Tuesday, February 26, 2008

Roth IRA Update

After my wonderful banking experience on Monday I decided to tackle diversifying my Roth IRA today, which is one of my goals for this year. Haha…yeah – not such a great experience, not only did I not get the advice I needed to do what I wanted to do (which I can understand not getting my way) but more importantly I didn’t get very helpful, friendly or knowledgeable people. Usually I really like Vanguard, but then I guess I’ve never had to call their call center.

Currently my Roth IRA is invested only in an S&P 500 Fund. So in theory my Roth IRA is “diversified” in domestic stock but I’d like further diversity as in more than one fund. The one problem with diversifying my Roth is that there is a minimum initial investment per fund of $3,000, unless you invest in the Vanguard Star Fund (which after reviewing this fund, I’d rather stay all in the S&P 500). I only started my Roth in 2007 so there’s only slightly more than $4k in my account.

I contacted Vanguard and talked to several people trying to find some way around this $3,000 minimum, such as using automatic deposit (which I’m currently doing) or paying a small penalty or really any solution and I was told no and given probably the same pat response that’s given to everyone “The minimum investment amount for all funds is $3,000”. Well I’d already done my research before calling and that’s not the case, there is one fund, the Star Fund, that you can invest in with a minimum of $1,000. So I’m very disappointed that that wasn’t even offered to me, not that I’d use it, but at least to prove to me the person I was talking to was at least familiar with the products offered.

Since it appears I’m not going to have any luck getting around this $3,000 minimum rule I now have a decision to make. I need to decide if I’m going move this goal to next year after my Roth has increased or if I’m going to have to dip into my other savings to fully fund my Roth at once. If I do choose to dip into savings most likely it will be my house down payment savings as I don’t want to dip into my emergency fund and my regular savings for irregular expenses (ie car maintenance) is not sufficient to cover this expenditure.

Here’s the Pro’s and Con’s of each options

Option 1 – Move Diversification Goal to Next Year
Pro: It’s the easiest and simplest option and it does not require adjusting current allocation of savings.
Con: I would have to continue investing in the S&P Fund for this year and then sell a portion to invest in a different fund, which would go against my philosophy of buying and holding.

Options 2 – Fully Fund Roth IRA for the Year at One Time
To do this I would have to dip into my down payment savings and would pay back my down payment savings by the end of this year with what would have been my monthly Roth contributions.
Pro: This would allow me to diversity this quarter and would theoretically be investing when the market is low.
Con: Loose the interest I’m currently earning towards the down payment. Investing in one lump sum means I am no longer dollar cost averaging. On top of that I would no longer have the artificial smaller paychecks with savings automatically directed to Roth savings.

What do you all think? Which option should I choose?

Author's Note: 2/27/08 Trent over at the Simple Dollar Appears to be having the same issues with Vanguard's $3,000 minimum, thought you all might want to check out his post too.


jleane said...

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"Future Millionaire" said...

I was just doing a little blog catch up reading and noticed that Trent over at the Simple dollar had a similar issue with Vanguard and their $3,000 minimum. Thought you all might want to check it out the link to the article is :http://www.thesimpledollar.com/2008/02/26/the-vanguard-catch-22/

No Debt Plan said...

Here's what we did: invested in the Vanguard Target Retirement Fund 2050. It's the furthest one out and has a 90%/10% stock/bond split. More bonds than I want, but in today's markets it is actually a good thing. Instant diversification and allows you to build up to a bigger and better portfolio.

I think it was something along the lines of 70-75% Total Stock Market Fund, and then some Euro/Pacific funds, a small portion emerging markets, and then bonds.

"Future Millionaire" said...

@ no debt plan - I always say great minds think a like, I too am invested in Vanguard Target Retirement Funds. I have my 401k invested in a Vanguard Target Retirement Fund 2045, primarily because its has a lower fee than the 2050 and for the time being its the same mix of stocks and bonds as the 2050 so there's not real difference - of course all of this will change as the years go by. I almost did the same for my Roth IRA and invest in a Vanguard Target Retirement but then I thought about diversification and if I had both of my retirement accounts (401k and Roth IRA) then I've got all my eggs in one basket. I'm also thinking my Roth IRA will allow me some opportunity, with smaller amounts of money, to invest in individual mutual funds -- but first I have to over come Vanguard's $3k minimum. Thanks for sharing how you and Mrs. No Debt invest your retirement savings.

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