Read 1861 times)

gregby

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Rookie Qs and Getting Started with Vanguard
« on: April 05, 2017, 04:10:54 PM »
Hey Superfriends,

Been gobbling up all the MMM advice over the past month and lowered tons of bills! Totally onboard, and have helped a few others learn too. Feels great. So we just migrated my wife & my 401ks to Vanguard Roth IRAs...after two weeks of waiting they just arrived today - like $40k. Woooo!

Been wading thru tons of threads and came away with questions I hope you helpful folks can answer.


1) We're fine with being semi-aggressive. To diversify a little, thinking of dumping all into 2 index funds: 80% in VTSAX and 20% in VTIAX. These are not ETFs (which seem more high maintenance) and we're okay letting things ride for a while. Sound okay?

2) Trying to minimize our tax liability; am I going to get dinged on any gains I make here in VTSAX or VTIAX, or for the assets at Vanguard in general? We already get a pretty big tax hit since my wife is an independent contractor, so we'd like to avoid any additional liability there if possible.

3) How do I know which types of funds pay dividends? If these 2 do pay dividends, will I be prompted to get paid out at certain intervals, or will I be prompted to automatically reinvest those into the two funds?

4) Thinking of contributing a few grand to each fund every month, then when we reach our goal ($1M in about 10 years), we'll just pull 4-7% out each month (tax-free since its a Roth, right?) and live off that amount. Is it really that easy?


Pretty big novice here, thanks in advance everyone!! Keep fighting the good fight!

Guide2003

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Re: Rookie Qs and Getting Started with Vanguard
« Reply #1 on: April 06, 2017, 06:30:37 PM »
Congrats on the lifestyle progress and welcome! I am certainly not the most knowledgeable so hopefully others will chime in, but maybe these answers will help direct your research:
1. As long as you're ok with no bonds, those are two fine funds. It looks like the Admiral shares expense ratio is the same for both as the equivalent ETF's, so I don't see any advantage for one over the other. (Actually, I believe the mutual fund will be more subject to capital gains due to sales within the fund, but I can't expound on this....someone want to chime in?)
2. You're only ever taxed on realized capital gains, which only happen when you sell. For buy-and-hold, you won't have capital gains until you rebalance, retire, or have to sell your taxable funds to max a sheltered account or fund some other expense. See this thread for how to allocate your investments to minimize tax liablity: https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/
3. As total market funds, both of those will pay dividends. Vanguard will let you set up a DRIP to reinvest the dividends commission-free. This is an option when you open the account or can be started later by giving them a call.
4. If you're contributing a few grand each month, a good chunk of that probably won't be tax advantaged and you'll have to pay some tax on it. While there' some discussion on here about safe withdrawal rates, its usually on the side of being less than 4% rather than greater. Also, that's 4% each year, not each month hahaha. If only it was that easy! But you'll have plenty of time over the next ten years to refine that math, test assumptions, and figure out the more advanced stuff. Again, welcome and good luck with the savings!

Edited for the capital gains difference between mutual funds and equivalent ETF's
« Last Edit: April 06, 2017, 06:51:51 PM by Guide2003 »

MDM

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Re: Rookie Qs and Getting Started with Vanguard
« Reply #2 on: April 06, 2017, 07:55:44 PM »
So we just migrated my wife & my 401ks to Vanguard Roth IRAs...after two weeks of waiting they just arrived today - like $40k. Woooo!
Did you mean to increase your 2017 taxable income by $40K?

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1) We're fine with being semi-aggressive. To diversify a little, thinking of dumping all into 2 index funds: 80% in VTSAX and 20% in VTIAX. These are not ETFs (which seem more high maintenance) and we're okay letting things ride for a while. Sound okay?
Yes.  See ETFs vs mutual funds - Bogleheads.

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2) Trying to minimize our tax liability; am I going to get dinged on any gains I make here in VTSAX or VTIAX, or for the assets at Vanguard in general? We already get a pretty big tax hit since my wife is an independent contractor, so we'd like to avoid any additional liability there if possible.
Not on your own capital gains from any increase in fund share price (unless you sell), but on dividends (whether reinvested or not), capital gain distributions, etc. from stocks owned by the funds.  See Vanguard funds: distribution methodology - Bogleheads.

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3) How do I know which types of funds pay dividends? If these 2 do pay dividends, will I be prompted to get paid out at certain intervals, or will I be prompted to automatically reinvest those into the two funds?
See Guide2003's answer.

Quote
4) Thinking of contributing a few grand to each fund every month, then when we reach our goal ($1M in about 10 years), we'll just pull 4-7% out each month (tax-free since its a Roth, right?) and live off that amount. Is it really that easy?
You aren't allowed to contribute more than $5500/yr/person ($6500 if 50 or older) to a Roth IRA.

MustacheAndaHalf

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Re: Rookie Qs and Getting Started with Vanguard
« Reply #3 on: April 07, 2017, 04:12:59 AM »
So we just migrated my wife & my 401ks to Vanguard Roth IRAs...after two weeks of waiting they just arrived today - like $40k.
As MDM mentioned, this sounds like a "Roth Conversion".  If you start with a pre-tax account and move it to a post-tax account then the IRS taxes you.  Even if you had a "Roth 401(k) plan" at work, the employer match has to be pre-tax.  So you should take a closer look to see if you made a Roth Conversion and might owe $40k worth of gains at ordinary income tax rates.

If you didn't mean to do that, you need to recharacterize from a Roth IRA to a Traditional IRA.  Your 401(k) can migrate to a Traditional IRA (if both are pre-tax) without being taxed.


As to taxation on holding index funds, VTSAX has a roughly 2% dividend which is at special rates.  Most people pay only 15% tax on qualified dividends, so roughly speaking you might pay 0.3% in tax a year (plus any capital gains the fund throws off).  So if you hold $10,000 of VTSAX in a taxable account, you would expect $200 worth of qualified dividends and paying $30 worth of tax.  The fund might make some sales that trigger additional tax, but index funds are in general very tax efficient.

None of that matters for the money in a Roth IRA - dividends in there are not taxed.

gregby

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Re: Rookie Qs and Getting Started with Vanguard
« Reply #4 on: April 07, 2017, 03:33:46 PM »
Good information here, thanks everyone. So helpful!

Yes the total amount we're putting into the two Vanguard Admiral funds is $40k at this time. Probably add as much as possible into these two funds each month, however. Am I limited to rolling over $5,500 per year into my Roth from other sources; or can I add as much as I want from my checking account? Sounds like the money market account is within the IRA. Struggling with the terminology here...thanks for your patience! I guess I meant to say that we currently have our money in a Rollover IRA Brokerage account, and its all sitting in a money market fund at Vanguard.

Can I just tell Vanguard to split this money into the two stocks listed (VSTAX + VTIAX)? I feel like I need a call w/them...seems like an honest group. Are they fiduciaries?

New plan:
  • Ask Vanguard about the tax status of the funds that were rolled into the Roth. Fairly sure it was a 401k, so maybe I'll move to a traditional IRA, then gradually move $5,500 over to a Roth each year until its all totally migrated.
  • Split the $40k between the 2 funds (VTSAX 80/ VTIAX 20)
  • On a monthly basis add as much as possible from my checking account to the money market account (within the IRA) and move that around to the two funds as needed
  • Setup DRIP to reinvest dividends on both funds
  • Sit back and watch money grow, making other strategic investments in stocks & real estate
  • Continue to read MMM forums for tips...

Cannot thank you enough! Much appreciated.

MDM

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Re: Rookie Qs and Getting Started with Vanguard
« Reply #5 on: April 07, 2017, 03:54:34 PM »
Am I limited to rolling over $5,500 per year into my Roth from other sources; or can I add as much as I want from my checking account?
The limits are the opposite of what the question suggests.

See http://www.figuide.com/the-difference-between-ira-contributions-and-rollovers.html - the specific dollar amounts may differ due to the age of the article, but the difference between "contribution" and "conversion" is the important part of that article.