Index Fund Advice Needed

[Evad]

Hi all first time poster here.

I'm 22 and still in grad school, but I would like to start investing some money for the long term.

I'd like to open up a Roth IRA and put the 4k max into Vanguard 500 Index (VFINX). The only question becomes what if I do not make 4k this year?

Beyond that I want to put some money into other index funds. As far as I know these are all no-load and pretty low on the expense ratio and fee side.

They are:
Vanguard Extended Market Index (VEXMX)
Vanguard Small-Cap Index Fund Investor Shares (NAESX)
Vanguard Total International Stock Index (VGTSX)

I'm thinking about putting 4k into each of these as well. Do these four funds look good and balanced enough for me? Advice or thoughts?

[sweeps]

You can only put in the amount of your earned income or $4,000, whichever is less.

Have you considered the Target Retirement funds? They will get you exposure to all the areas you're talking about without having to worry about minimum balance requirements.

[Ima saver]

But you still have to have $3000 minimum to open a target retirement fund. I worked pt for a water company and did not know how much I was going to make a year. So, I waited until I earned $500 and put that in my IRA. Since you need a minimum of $3000 to open a fund, you might need to just put that money into savings until you earn enough to open an account for $3000.

[Evad]

So there is no minimum needed to start a Roth IRA?

I did look at the Retirement funds and I find it interesting how they rebalance over time.....perhaps I'll save that for when I get a 401k in a year?

[Evad]

Ok I got it now Ima Saver. Thanks!

I'll just make sure I clear 3k this year then. I assume I have to wait to open the IRA until after I make 3k though?

[sweeps]

Yes, there is a minimum $3,000 to open a target retirement fund. But that's a lot better than whatever the combined minimum balances of the 4 funds previously mentioned.

Note that there is a minimum $5,000 balance in your entire Roth to avoid a $10/month maintenance fee (unless you have more than $50K in total assets at Vanguard).

[Ima saver]

But you will have $5000 by year two, so paying $10.00 isn't that bad. I have my roth IRA and regular roth, both in Vanguard Index 500 fund.

[Evad]

There is no way around the $10 fee since you can't put more than 4k per year in anyhow.

Again I'm looking to invest 16-20k here so you advocate putting it all in one fund instead of the four seperate ones?

[sweeps]

How are you going to get the $20k into the Roth all at once? It's going to take you 4 years or so. If you want to be diversified during that time, the Target Retirement fund is a better choice. If you want to split it all up after the 4 years, you can -- you're not locked into the fund for life.

[WellManicuredMan]

I have my 401(k) in Vanguard Target Retirement 2045 and I'm trying to decide if I should put my $4,000 Roth money into the same fund or into VFINX (500 index). Right now it is sitting in their Prime money market fund. Decisions, decisions...

[Evad]

re-read my first post sweepsplayer....i'm going to put my max amount into the roth then i'm going to put the rest into just normal funds

[WellManicuredMan]

Originally Posted by Evad

re-read my first post sweepsplayer....i'm going to put my max amount into the roth then i'm going to put the rest into just normal funds

So you mean you're going to invest the rest (amount over $4,000) with taxable accounts?

[Evad]

Originally Posted by WellManicuredMan

So you mean you're going to invest the rest (amount over $4,000) with taxable accounts?

I guess so....thats why I am here I don't really know what to do with my money. Right now it is just sitting in a savings account not doing anything for me. I've already got a ton of CDs and bonds and stuff. Is there a way to make it non-taxable?

[WellManicuredMan]

Originally Posted by Evad

I guess so....thats why I am here I don't really know what to do with my money. Right now it is just sitting in a savings account not doing anything for me. I've already got a ton of CDs and bonds and stuff. Is there a way to make it non-taxable?

If you don't plan on needing the money for anything and you have an emergency fund already, then your only option would be taxable accounts for the extra investments you want to make. If you might need the extra money in the near future, then you may want to get a high yield online savings account that pays 5%+ to stash the extra money until you can make additional contributions to your Roth.

[sweeps]

Originally Posted by Evad

re-read my first post sweepsplayer....i'm going to put my max amount into the roth then i'm going to put the rest into just normal funds

Your first post wasn't that clear, but okay I see what you originally intended.

Again, there's no reason why you can't choose a Target Retirement fund for both your Roth IRA and your taxable account. But I think the funds you have chosen are fine, to answer your original question.

[sweeps]

Just as an off-the-wall suggestion, you may want to check into your state's 529 plan. If it supports graduate school and it offers a no-risk fund option and especially if it offers a state tax deduction for contributions, you could put money into that plan and then make qualified withdrawals (no tax, no penalty) for your grad school.

[Ima saver]

I think all of your choices are very good. I like Vanguard no load funds a lot.

[Evad]

You guys are very helpful thank you.

What exactly gets taxed? My total earnings off of the funds each year? Will this be prohibitively expensive over time?

[sweeps]

Taxation of Mutual Funds

Note that index funds tend to be more tax-friendly than managed mutual funds because they do not buy and sell their holdings nearly as often.

Might I just warn about the taxability of non-tax-exempt mutual fund investing.

The first mutual fund I opened was not tax-deferred, cause I was scared of not being able to get at my $$$.

I invested $300.00 a month for like 4 years, nothing much happened, it was right after a big run up, that I started. I stopped investing it that fund when I bought my house. Then the market started to go up and go crazy (like 1996, I would say).

Oh, look how that fund is growing. Come January, I got a 1099 in the mail that had capital gains of like $8,000. I had instructed for everything to be re-invested.

Imagine it being January, and you are going to do your taxes, and suddenly you have $8,000 of additional income. I had never owed taxes in my life let alone like $2,000. Then it happened again and again. I almost said, "Thank God for that tech bubble burst"