Vanguard Roth IRA review
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- No management fees & low fund fees
- Wide range of investment options
- Research and planning tools to guide you
Vanguard is one of the world’s largest investment companies. It offers various investment products and services, including investment accounts, such as taxable brokerage accounts, 529 college savings plans, and retirement accounts (e.g. Roth IRAs), funds, such as mutual funds and exchange-traded funds (ETFs), and financial advisory services.
Vanguard has been around for 45 years, has more than 30 million investors in about 170 countries, and is managing $5.6 trillion in customer assets as of August 2019.
What are the benefits of Vanguard’s Roth IRAs?
No management fees
Vanguard does not charge a fee to open and invest in a Roth IRA. It also doesn’t charge a commission or fee for most online trades. Its free service is for the self-directed service.
If you’re interested in more support, Vanguard also offers an advisory service called Vanguard Personal Advisor Services® for a fee with a minimum investment of $50,000. Through the service, you’ll be connected to a personal advisor who’ll build a custom financial plan for you, work with you to execute that plan, and review your portfolio quarterly and rebalance if needed. You may connect with your advisor via phone, email, or video. The service’s annual fee is 0.30% of the assets that Vanguard manages for you. So, for an investment of $50,000, the fee is $150 per year.
Low fund fees
Vanguard is not a publicly-traded company and therefore not owned by outside shareholders. Instead, the company is owned by its funds, which in turn are owned by investors of those funds. According to Vanguard, because of this structure, it’s able to keep fund expenses (i.e. costs to clients) low; the average fund fee (aka expense ratio) for Vanguard mutual funds and ETFs is 83% less than the industry average. As of December 31, 2018, Vanguard's average fund fee is 0.10% while the industry’s average mutual fund and ETF fund fee is 0.58%. Latest data is available here.
Customize your own portfolios with a wide range of investments
When you open a Roth IRA with Vanguard, you may decide what you want to invest in—whether that’s in stocks, bonds, ETFs, mutual funds, or CDs. You have the flexibility to customize your portfolio and there is a lot to choose from. Vanguard has also created its own mutual funds and ETFs that you could choose from. As of February 2020, Vanguard offers 130 mutual funds and 74 ETFs. You could also invest in funds from other companies through Vanguard. More information about Vanguard’s funds is below.
Robust research and planning tools to guide you
Vanguard provides many tools to help you navigate your investing process. It has a tool to help you determine how much income you need in retirement and a tool that estimates how long your current retirement savings will last and projects out how big your savings could be. It also has various research tools to help you determine what investments might be best for you. For example, it has screener tools for ETFs and mutual funds that allow you to search and compare funds by themes or some other criteria. It also has an investor questionnaire that you could fill out and get a suggestion for an asset allocation. Note: These tools are available without needing to invest with Vanguard.
Who is Vanguard good for?
- Investors looking for the some of the lowest fund rates available
- Investors that don’t want to pay a management fee or one based on AUM
- Investors that want to have access to a wide range of investments to choose from
- Self-directed, hands-on investors that want to pick and manage their own investments
Who is Vanguard not for?
- Investors that don’t want to determine on their own what to invest in
- Hands-off investors looking for active management of their accounts (Note: you could consider their advisory service that comes with a 0.30% management fee and require a $50,000 minimum investment.)
- Investors looking to see all of their investments, including those held outside of Vanguard, in one place
Drilling into Vanguard’s fees
Vanguard offers Roth IRAs for free. There is a $20 fee for a Roth IRA account if your investment is under $10,000, but you could get this fee waived by signing up for electronic delivery of documents (e.g. statements, confirmations, etc.). Its free service doesn’t come with any advisory support. If you are interested in advisory services, Vanguard offers a service called Vanguard Personal Advisor Services®.
If you decide to invest in ETFs and/or mutual funds, they generally come with fund fees (aka expense ratios). These fees are for managing a fund. These management fees vary depending on the fund and is a percentage of your investments. For example, for a $1,000 investment, a 0.15% fund fee is $1.50. The fees are automatically deducted by the fund. Vanguard’s fund fees are one of the lowest available. Vanguard's average fund fee is 0.10% while the industry’s average mutual fund and ETF fund fee is 0.58%. This means Vanguard’s average fund fee is 83% less than the industry average.
Trading ETFs, mutual funds, and stocks online are free. Trading Vanguard ETFs and mutual funds are also free by phone. For those with assets under $500,000, ETF and stock trades by phone cost $25 per trade and mutual fund trades by phone are $50 per trade. New-issue CDs, U.S. government agency securities, and corporate bonds may be traded for free. For these investments in secondary markets, the cost is $1 per $1,000 face amount with a maximum of $250. U.S. Treasury securities may be traded for free.
Account transfer and withdrawal fees
Vanguard does not charge a fee for incoming or outgoing transfers or for withdrawals. Note: some companies might charge for outgoing transfers, so you could get charged for transferring your account to Vanguard. Consider confirming this so you know what to expect in fees.
What goes into a portfolio?
You decide what goes into your portfolio through Vanguard. You could choose from individual stocks, bonds, US treasuries, mutual funds, ETFs, and CDs. Vanguard offers 130 mutual funds that you could invest in. Note that certain funds have investment minimums. The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR Fund is $1,000. The minimum investment for most other funds is $3,000. For exchange-traded funds (ETFs), the minimum initial investment is the price of 1 share. Minimum investments for each fund are provided in each fund profile available on the Vanguard site.
For your Roth IRA, if you don't want to research which funds might fit your retirement needs and do the ongoing work necessary to maintain your portfolio, you might want to consider a Vanguard Target Retirement Fund. These funds are designed around your anticipated year of retirement and are managed by Vanguard fund managers. Their asset allocations are automatically adjusted over time as you get closer to your retirement age, and your portfolio is automatically rebalanced to ensure that the portfolio make-up doesn’t shift too much from its original design as the market changes.
Since these funds are actively managed, they might have higher expense ratios (fund fees) compared to other Vanguard funds. According to Vanguard they are generally still lower than the fees charged by other funds that have similar holdings. For example, the Vanguard Target Retirement 2050 Fund (for those anticipating to retire in the year 2050) and Vanguard Target Retirement 2060 Fund both have a 0.15% expense ratio, which is 67% lower than the average expense ratio of funds with similar holdings.
How easy is it to do things at Vanguard?
Opening a Vanguard Roth IRA account
You may open a Vanguard Roth IRA by opening an account directly or by transferring or rolling over an IRA or 401(k) or 403(b) held at another institution or former employer. All of these processes maybe be done online. To open an account or complete the transfer, you’ll be asked to provide personal information like social security number, date of birth, and mailing address. These questions are standard required information for setting up investment accounts. The information is used for regulatory reporting and for investment qualifications.
Buying and selling investments
Once you have a Roth IRA with Vanguard, you could trade individual stocks, mutual funds, ETFs, bonds, and CDs online by logging into your Vanguard account.
You may trade stocks from 9:30 a.m. to 4 p.m. ET. Vanguard also supports trading during “extended-hour sessions”, which is from 4:15 p.m. to 6:30 p.m. ET. Executions during these sessions aren’t guaranteed; if a trade doesn't execute, the order is automatically canceled at the end of the session.
Mutual funds are executed once a day after the market closes at 4 p.m. ET. If you buy or sell shares of a mutual fund, your trade will be executed at the next available share price for the fund, or net asset value (NAV), which is calculated after the market closes and typically posted by 6 p.m. ET. This is the standard process for all mutual funds and not just those traded through Vanguard.
Withdrawing or distributing from a Vanguard Roth IRA
Withdrawing from a Roth IRA is called a distribution. You could start a Roth IRA distribution online at Vanguard. There isn’t a fee for electronic bank transfers to a bank you link to your Vanguard account. Withdrawals through electronic bank transfers typically take 2-3 business days. If the bank you want to transfer into isn’t linked to your Vanguard account, then you could link one online; however, a withdrawal to a new bank can take 7-10 days. You could ask for a wire transfer as well for a $10 fee per wire. Note: withdrawing from a Roth IRA could have tax implications, such as a penalty for when you take money out of your Roth IRA early. See IRS distribution rules and consult a tax advisor if you have questions.
Converting a Traditional IRA to a Roth IRA
To convert a Traditional IRA held at another company to a Vanguard Roth IRA, you’ll first have to transfer that Traditional IRA over to Vanguard. Once the transfer is complete, then, you may convert your Traditional IRA to a Roth IRA online. You'll get a more accurate estimate when you start your transfer online. The online process will have instructions to follow as you go through each of the steps. Note: there may be tax implications for converting your IRA. Do consult a tax advisor if you have questions.
How is your Roth IRA protected at Vanguard?
If Vanguard must liquidate its assets, your Roth IRA investments are insured by the Securities Investor Protection Corporation (SIPC). Each “separate capacity” account is protected up to $500,000 with a limit of $250,000 for uninvested cash. For more details on what’s a “separate capacity” account, visit the SIPC site. The SIPC is a U.S. government creation but not an agency of the U.S. and insures all brokerage accounts up to $500,000. SIPC is funded by all of its member broker/dealers. In some cases, it also protects against unauthorized trading or theft in the account. Market losses and promises of investment performance are not covered.
Vanguard is registered with the Securities and Exchange Commission (SEC), an independent agency of the United States federal government that enforces and proposes federal securities laws and rules and regulate the securities industry. It’s also a member of the Financial Industry Regulatory Authority (FINRA), an independent non-governmental organization that writes and enforces rules that control registered brokers and broker-dealer firms in the United States.