I can't figure out what I did and the Vanguard reps I called aren't explaining in a way I can understand. Maybe someone here can help.
I had my IRA in Waddell & Reed Ivy Funds and made the switch to Vanguard last year. After everything was settled, I noticed that there was ~$3400 in the Vanguard Traditional IRA account that was marked as "Vanguard Federal Money Market Fund (Settlement fund)". I didn't understand why that didn't just go into one of the Ivy funds (yes, I know I need to get those moved to something else; that's another question I have for another thread) so I called Vanguard and asked about it. Basically my understanding of the conversation was that I could use that settlement amount to contribute to my IRA as part of my $5500 for the 2018 year (I may have misunderstood). I assumed that it would be part of my annual limit of $5500, so my plan was to contribute that amount to a Vanguard Fund (I chose the Vanguard Target Retirement 2035 Fund Investor Shares ). That's all fine and good, but now I see that it didn't count towards my $5500 I have $0 contributed for 2018.
So what happened? Where did that $3400 come from in the IRA transfer and what did I actually do with it? Was that $3400 Settlement account really already part of my IRA and I just transferred it over to something else? Or was it cash that I could have contributed for 2018 and I did it wrong? Did I create some kind of taxable event by doing whatever it is I really did? I'm so confused and reading the Vanguard site is just confusing me more.
Help? Thanks!
Thanks.
I don't know why you have $3400 in the Vanguard money market fund.
@Cromacster giave two reasonable ideas. One way to figure it out is to look at your last W&R statement and your first Vanguard statement and match things up until you find a $3400 discrepancy.
The money market fund is inside and a part of your IRA. You can think of it as a savings account with $3400 in cash in it. It doesn't count towards your contribution limit for this year because it was already in your IRA.
It sounds like you used the $3400 inside your IRA to purchase shares of a Vanguard target date fund. This did not create a taxable event. Purchases and sales inside IRAs do not create taxable events.
You can still contribute, assuming you have enough earned income and are not over the IRS income limits, $5500 to your IRA for 2018. You have until the tax filing deadline (~4/15/19) to contribute.
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What
@wenchsenior wrote is misleading.
Contributing to an IRA simply means moving money from outside the IRA into the IRA. Once the money is inside the IRA, it can be used to
purchase investments inside the IRA. You have made an IRA contribution (and can take the associated tax deduction and credit, if applicable) even if you don't purchase an investment inside the IRA. You do, most likely, want to invest the money inside the IRA, of course - but from an IRS point of view, the contribution is only moving the money into the IRA, not what you do with it once it's in there.
Also, I have been able to do all of this in one step from the Vanguard website many times - I can go into my IRA, say I want to make a contribution for 2018, I want to buy such-and-such mutual fund, and I want the money to come from my checking account or savings account at another bank. It's all done in one step, not the two steps
@wenchsenior describes. (Vanguard does have two different styles of accounts and it could work differently for that reason.)
Finally, if you're not sure what you're doing and are confused, I would do whatever it takes to learn and be confident of what you're doing before you do it. So far it seems like you haven't made any serious errors, but if you keep going the way you're going, it's quite possible that you'll make a mistake that could cost you thousands in taxes and penalties, or not achieving FIRE when you want. Asking questions until you get it is a good approach, but do it before you take action, not after - some things can't be undone, and some things have time limits or deadlines.