vanguard ira

Are you ready to start investing but don’t know how to start?

Let me tell ya, I’ve been there.

One year ago, as a complete investing beginner, I had no idea what I was looking at when I ventured onto Vanguard’s site.  I found myself getting lost very quickly, which in turn made me frustrated.  My frustration made me want to quit.

Sound familiar?

I’ve created this guide for you beginners who want to start investing but aren’t sure how to take the plunge.

Please be aware that these screenshots and directions are for the U.S. Vanguard website, so if you are a foreign investor, these won’t apply to you (sorry 🙁 )

Let’s get started!  But first, a few things…

Why Vanguard?

Vanguard is an investment company owned by its clients.  That means that the moment you create and fund your IRA, you are essentially an owner of Vanguard!

As they put it:

“Vanguard is client-owned. As a client owner, you own the funds that own Vanguard.”

Why do you care?  Vanguard charges us the cost price for the funds.  That means there’s not a mark-up to increase profits for the company.  The funds cost you what they cost Vanguard to manage them.

Vanguard’s costs (expense ratios) tend to be way less than other companies.  While some companies’ funds have an expense ratio of upwards of 1%, Vanguard’s are a fraction of that.  That can make a big difference in your earnings.

Plus many of Vanguard’s funds often outperform other industry leaders.  ‘Nuff said.

But…here’s the kicker.  All of those glorious, Vanguard low-cost index funds that I talk about, have at least a $1,000 minimum initial purchase.  My favorite fund, VTSAX (recommended by Jim Collins), has a $10,000 minimum.

But wait!  Don’t get scared yet. You do have options.

Option 1: Put aside extra savings every month until you hit $1,000.  If you save the money in an online savings account, you can at least earn a small amount of interest until you can invest it.

I use GS Bank and earn 1.20% monthly.  Sure, it’s not comparable to the 7%+ you may earn when you invest, but it’s a good temporary place for that money.

Option 2: Open a brokerage account with Vanguard and buy ETFs.  I’m not super familiar with ETFs, so I can’t tell you whether or not this is a good option.  But, if you’re interested in learning more, you can find more information here.

Option 3:  If you don’t have $1,000 to open the account, but can set up automatic transfers of at least $100 a month, you can open an IRA with Charles Schwab.

Schwab has upped their game to compete with Vanguard.  They currently have 8 funds that actually have lower expense ratios than Vanguard!  And their minimums are only $1 to invest.

I rolled over one of my old 401ks to Schwab as an experiment.  I’m withholding total judgment yet, but so far, I haven’t had any issues with Schwab. *Update* I just had a wonderful customer service experience with Schwab, where the guy offered to waive a fee before I even asked for it.  I’m impressed.

Why an IRA?

Why am I showing you how to open an IRA?  Because it’s an account that most people can have.  And it’s an account that I believe everyone who is eligible should have.

Here’s a quick breakdown of an IRA.  This is a retirement account, literally called an Individual Retirement Account.  That means that you cannot withdraw from it (without a penalty) until you are 59 1/2.  But, in exchange for keeping your money tied up for most of your life, you get a tax break, either when you initially contribute to your IRA, or when you pull it out later (more on that below).

An IRA is for anyone who currently has a job, is self-employed, or has an old employer retirement account to rollover (401(k)s, 403(b)s, 457s, etc.).

You must be earning income to contribute to an IRA.  So if you are unemployed, but opened at IRA with a rollover from your old 401(k), you cannot contribute any more money to that IRA unless you get a job or start a business.

But if you do have a job, you can contribute up to $5,500 (or as much as your taxable earnings, if they are less than that) in 2017.  If you are self-employed and have a SEP IRA, you can contribute 25% of your earnings, or $54,000, whichever is less.  Visit the IRS website to get more information on contribution limits.

Why would you want to put $5,500 of your hard-earned money into an untouchable account?  For a few reasons:

  1. You will save money for a necessary retirement nest-egg and put it in a place where you know you won’t touch it.
  2. You will get a tax break.  (more on that below)
  3. You can invest the money in your IRA.  Putting that money in the stock or bond market can get you a great return on that money.

Have I convinced you?  Let’s get started with your Vanguard account!

Opening your Vanguard account

From www.vanguard.com, click on “Open an Account” in the top right-hand corner.

Vanguard

 

It will then show you all of the account options you will have.

For the purpose of this post, I’m going to focus on IRAs.  But if you want to read more, or choose a different account, you can click the “Need help deciding?” button to learn more about each account.

If you’re on this IRA journey with me, go ahead and click “Open a new account”.

Then it will ask you how you want to fund the account.  You have three options:

-Transfer money from your bank

-Rollover from a 401k or similar employer plan

-Transfer from a financial institution (like E*trade or Fidelity)

If you have an old 401k or an account with another financial institution that you want to rollover or transfer, you would choose the applicable option here.  You can check out Vanguard.com for more information on either of these options.

But because this is a beginner’s guide, I’m going to choose to fund it through my bank, starting from the ground up.  Click “Check or transfer from my bank or another Vanguard account” and then click “Continue”.

 

Now it’s going to ask you to sign into your Vanguard.com account.  If you already have one, input your username and password and click “Continue”.

If you don’t have a sign in, no big deal.  You will create one at the end.  Click the button for “No” and click “Continue”.

 

Something else to note on the above screen…Vanguard’s helpline phone number in the top right corner.  If you have questions or get stuck on any of these steps, you can call that number and they will help you with the process.  I luckily have not had to call them yet, but I’ve heard from others that Vanguard’s customer service is amazing.  So if you need to use it, use it.

Now it’s going to give you a quick overview of what you’re in for.  Make sure you have the things under the “Things you’ll need” heading, and click “Continue”.

 

Opening your IRA

Here’s where you will designate what type of account you are opening.  Like we saw earlier, Vanguard has a bunch of accounts available to you.   We’re working on IRAs today, so we’re going to select the “Retirement” button.

 

Then it will give you two options: Roth IRA or Traditional IRA.  The main difference in these two accounts is when they are taxed.  Here are the basics:

Your contributions to a traditional IRA are not taxed going in.  You will get a deduction on your taxes after contributing your after-tax money (money from your paycheck, presumedly), wiping out the taxes on the contributions.  But, when you turn 59 1/2 and start to make withdrawals, you will have to pay tax on your withdrawals.  So no tax going in, but tax coming out.

Your contributions to a Roth IRA are taxed going in.  You do not get a deduction on your taxes.  But, when you turn 59 1/2 and start to make withdrawals, you will not pay tax on your withdrawals.  So tax going in, but no tax coming out.

Which is better?  There are heated debates on this, so you will have to decide yourself.  Here are a few good articles debating the merits of each:

Bankrate: Traditional IRA vs. Roth IRA

Investopedia: Roth vs. Traditional IRA: Which Is Right For You?

NerdWallet – Roth vs. Traditional IRA: Which Is Best for You?

I personally have a traditional IRA because I plan on retiring early and converting it to a Roth down the line.

Once you have educated yourself and selected which type of IRA you want, click “Continue”.

 

The next few screens just ask for your personal info.  *Something to note* If you ever need to transfer this account to another financial institution, or transfer another account to this account, the names must match EXACTLY or you will have to fill out a bunch of ridiculous paperwork.  So make sure your accounts across all of your investment accounts have your first, middle, and last names exactly the same.*

After you have filled out all of the personal screens, you will be ready to start adding money to your account!  You can do this through an electronic transfer from your bank, or by mailing in a check.  If you add your bank account info, you can save it as your preferred bank so you don’t have to enter all the info every time you want to move money.

After you have completed all the fields, click “Continue”.

 

Now you get to decide how much money to contribute.

Notice that it shows how much you can contribute each year?  Vanguard will keep a running total, so it’s easy to make sure that you never go over the annual contribution limit.

Enter your initial contribution amount and click “Continue”.

 

This next part can be confusing for beginner investors.  It’s asking whether you want to reinvest or transfer your dividends.

But first, what are dividends?  Dividends are like little bonuses paid to you by the companies you own stock in.  When you buy a stock or a mutual fund full of stocks, you are buying shares of stock in each of those companies, making you a shareholder of that company.  Sometimes one or more of those companies will distribute a portion of their earnings to you, the shareholders!  And now the company’s dividend becomes money in your pocket!

So back to the question…reinvest them or transfer them?  If you choose to reinvest them, you are automatically buying more stock with that dividend, which means you’re potentially increasing your present and future earnings.  If you transfer them out, they go to sit in your money market account, where you can then transfer them to your regular bank account, or leave them in the money market to grow marginal interest until you transfer the balance or buy more stock with them.

It’s up to you to choose, but I like to just have any bonuses or extra money go straight towards increasing my wealth without ever touching my hands (literally or figuratively), so I reinvest my dividends.

After you have made your choice, click “Continue”.

 

Next, you’ll review and e-sign and create your Vanguard online account, if you haven’t already done so.  After that, you will have to wait for your bank transfer to go through.  This is the part that definitely takes the longest, but it usually only takes so long the first time.  You may have to wait 7 days for the transfer to go through, and then an additional 7 days for the money to clear so you can buy your funds.  Vanguard will email you when you’re funds are ready.

Buying your fund(s)

Now for the fun part…buying your investment!  Right now, your money is just sitting in your IRA, earning tiny amounts of interest.  It may as well be in a bank, if you’re just going to leave it as is.

But you want to earn those 7% average returns, right?!  So you need to INVEST that money!

Here’s how you do it:

After your funds have cleared, you get to choose which funds you want to buy.  After you log in to your online account, it will take you to your account overview page.  Find your IRA and then click “Buy & Sell”, then “Buy Vanguard Funds”

 

That will take you to the buying and selling screen where you can buy or sell funds.  From here, you need to select where the money is going.  Click the button next to “Add another Vanguard mutual fund”.

 

If you have already researched and picked one of Vanguard’s mutual funds, you can enter the ticker symbol here.  If not, click “Select from a list of our funds”.

 

This will bring up a list of Vanguard’s mutual funds.

Here are a few things to consider when choosing a mutual fund:

  1. The higher the stock allocation (percentage of the fund), the higher the risk and return.  Stocks are good for people who are building wealth.
  2. The higher the bond allocation, the lower the risk and return.  Bonds are good for people who are wanting to keep wealth, i.e. someone who is already retired or nearing retirement.
  3. You want the lowest expense ratio (ER) possible because this is your cost.  Most of Vanguards ERs are reasonable, so you’re already on the right track.  I don’t own any funds with higher than .20% ERs, but aim to have enough to get that .04% ER.

Here are some of my personal Vanguard mutual fund picks:

Total stock market index-funds:

VTSAX ($10,000 minimum)

VTSMX ($3,000 minimum)

Total bond market index-funds:

VBTLX ($10,000 minimum)

VBFMX ($3,000 minimum)

Mix of stocks, bonds, and international:

VTINX ($1,000 minimum)

Once you’ve picked your fund, you will need to select it and tell Vanguard how much of that fund you want to buy.  For example, if you have $1,000 in your money market account, you can use all $1,000 of that to buy your new fund.

Select your new fund, add how much you want to spend, and hit “Next”.

Now it will ask where the money is coming from.  Because you had to fund your account when you set up your IRA, the money should be sitting in your money market account.

Select “From my settlement fund” and click “Continue”

 

Congrats!  You have just contributed to your very own IRA, and purchased an amazing mutual fund that will hopefully grow like crazy until it’s time for you to retire.  Well done!

I hope this took the frustration out of the investment process.  If any of your screens looked different than mine, please let me know so I can update this post.  And if you have any questions, please let me know in the comments below!

Happy investing!

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