Author Topic: Will open a Vanguard Roth IRA account; $1k or save for $3k before starting?  (Read 6384 times)

PWGuy

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I can set aside $1,000 without much effort to start my Vanguard Roth IRA; however, $3,000, at this point, won't be as easy since I have to dip into my Emergency Fund.  I already have $160k in my 401k (age 35) but would like to get started on a Roth IRA soon.

If I start with $1,000, I was thinking a Target Retirement Fund.  Once I hit the $3,000 mark in that fund, I would call Vanguard and request a transfer to VSTMX of the total balance.  Is there a fee for this?  Then once I hit $10,000, I'd switch to VTSAX.  I plan to invest either weekly or monthly.

Thanks in advance for advice!

wtjbatman

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I can't comment on any fees, but I just wanted to point out that if you deposit money in an IRA now you can still squeeze into the 2013 contribution window. You have until April 15th. Just wanted to mention that in case it's something you didn't realize.

amha

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There's no fee to move $$$ from one Vanguard fund to another. (Theoretically, you'd have to pay taxes on any capital gains, but that's probably not much of a consideration with these amounts.)

My advice is: why not start now? Better to have $1000 working for you at Vanguard than doing nothing at the bank!

Like the above poster says, you have another week or so to make contributions for FY2013 into an IRA. That's pretty useful, since it means you could, in theory, deposit $11K into your Roth IRA this year ($5500 for FY2013 in the next week; the remaining $5500 for this year by next April 15). That's valuable! Plus, with a Roth IRA, you can always remove the principal penalty-free. So you can put your emergency fund $$$ there, and then should you ever have to use it, you'll be able to get it out (just not any gains). See:

http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/08/06/can-a-roth-ira-be-your-emergency-fund

http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html

PWGuy

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There's no fee to move $$$ from one Vanguard fund to another. (Theoretically, you'd have to pay taxes on any capital gains, but that's probably not much of a consideration with these amounts.)

My advice is: why not start now? Better to have $1000 working for you at Vanguard than doing nothing at the bank!

Like the above poster says, you have another week or so to make contributions for FY2013 into an IRA. That's pretty useful, since it means you could, in theory, deposit $11K into your Roth IRA this year ($5500 for FY2013 in the next week; the remaining $5500 for this year by next April 15). That's valuable! Plus, with a Roth IRA, you can always remove the principal penalty-free. So you can put your emergency fund $$$ there, and then should you ever have to use it, you'll be able to get it out (just not any gains). See:

http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/08/06/can-a-roth-ira-be-your-emergency-fund

http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html

I've read threads on this forum recommending people NOT put their emergency fund into an IRA.  I guess I'd like to hear Pros/Cons from multiple people first.  Obviously the risk of losing it being the biggest drawback :).

kyleaaa

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No fees to transfer between funds. You also don't have to call them: just do it online. Takes 20 seconds.

PWGuy

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No fees to transfer between funds. You also don't have to call them: just do it online. Takes 20 seconds.

Great, thanks for the info!

Workinghard

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There's no fee to move $$$ from one Vanguard fund to another. (Theoretically, you'd have to pay taxes on any capital gains, but that's probably not much of a consideration with these amounts.)

My advice is: why not start now? Better to have $1000 working for you at Vanguard than doing nothing at the bank!

Like the above poster says, you have another week or so to make contributions for FY2013 into an IRA. That's pretty useful, since it means you could, in theory, deposit $11K into your Roth IRA this year ($5500 for FY2013 in the next week; the remaining $5500 for this year by next April 15). That's valuable! Plus, with a Roth IRA, you can always remove the principal penalty-free. So you can put your emergency fund $$$ there, and then should you ever have to use it, you'll be able to get it out (just not any gains). See:

http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/08/06/can-a-roth-ira-be-your-emergency-fund

http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html

My son just did this. So happy to see him get started at age 21 and engage with Vanguard's site, checking his investment, etc. Don't forget if you go through Vanguard, depending on the fund you can convert to Admiral shares with a minimum of 10K (two Roths total 11K).

FrugalSpendthrift

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I've read threads on this forum recommending people NOT put their emergency fund into an IRA.  I guess I'd like to hear Pros/Cons from multiple people first.  Obviously the risk of losing it being the biggest drawback :).
You don't have to invest it in something risky.  You could just put it into a money market until you have built your emergency fund back up.


matchewed

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I've read threads on this forum recommending people NOT put their emergency fund into an IRA.  I guess I'd like to hear Pros/Cons from multiple people first.  Obviously the risk of losing it being the biggest drawback :).
You don't have to invest it in something risky.  You could just put it into a money market until you have built your emergency fund back up.

It's not just the risk of losing the money in a market downturn. The risk of draining your EF just to start funding an IRA is if you have an emergency. Now you have no money for that emergency.

Save up the cash if there are minimums to jump in. Starting an IRA now or starting in three months when you have the money will be meaningless in a year from now, 5 years, 10 years... etc.

Now if you have a large enough investment cushion it is by all means fine to have an EF in a Roth IRA where you can access contributions quickly and easily. As long as you are comfortable with the risk of market fluctuations.

But all this depends on how big your EF is and how it is structured.

Aghast

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I've read threads on this forum recommending people NOT put their emergency fund into an IRA.  I guess I'd like to hear Pros/Cons from multiple people first.  Obviously the risk of losing it being the biggest drawback :).
You don't have to invest it in something risky.  You could just put it into a money market until you have built your emergency fund back up.

It's not just the risk of losing the money in a market downturn. The risk of draining your EF just to start funding an IRA is if you have an emergency. Now you have no money for that emergency.

Save up the cash if there are minimums to jump in. Starting an IRA now or starting in three months when you have the money will be meaningless in a year from now, 5 years, 10 years... etc.

Now if you have a large enough investment cushion it is by all means fine to have an EF in a Roth IRA where you can access contributions quickly and easily. As long as you are comfortable with the risk of market fluctuations.

But all this depends on how big your EF is and how it is structured.

A money market fund in a Roth IRA is just as safe and accessible (There might be an extra form or two to fill out, depending on where your Roth IRA is) as a savings account at a bank.  If you have an emergency, you withdraw the money.  If you don't have an emergency, you move the funds in the Roth IRA from money market to stocks or bonds, for example, as you rebuild your EF outside of your Roth IRA.  It doesn't increase your risk at all.

Example:

$5000 emergency fund plus $1000 to invest

All $6000 goes into a Roth IRA ($5500 to 2013 and $500 to 2014) -- $5000 goes into a money market fund and $1000 into a target date fund.

Scenario 1: No emergency occurs.  Deposit $1000 into savings account outside of Roth IRA and move $1000 from money market to target date within Roth IRA.  EF remains at $5000.
Scenario 2: Emergency tuba lessons needed -- withdraw $1000 from money market - EF is down to $4000.

 

Joel

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You can only contribute $5,500 per tax year to your IRA or Roth IRA. If you can contribute the money by 4/15, it will count towards your 2013 tax year. That's worth doing if you can afford to do it.

PWGuy

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I've read threads on this forum recommending people NOT put their emergency fund into an IRA.  I guess I'd like to hear Pros/Cons from multiple people first.  Obviously the risk of losing it being the biggest drawback :).
You don't have to invest it in something risky.  You could just put it into a money market until you have built your emergency fund back up.

It's not just the risk of losing the money in a market downturn. The risk of draining your EF just to start funding an IRA is if you have an emergency. Now you have no money for that emergency.

Save up the cash if there are minimums to jump in. Starting an IRA now or starting in three months when you have the money will be meaningless in a year from now, 5 years, 10 years... etc.

Now if you have a large enough investment cushion it is by all means fine to have an EF in a Roth IRA where you can access contributions quickly and easily. As long as you are comfortable with the risk of market fluctuations.

But all this depends on how big your EF is and how it is structured.

A money market fund in a Roth IRA is just as safe and accessible (There might be an extra form or two to fill out, depending on where your Roth IRA is) as a savings account at a bank.  If you have an emergency, you withdraw the money.  If you don't have an emergency, you move the funds in the Roth IRA from money market to stocks or bonds, for example, as you rebuild your EF outside of your Roth IRA.  It doesn't increase your risk at all.

Example:

$5000 emergency fund plus $1000 to invest

All $6000 goes into a Roth IRA ($5500 to 2013 and $500 to 2014) -- $5000 goes into a money market fund and $1000 into a target date fund.

Scenario 1: No emergency occurs.  Deposit $1000 into savings account outside of Roth IRA and move $1000 from money market to target date within Roth IRA.  EF remains at $5000.
Scenario 2: Emergency tuba lessons needed -- withdraw $1000 from money market - EF is down to $4000.

I already have my EF in CapitalOne 360 savings accounts (formerly ING Direct) paying the paltry .75%.  Vanguard isn't paying more than this so forgive me for not seeing the advantage in moving from CapitalOne to the Vanguard  Prime Money Market Fund??

Aghast

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You are forgiven.  The advantage is that you get more tax-advantaged space.  Once April 15th passes, the deadline to add up to the maximum $5500 to your IRA is gone forever.  By moving your EF into a Roth IRA, it can serve as a placeholder (unless you withdraw it for an emergency)

PWGuy

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You are forgiven.  The advantage is that you get more tax-advantaged space.  Once April 15th passes, the deadline to add up to the maximum $5500 to your IRA is gone forever.  By moving your EF into a Roth IRA, it can serve as a placeholder (unless you withdraw it for an emergency)

I'm still struggling to see how this will benefit me by having $5,500 in the Rota IRA Prime Money Market and then a separate $1,000 in actual retirement savings.  I'm only realizing potential, MEANINGFUL gains with the $1,000 in funds in the retirement funds (target retirement).

wtjbatman

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You are forgiven.  The advantage is that you get more tax-advantaged space.  Once April 15th passes, the deadline to add up to the maximum $5500 to your IRA is gone forever.  By moving your EF into a Roth IRA, it can serve as a placeholder (unless you withdraw it for an emergency)

I'm still struggling to see how this will benefit me by having $5,500 in the Rota IRA Prime Money Market and then a separate $1,000 in actual retirement savings.  I'm only realizing potential, MEANINGFUL gains with the $1,000 in funds in the retirement funds (target retirement).

If you only ever keep the money in the money market fund it doesn't benefit you. However if you deposit $5500 before April 15th of this year, you are taking advantage of the limited opportunities to put money in an IRA ($5500 per year). That means that if you were to, say, save enough of an EF in the future OUTSIDE of the Roth IRA, you can then take that initial EF that you invested in the money market fund in the IRA and invest it in whatever fund you want.

The point that multiple people (including me, the first guy who replied to your thread) are trying to make is that if you haven't maxed out your IRA contributions for the year 2013, you literally only have 4 days to do it. And in almost every case it is worth it for you to do it. You said you wanted to get started on a Roth IRA as soon as possible, well if you max it out within the next few days you are guaranteeing yourself extra money in your Roth IRA for your eventual retirement. The point isn't to keep your EF in your Roth IRA forever, the point is to take part of your EF right now to fully fund that Roth IRA for 2013, then build your EF back up outside of it. In the mean time keep the EF money in your Roth in a money market fund so there's no danger of you losing money. Then, once your EF outside of the Roth is built up, move the money in the Roth from the money market fund to an actual investment fund.

jexy103

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PWGuy, reading through this thread, I kept thinking "Please let someone have told him to deposit $5,500 for 2013" and then "Please let him have said he has done it already!"

Right now today, you have the option to put up to $5,500 into a Money Market Fund within your Roth IRA. Once there, you can withdraw your contributions if an emergency happens, and the principle is safe, since it's basically a savings account within your IRA. On April 16th, you will never again be able to contribute that $5,500 for 2013- you have 4 days to deposit it.

The advantages of leaving your money where it is: slightly easier to access (no forms to fill out, just click click and transfer to primary bank account).

The advantages of moving your EF to your Roth IRA:
1) You can contribute the full $5,500 for 2013.
2) Once you replenish your (more) liquid emergency fund, you can transfer the $5,500 out of the Money Market account (within your Roth IRA) into actual investments, such as index funds (within your Roth IRA).
3) That $5,500 will now have the potential to earn your MEANINGFUL gains, which it won't in Capital One 360 savings account.
4) You can still withdraw your contributions (the $5,500 you deposit) in case you have an emergency before you have replenished your 360 account.

Please read this article: http://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund. It shows you the advantages of moving your emergency fund to your Roth IRA using clear math.

Remember to always understand what you're investing in before you invest your money in it, but also know that it is a good idea to max out your 2013 Roth IRA, if it is at all possible for you to do it. If I were in your situation, I would deposit my emergency fund in the Roth IRA Money Market Fund yesterday. It is still accessible, and it has far more earning potential in your Roth IRA than in your 360 account.

wtjbatman

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PWGuy, reading through this thread, I kept thinking "Please let someone have told him to deposit $5,500 for 2013" and then "Please let him have said he has done it already!"

First reply in this thread, actually. But he seemed to ignore that advice (or never responded to it anyway).

PWGuy

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Got it now - thanks much

blackjack

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thanx for this... I recently opened up a roth ira using the target fund date... i just hit 3k and was considering to switching to VSTMX