investing in "Vanguard Mutual Funds" with Vanguard or other broker

[permitivity]

Hi,
I'm signing up for a Roth IRA with Vanguard, and they're asking me to pick which I want to invest in:
1. Vanguard Mutual Funds
2. Other stuff (stocks, bonds, non-vanguard mutual funds)


I definitely want to invest in mutual funds (I"m 25, a beginner to this). But I was wondering, if I invest in Vanguard index funds, and later I decide to move my Roth IRA to, say Fidelity, would there be more fees due to the fact that my investments are in Vanguard branded mutual fund and not some other generic mutual fund?

I just don't want to put 4K into something that locks me into a certain broker.

My thinking is that Vanguard would charge Fidelity higher fees, where as it won't charge its own customer. If my move my Roth to Fidelity, am I moving my investments (Vanguard branded index funds), or am I moving the value of my Roth over and can reinvest how ever I want to?


Thanks!

[sweeps]

No, there is no difference that I'm aware of if and when you decide to roll over. If anything I think it would cost you more if you're using Vanguard brokerage (instead of Vanguard mutual funds) because you'll be charged commissions to liquidate your investments.

[Aleta]

You would just be selling your shares and moving them to another company. There shouldn't be a difference other than you're investing in their index funds. I have their Target Retirement account and it invests in the various index funds. Check it out. You can even switch between target funds.

Something that I was surprised to learn is that you can invest in the target retirement funds without it having anything to do with IRA's, or any of those. They say that some people invest in those funds because the fees are low and you don't necessarily want to own a lot of different funds.

[Ima saver]

I have moved my ira's (before there were roths) around several times between mutual funds. There had never been a fee involved.

[permitivity]

Umm...ok, let me see if I have this right:

If I invest 4k in say Vanguard Market Index Fund, and after 5 years I decide to go to Fidelity, then am:

1. I moving my 4K's worth of Vanguard Market Funds to Fidelity? What if Fidelity doesn't sell Vanguard Market Funds?

OR

2. Moving the market worth of the Vanguard account (liquidate it), and the move the money to Fidelity to invest in something new?

Along the same lines, if I stay with Vanguard, and I have 4K invested in the made up Vanguard Market Index Fund, and I decide that's not a good place for my money anymore, can I liquidate the 4K's worth of Vanguard Market Index Funds and take that money and reinvest in Vanguard International Index Fund?

This is all with reference to the Roth IRA. I thought once you make an investment, you won't be able to sell the investment and reinvest?

Thanks for the quick replies!

Edit: Basically, if I want to take the old investment and change it, do I have to liquidate it, so I can get the money to invest in something else? When I liquidate, isn't that just like an early cash out, and would incur fees?

This is kinda dumb question, but when you say "brokerage account" - isn't all Roth IRA's brokerage accounts? Or is a brokerage account only if your Roth IRA invests in something other than a mutual fund?

[kv968]

You can move your Vanguard investments to Fidelity but you'll probably have to liquidate them and pay a brokerage fee to buy them back. I'm not completely sure on this and you should really call Fidelity and ask them their policy. Fidelity has certain funds that aren't theirs but you don't have to pay a transaction (broker) fee in order to buy. Vanguard however isn't one of those companies. You can find the "no transaction fee" funds here:

Fidelity

Some companies may charge you a fee (usually $50) to close an account with them and I'm not sure if Vanguard does that or not. I don't think they do, but again, you could get in touch with them and ask.

As far as moving money around in your IRA within the company itself, you can do that with most funds without getting charged. Some funds however such as small-cap and int'l funds may impose an early redemption fee if you sell them within a certain amount of time from purchase (usually 2-3 months). Besides that, you can move it around. Most companies, and I imagine Vanguard does this, also have a provision in place that prohibits you from selling a fund and buying back into it more than once within a certain time period (usually 90 days). This and the early redemption fee is to discourage short-term trading.

And no, not all IRA accounts are brokerage accounts. If you invest solely with the company's funds itself, a brokerage account isn't needed. If you wish to buy other funds, stocks, bonds, cd's, etc... outside of the fund family then a brokerage account is needed.

[Ima saver]

I had my ira in another mutual fund company. I just filled out a form that the vanguard company sent me and they took care of getting the money transferred out of one mutual fund company and into theirs. It was no hassel and no fees for me.

[disneysteve]

Originally Posted by permitivity

If I invest 4k in say Vanguard Market Index Fund, and after 5 years I decide to go to Fidelity, then am:

1. I moving my 4K's worth of Vanguard Market Funds to Fidelity? What if Fidelity doesn't sell Vanguard Market Funds?

OR

2. Moving the market worth of the Vanguard account (liquidate it), and the move the money to Fidelity to invest in something new?

Along the same lines, if I stay with Vanguard, and I have 4K invested in the made up Vanguard Market Index Fund, and I decide that's not a good place for my money anymore, can I liquidate the 4K's worth of Vanguard Market Index Funds and take that money and reinvest in Vanguard International Index Fund?

Regarding #1: There would be no reason or benefit to using another company or brokerage to invest in Vanguard Funds. If you want Vanguard funds, buy them in your Vanguard account.

That doesn't mean you couldn't also have a Fidelity account in which you purchase their funds. You can have as many Roth accounts as you'd like as long as you don't put a combined total of more than $4,000 in them in 2007.

Regarding #2: You could do that if you chose to. Just make sure it is done as a direct transfer from Vanguard to Fidelity. If Vanguard liquidates your Roth account and sends you a check, they will withhold 20% for taxes. You can reinvest the full amount within 60 days (I think that's the time limit) if you can come up with that 20% out of your own funds. If you don't, it is considered an early withdrawal and you get hit with taxes and penalties.

Regarding the final question above, swithing between Vanguard funds is quite simple and can be done with a few clicks on their website.

[Scanner]

This is kinda dumb question, but when you say "brokerage account" - isn't all Roth IRA's brokerage accounts? Or is a brokerage account only if your Roth IRA invests in something other than a mutual fund?

You do seem a little confused between a brokerage and a mutual fund company.

Maybe a small history lesson would be in order.

About 20 years ago, brokerage companies used to be seperate from mutual fund companies. You had Charles Schwabb, AG Edwards, PaineWebber, Merrill Lynch etc. - there, you could buy all kinds of mutual funds, most of the time loaded mutual funds that your financial advisor would steer you into in exchange for his/her advice.

Then, somewhere in there, you had deregulation. You can imagine that "no-load" companies like Vanguard, T. Rowe Price et al didn't like this very much as many people could have been steered away from their product, which by and large, would have only be available retail (by mail back then). The mutual fund companies themselves (in this case, Vanguard) decided to get into "brokering" themselves, whether that was "discount brokering" or "full service brokering." They cut deals with other mutual fund companies in exchange for being able to offer them to you.

For instance, I know American Century is about the only no-load mutual fund company that offers a "Zero Coupon Bond Fund." Maybe Vanguard execs. don't want to get into doing that and administering that since they don't particulary have a reputation for it, so they just take a visit over to Am. Century and cut a deal. Beisides, Vanguard investors may only need a fund like that to "dump it somewhere" for awhile while they await a life event such a college education arriving.

You may ask, what does Vanguard get out of selling an Am. Century Fund?

Well, 2 things:

1. A commission. What do you think? They are some kind of Good Sagibitarians?

2. Customer appreciation. You as a customer will like Vanguard better for offering more choice when you need it. They are banking on the fact you won't mind the small commission that is probably negotiated into the management fee anyway.

Brokering is really only selling - discount brokeriing is selling you a regulated product (a mutual fund) without advice - full service brokering is selling to you after they have decided what you needed.

A "Roth IRA" has nothing to do with brokering or even mutual funds.

It's just a type of account.

I could form a "Silver Trust" at a silver trust co. and own silver bullion for my IRA, I could buy a silver ETF for my IRA, I could buy mutual funds that invest in various mining companies or I could even buy stock in siliver mining companies itself under the umbrella of an IRA.

I use this example because it quickly comes to mind - about 1/2 of my Roth is in a silver ETF at this time at Scottrade (a brokerage).

Or I could do any of the above without the umbrella of an IRA.

When you open an IRA, it is sort of a declaration of sorts - there before the Grace of Uncle Sam, you are vowing that this money be used for retirement and retirement only lest you incur the wrath of Uncle Sam's brother, the IRS.

I hope this clarifies matters - you would think with the education out there that only "mutual funds" are availabe for investing for retirement but that simply isn't true. It's just the most common.

[Scanner]

You know, I was thinking - I probably made this too complicated.

I am going to refer to a movie before your time - in the 1980's starring Dan Akroyd and Eddie Murphy called Trading Places.

In this movie, Eddie Murphy is a street-wise bum making a living doing "marginal" activities in the street. Dan Akroyd plays a man working on high stress Wall Street trying to live the Jonzez life in surburban NY or NJ, I forget. He's got it all - a house, demanding wife, nice car and a plush job on Wall Street.

One day, these 2 very rich, prototypical older conservative white men place a bet (I think while taking a wiz in the bathroom) for $1.00 - that they can switch the places of Dan A. and Eddie Murphy - rags to riches and riches to rags.

Anyway, they approach Eddie Murphy, who is the prototypical (maybe sterotypical) urban back man to work as a Commodity Broker.

At first, he says, "No, I could never do that. I'm not sure I would understand such things."

They say, "Sure, it's easy. . .a commodity is just a thing, like grain, oil, water. When the price goes up. . .you make money. When the price goes down. . .you make money. Get it?"

Eddie Murphy looks at both of them suspiciously and in urban twang says,

"You guys sound like a couple of bookies to me."

The two older conservative white men look at each other as if wow, they really got their work cut out for them and say,

"He gets it!!!!"

And that's all brokering really is - sorry if I made it complicated. Vanguard just wants to be your bookie as well as your mutual fund manager.

[Scanner]

To continue the lesson - if a broker is a bookie, what is a mutual fund manager?

Well. . .he or she is like a paid snoop, one you pay millions to do some snooping.

You see, up on Wall Street, there are all kinds of insider deals going on, after hours trading, back room deals, paying off poltiicains for knowledge of industry regulations, etc.

It's the mutual fund manager's job to do as much snooping as he/she can to get the insider information on your stocks - when to buy, when to dump something. He or she gets you on the inside, or is supposed to.

The one's who usually make the covers of the magazines are the best at this stuff and score big in a year. Then Kiplingers or Forbes reporters come out and do a story on them and why they are so successful and stuff.

The other option is not go with a snoop and just let a computer pick the stocks for you - that's called indexing. Sometimes that works well, sometimes it doesn't - I think especially international you need to have somebody snooping out things.

You stick with me and I'll have you up to snuff in no time.

[MonkeyMama]

Originally Posted by disneysteve

Regarding #2: You could do that if you chose to. Just make sure it is done as a direct transfer from Vanguard to Fidelity. If Vanguard liquidates your Roth account and sends you a check, they will withhold 20% for taxes. You can reinvest the full amount within 60 days (I think that's the time limit) if you can come up with that 20% out of your own funds. If you don't, it is considered an early withdrawal and you get hit with taxes and penalties.

Whoa, the 60 day rule is true but not the tax thing. There is no tax withholding requirement if you take a check and redeposit the money yourself. & in general if you are just rolling over an IRA it would be really dumb to withhold taxes - the taxes withheld would be considered an early distribution subject to taxes and penalties.

Of course I just moved some money around last year and as a tax accountant I know all this. I was really surprised all the forms asked if you wanted to withhold taxes, but did not explain any of the ramifications (that it was considered an early withdrawal). Since I knew better I just paid the taxes in myself separately - since I did some ROTH conversions. Nothing you should have to worry about thought moving from one traditional IRA to another, or one ROTH to another. IT's just a rollover with no taxes.

A direct transfer is certainly easier though and less stress to make the 60-day rule if something gets lost in the mail or goes wrong.

I have never moved money out of Vanguard or Fidelity but have been charged fees to move IRAs out of other borkerages. Whether it is a direct transfer to a new institution or a check to you to re-invest in 60 days, I thought most places charge you a fee when you liquidate. Maybe Vanguard is a little better about not charging. ?

[yellow heel]

Can't the OP open a Roth IRA account at any of the discount brokerage such as scottrace, etrade, tdameritrade and invest in any mutual fund that are availabe through the brokerage?

[kv968]

Originally Posted by yellow heel

Can't the OP open a Roth IRA account at any of the discount brokerage such as scottrace, etrade, tdameritrade and invest in any mutual fund that are availabe through the brokerage?

You could do that, but purchasing funds from Vanguard, T Rowe and Fidelity are mostly going to incur a transaction (commission) charge. The brokerages offer "No Transaction Fee" funds but rarely, if at all, are the big fund families such as the above included in that list.

My advice would to be decide which company (T Rowe, Vanguard, etc...) has the most funds that you feel would fit your needs and go with them. If there is another fund out there you would like to invest in that isn't their's and you would like to keep all your investments in the same account, you could always use their brokerage system and buy it that way. In the meantime, you're buying most, if not all, of your funds from the fund company itself saving all those commission charges.

Scanner, you're the best.






but for the record, it was Philly and a plush job at a commodities broker


Aykroyd in the pawn shop trying to sell his watch

Look, it tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad!


In Philadelphia, it's worth fifty bucks.

truly one of the great comedies of the cinema





back to the point



the large mutual fund companies will work with you to easily facilitate a transfer if one is so desired.


when I left Fidelity last year to move back to Vanguard, it was practically painless.

I say practically because there was some actual mailing of forms, I couldn't do it all electronically.

[disneysteve]

Originally Posted by MonkeyMama

Whoa, the 60 day rule is true but not the tax thing. There is no tax withholding requirement if you take a check and redeposit the money yourself. & in general if you are just rolling over an IRA it would be really dumb to withhold taxes - the taxes withheld would be considered an early distribution subject to taxes and penalties.

I don't mean to doubt your professional expertise but this goes against everything I've ever read (and my own personal experience). If you do a trustee to trustee transfer, such as rolling over a 401K to an IRA, there is no problem. But if the current trustee sends the check made out to you, they withhold 20%. You then have 60 days to reinvest the money and you can invest 100% of the amount if you can come up with the 20% that got withheld.

Here is one article from Money magazine that addresses this. It was actually the cover story:The Money Move You Must Get Right - April 1, 2006 Read the last paragraph.

Here is the same info from The Motley Fool: Fool.com: IRA Rollovers vs. Transfers - Part III They also reference the "mandatory 20% withholding rule."

And here is the info page from Fidelity that also explains it:Have questions about a Rollover IRA? Check out Fidelity's frequently asked questions.

And from Vanguard:https://flagship.vanguard.com/VGApp/...IRAContent.jsp

[MonkeyMama]

Originally Posted by disneysteve

I don't mean to doubt your professional expertise but this goes against everything I've ever read (and my own personal experience). If you do a trustee to trustee transfer, such as rolling over a 401K to an IRA, there is no problem. But if the current trustee sends the check made out to you, they withhold 20%. You then have 60 days to reinvest the money and you can invest 100% of the amount if you can come up with the 20% that got withheld.

Here is one article from Money magazine that addresses this. It was actually the cover story:The Money Move You Must Get Right - April 1, 2006 Read the last paragraph.

Here is the same info from The Motley Fool: Fool.com: IRA Rollovers vs. Transfers - Part III They also reference the "mandatory 20% withholding rule."

And here is the info page from Fidelity that also explains it:Have questions about a Rollover IRA? Check out Fidelity's frequently asked questions.

And from Vanguard:https://flagship.vanguard.com/VGApp/...IRAContent.jsp

This is when it comes to rolling out from an employer plan.

I just took money out of 2 different IRAs last year, checks made directly to me, and had nothing withheld. I had 60 days to move it.

Seeing all the confusion around here I did some research yesterday and was thinking of doing an article on the subject. Frankly I gave up, too confusing. It depends on the type of plan, your state, and broker.

Moving money from a 401k (or employer plan) to an IRA is often called a "rollover IRA" and yes I see where that 20% rule then comes to play - I had not heard of that before. I now see the IRS requires automatic 20% when you withdraw money, none when you direct transfer.

If you withdraw any money from a regular IRA and you take a check the standard is 10% automatic if you don't indicate. But you can ask to have none or more withheld. The confusion is you can rollover IRAs to other IRAS but technically a "rollover IRA" is from an employer plan.

If your experience was 20% could be your state rules or just your broker. You can always ask if you can withhold more or less, or none, if it is an IRA.

ROTHs have none withheld automatically. Though if it is an early distribution frankly you may need to withhold a small amount (taxed on earnings, maybe penalty).

[MonkeyMama]

Since this discussion is about a ROTH, none of this really matters. Sorry for the sidetrack permitivity. You can move it however you want when you are ready - there would be no tax withholding - direct transfer sounds rather easy though - so you don't drop the ball on the 60 day thing.