Roth IRAs and a nod to Vanguard Funds
by Josh Staiger
Over the years, I've been contributing to a Roth IRA a few thousand dollars at a time. Thus far, my account has resided with Ohio Savings Bank, simply because this was a convenient place start five years ago. I started out with a certificate of deposit (CD), but at some point the CD expired, and my money was rolled into a plain old savings account making interest in the low single digits. At the time I told myself that I didn't want to open another CD because I was planning to invest the money in something more substantial, such as a mutual fund, "real soon now". That was over a year and a half ago.
Of course, this is silly. The whole point of a Roth IRA is that you put money away, and although you can't touch your gains until age 59 1/2, the government can't touch them either. The higher the returns on your money, the more you are potentially saving in taxes. By having kept my money in a savings account earning bollocks in interest for over a year, I've thrown away thousands and thousands of dollars in potential tax savings over time. This is not a good idea.
For the past few weeks I've been been researching brokerages and fund companies that would allow me to invest in mutual funds. A handful of publications offer ratings of discount brokerages, but it seems that these are either generated randomly or there are other factors (kick-backs?) at play because I see little consistency amongst the opinions of different publications.
Around this time, it hit me that Philip Greenspun had written an essay entitled Money, Money, Money. In Money, Money, Money, Philip speaks highly of Vanguard funds, as do many of his commentators. This prompted me to surf over to vanguard.com.
I had a look at their fee structure decided that I can avoid maintenance fees if I play my cards right. Their fund expense ratios look good. Looks like a good fit.
Vanguard's online Roth IRA transfer application is mostly straightforward, but at one point I got stuck and had a question. This is how this works:
I call 1-800-414-1321. Zero hold time! I'm connected to retirement specialist Brian. Brian answers my question and proceeds to ask if I understand Vanguard's fee structure. This is impressive because fees are one of the most confusing parts about financial accounts. At this point in my life I've come to expect vague statements about fees to be tucked away in obscure portions of the online documentation, and even after finding those I'm suspicious that something in the fine print is going to screw me.
I explain to Brian that I'm planning to invest all my money into one fund (the Total Stock Market Index Fund). Brian confirms my understanding that my total balance in this one fund will give me an exemption from any maintenance fees, and that the fund has no front-end or back-end costs. I thank Brian and hang up.
Before submitting the application I called Vanguard two more times to confirm a few things. Each time zero hold time, and each time the rep was very knowledgeable, spoke crisp English, and it didn't sound like he was working in the midst of a cocktail party.
After completing my Roth transfer application, I decided to transfer some additional money to Vanguard and open a general investing account in addition to my Roth IRA.
Vanguard has some nice features such as automatic investments where money is periodically drawn from your bank account and invested in a fund. This gives you the benefit of dollar cost averaging, and also forces you to be disciplined about your savings. The nice thing about investing in no-load mutual funds is that you can make a lot of small (few hundred dollar) transactions like this per year without getting reamed by commission fees.
Thus far I like Vanguard for mutual fund investments. We'll see what the future holds.
By the way, if you're thinking about investing in any capacity, I highly recommend that you take a stroll down to your local art house movie theater and see Enron: The Smartest Guys in the Room in order to build up your mistrust of corporate America and investment bankers before you give them your money. Jeff has a good review.