Vanguard Roth IRA: Is It the Best Roth for You?

Retirement isn’t an easy matter for people without prior planning. As you age, you may wonder if you have done enough to your savings plans for peaceful retirement! A terrible fact is most American to-be-retirees are not saving enough and could have work harder and longer to have a decent life in retirement.

The Roth IRA offers one of the solutions to this problem. 

Why Vanguard Roth IRA? 

First, let’s talk about a traditional IRA and a Roth IRA, and you may have heard the differences: A traditional IRA is a tax-deductible plan, you can make deductions about your contributions in your tax return. A Roth IRA is not tax-deductible for contributions but tax-exempt at retirement.

Tax treatments make the principal difference for these retirement plan participants. If you choose Roth IRA, Vanguard accounts offer many benefits other institutions do not provide. 

They include low-cost funds and a wide selection of funds, and so on. Vanguard IRAs have more than 200 funds to choose from, and they are noted for offering low-cost funds in retirement plans.

Whether you are a general or annuity plan participant, you had better consult your tax or investment advisors, or retirement plan sponsors consultants as your first plan for the long-term. The nature of your retirement plan involves investment risks, tax aspects, and other life planning goals. As an investor for your retirement plan, you should talk to your close family member regarding joint plans with you like college savings or other specific life-goal settings.

Significant Benefits of a Roth IRA

Some attractive incentives are drawing people to Vanguard Roth IRAs; they are following but not least of all:

1. Low Costs

It is a truth Vanguard provides low-cost funds in the mutual fund industry. Their average fund fees are 0.1% compared to general funds of 1.5% on average. The benefits are enormous when you are talking about the snowball effects of cost savings by 1.4% expenses. One more thing to note is the low-cost policy also applies to actively managed investments and exchange-traded funds(ETF) besides index funds.

2. Wide Selection of Funds

You can benefit from the vast range of mutual funds within the Vanguard fund family. Just imagine there are more than 3,100 mutual funds for you to choose from, and more than that, costs for the exchange-traded funds are mostly commission-zero on Vanguard Roth IRAs. But you should note you may pay commission for Vanguard funds at other brokers’ accounts.

3. Tax-Free Growth

Unlike traditional IRAs, Roth IRAs grow your assets free of tax. Furthermore, as contributions belong to income after tax, they will not be subject to capital gains and dividend or income tax in the future. That will benefit plan investors and plan participants. Future tax is a strange thing. Besides helping to spiral the asset base, your family members can benefit from an inheritance gift. You should consult your estate lawyer before investing in this plan.

4. Tax-free withdrawals in Retirement

What makes investors or retirees popular is you can withdraw the money free if you meet some criteria like a 5-year rule. According to Internal Revenue Service, provided you are 59 ½ years old and own your Roth IRA for five taxable years after your first contribution, you can withdraw your money from whichever Roth IRA account there is (if any).  

5. Flexible Withdrawals

More than that, retirement plan participants can even withdraw contributions anytime without tax if certain conditions are met. That said, if people can take the money out of their Roth IRA accounts under the conditions: 1. Buying of a first home, 2. Disabled, 3. Dead, 4. Paying certain medical expenses unreimbursed or due to loss of jobs. 5. Paying children higher education expenses. 6. Paying childbirth or adoption expenses.

What are the Pitfalls of a Vanguard Roth IRA

  • Trading Costs

Though most of the trading commission for Vanguard’s funds are low to zero, you may have to pay a commission fee of up to $20 if you buy funds at other brokers other than Vanguard’s. If you intend to frequent trading of your brokerage assets in your Roth IRA account, you may incur a high cost and subsequently hurt your returns. I would suggest you use a buy-and-hold strategy to grow your investments.

  • Fund Minimums

You will find Vanguard brokerage services offers Roth IRA service, but you may be disappointed they impose a minimum investment of at least $1,000. At the same time, other brokers do not have this requirement for retirement plans. It increases the hurdle for people to open a retirement account if they want to directly invest in Vanguard’s mutual funds.

Some Powerful Vanguard Mutual Funds for Your Roth IRA 

When you think of Vanguard funds, you think of low-cost funds and a wide range of choices. However, there are three special funds you should take note of:

1. Vanguard Total Bond Market Index Fund(VBMFX)

The fund invests mainly in the US bond market. The holdings for the bonds are investment-grade and spread across different maturities. The investment goal is to provide a steady income and low volatility for fund investors. Furthermore, the tax for interest payments is also deferred in Roth IRAs.

The yield for the fund is currently 2.63%. It holds more than 8,500 funds in the portfolio with almost $200 billion in assets under management as of October 2018. More than 60% of bonds come from US Government, and the remaining go to corporate sectors of primarily finance and industries. The average maturity is 8.6 years, and the expense ratio is 0.15% low. The required minimum investment is $3,000.

2. The Vanguard Total Stock Market Index Fund(VTSMX)

As the name implies, the fund invests in the US equity market with high volatility. Major long-term investors hold heavy in their portfolios. They offer long-term growth by asset appreciation. The assets under management are more than US750 billion with well-diversified securities of 3,680. The major sectors are technology, finance, healthcare.

3. The Vanguard REIT Index Fund(VGSIX)

The investments of the fund hold real estate projects. It can diversify the risk of owning stocks and bonds. The fund buys office buildings and hotels, and malls for rental income and price appreciations. Besides, it has 31.5% of its portfolio in specialized REITs(Real Estate Investment Trust), of which 14.80% is retail REITs, and 13.5% is residential REITs.

As of Oct 2018, the fund holds 184 stocks and has 59.4 billion under asset management. The unadjusted yield is 4.16%.

Are there other options?

Except for Vanguard funds, there are alternatives available for Roth IRA investors. Through the following plan, participants can change their preferences when they change their goals. Remember to talk to your financial or retirement advisors for opinions suitable for your purposes.

  • Brokers

You can choose traditional or online brokers to open a Roth IRA. Just pay a visit to their stores or official websites for personal investors. It takes not a long time to open an account. Some advantages with a broker account are 1. They have no management fee. 2. However, you have to pay a fee similar to an expense ratio when you buy a mutual fund. 3. You may have to pay a commission whenever you buy or sell an investment though the trend is going towards zero one.

  • Robo-Advisors

A new trend: Robo-advisors help you invest! It’s also called digital advisors. You pay a fee, and a Robo-advisor picks the stocks and bonds for you. If you like things other than human advisors to manage your portfolios, you may give it a try!

  • Banks

A traditional way for people to go is to open a Roth IRA with a bank. There are some pros and cons about bank IRA. CDs( Certificate of Deposits) are offered to their clients for principal investments tools if you have an IRA with them. 

The point is if you have a mid to a long time to retire, you may miss chances for growing your nest eggs as CD yields are much lower than stocks and bonds. 

You should consider the time when planning to invest for your retirement. Though higher volatility, stocks and bonds are ideal candidates for long-term investment tools to grow your assets. 

If you are just several years into retirement, safe and low-yield CDs may be an appropriate option.

Read more: Vanguard CD Rates

Frequently Asked Questions About Roth IRAs

How do I open a Roth IRA?

Opening an IRA is quick and easy. Get some personal information ready like contact number, address, social security number. Choose your provider and select types of investment tools suitable for your unique situations. You can pay visits to providers’ websites to see their latest offers.

How much do I need to open a Vanguard Roth IRA?

Vanguard itself does not require a minimum to open an account. However, the mutual fund you intend to buy may demand a minimum. It depends on individual funds’ minimum criteria. 

Can I open a Roth IRA with Vanguard?

Yes, but you should note income limits and contribution limits are available for tax purposes. You should review the information and consult with your consultants before opening an IRA and invest.

Who has the best IRA?

Every IRA provider has its unique offers and features. Combining the factors mentioned earlier with your circumstances, you can find your suitable IRA. Remember to discuss with your advisors!

Is a Vanguard Roth IRA free?

It is up to the investment tools you plan to adopt. Investors may bear some costs like stock trading fees and mutual fund expenses. Besides, Vanguard will charge $20 for the annual subscription fee if you don’t register for an e-mail statement.

Final Words

A Vanguard Roth IRA is more than just a retirement planning tool for you as an investor. Through their wide range of fund choices and low-cost features, you can grow your asset base for different purposes like education and other life goals.

More than that, you enjoy tax-free growth and flexible treatments at withdrawals from your Roth IRA. You should remember the nature of a Roth IRA: long-term savings account and tax-efficient investments. A participant should consider the two factors in planning their financial future. 

If you make frequent trades in your IRA, you will incur higher expenses due to the selling and buying of assets. Costs related to early withdrawals and tax issues may reduce your returns in a compounding way. The best strategy is buy-and-hold for your investments. Therefore, apart from discussing it with your professionals, you need to research more finance and investment resources. 

Investoralist provides in-depth analysis and detail regarding Roth IRA and other related retirement products for readers to have a clear picture of personal financial planning. Subscribe to the newsletter for more information.  

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