By Stacey Ritzen, WCI Contributor
A Roth IRA can be one of the best and simplest ways to save for your retirement. This is true particularly early in your career when your pre-taxed dollars can be stretched further than they will after you enter a higher tax bracket later in life. Unlike traditional IRAs or employer-offered 401(k) plans that are funded with pre-taxed income—and are then subject to your marginal tax rate when you reach retirement age and begin making withdrawals—Roth IRA contributions that can be made to a brokerage like Vanguard are done so with income that has already been taxed.
In other words, once you invest in a Roth IRA, Uncle Sam doesn't touch that money again.
Similar to traditional IRAs, Roth IRAs do not require paying taxes on investment gains incurred, making the option a no-brainer way for people who meet the income cap criteria to save for retirement. In 2022, the Roth IRA income cap is $204,000-$214,000 for married couples filing jointly and $129,000-$144,000 for single filers or heads of households.
While not many physicians or high-income earners can participate in a Roth IRA (unless you're doing so indirectly with the Backdoor Roth), it’s a relatively simple process to enroll for those who are eligible, including residents. All you need is your name, address, and Social Security number to open an account with an online brokerage firm.
Today, we will walk through the process of opening a Roth IRA with Vanguard. In addition to being beginner-friendly, online brokerage firms such as Vanguard also tend to have lower investment fees than full-service brokerage firms, making it an easy and convenient option for investment novices.
How Much Should I Contribute to Open a Roth IRA at Vanguard?
Those who meet the income cap criteria to invest in a Roth IRA still have a yearly limit to which they can contribute—in 2022, that annual limit is $6,000 for those 49 and younger or $7,000 for those 50 or older.
If you have the means, a good rule of thumb is to put as much toward your retirement as possible. However, there are some caveats. Many financial experts say that those with a significant amount of student loans or credit card debt—both of which could have high-interest rates—are better served by paying off that debt before investing too much in IRAs or the stock market.
On the flip side, Vanguard Roth IRAs also don’t have a minimum investment requirement, with the exception of investing in mutual funds through a Roth IRA—which starts at $1,000.
More information here:
Vanguard Roth IRA Fees
Vanguard charges a standard $20 annual service fee for brokerage accounts. However, that fee can be easily waived by signing up for e-delivery service—which allows account holders to receive statements, annual privacy notices, confirmations, and fund reports electronically. Those who maintain at least $50,000 in qualifying assets are also exempt from service fees.
What Vanguard Roth IRA Funds Should I Invest in?
Those looking to open a Roth IRA with Vanguard should aim for a robust, diversified investment portfolio—which is a sophisticated way of saying “don’t put all your eggs in one basket.” A strong portfolio should include a variety of assets, such as stocks and bonds across different market sectors. Though this may sound complicated at face value, most investors can achieve this by way of a single stock index fund (for instance, VTSAX or VFIAX) and a single bond index fund (perhaps VBTLX), which are typically grouped by industry.
Dividend stock funds, such as a Standard & Poor (S&P) 500 Index, are an excellent place for anyone to start. These are essentially collections of stock in hundreds of the top US companies, including Apple, Microsoft, Amazon, Tesla, and UnitedHealth Group. Because S&P companies tend to fall in industries with mature growth and generate ample dividends, they’re a relatively safe bet for investors of any age.
On the other hand, bond index funds tend to be more conservative than dividend stock funds. As a result, they normally provide a more stable and secure investment than stocks, although they also tend to generate lower dividends.
The ratio of stocks to bonds in which an individual should invest, however, depends on both how old and how risk-averse you are. One standard rule of thumb has been to maintain a 60/40 portfolio of stocks and bonds. But for those who are in their early- or mid-career, a more aggressive stock allocation (think 80/20 or even 90/10) might be more appropriate to get you to financial independence. Those closer to retirement age may want to invest more conservatively, as there is less time to financially recover from a stock market crash or other financial disasters.
Some financial advisors tell their clients to stick to a “100 minus your age” formula. So, for example, a savvy portfolio for a 30-year-old would be 70% stocks and 30% bonds, whereas a 40-year-old is safest with a traditional 60/40 portfolio. But younger, risk-hungry investors looking to increase their portfolio diversification may want to consider options such as emerging markets or global foreign stock index funds for even more significant payoff potential.
More information here:
Roth IRA Vanguard vs. Fidelity IRA
Vanguard and Fidelity are leading names in investment management services, and both companies offer robust and convenient online services to individuals and corporations. That said, when it comes to Roth IRAs, a few distinctions set the two retirement powerhouses apart.
For starters, Fidelity has a broader range of IRA options for investors, and it has no minimum requirements for investing in index mutual funds into a Roth IRA, specifically, while Vanguard requires at least $1,000. While it’s easy enough to get around Vanguard’s annual service fees, Fidelity doesn’t require fees regardless of electronic delivery or account minimums.
Fidelity also offers a Roth IRA program for minors, while Vanguard does not. To be eligible, enrollees must be under the age of 18 and earn employment compensation. Although minors are still subject to the $6,000 annual cap, they can only contribute from their own earnings. (In other words, the check from grandma and grandpa can’t be invested into a Roth IRA unless the minor in question has earned the equivalent income in the taxable year.)
Another difference is when it comes to the respective companies' advisor-assisted, automated investing accounts. Vanguard’s Personal Advisor Services requires $50,000 to enroll and charges up to 0.3% of your balance annually. Though Fidelity’s Personalized Planning & Advice requires no minimum, it charges a slightly higher 0.5% advisory fee for managing your money.
Vanguard’s program charges overall lower fees than Fidelity, but the lack of a minimum to invest may be more attractive to those new to retirement planning who might need more hands-on service.
When it comes down to it, the difference between the two companies is pretty negligible overall, and if you already have a 401(k) plan or other retirement accounts through Vanguard, it might make more sense to have all of your funds in the same place.
Steps to Open a Roth IRA at Vanguard
If you’ve decided that opening a Roth IRA at Vanguard is the right move for your retirement planning, you can get started online by visiting the website. You’ll be asked to provide the company with basic information, including your address, phone number, Social Security number, bank account information, and employer’s contact information, if applicable.
First, the website will ask if you’re a new customer, or if you already have an account with Vanguard.
Next, you’ll be asked how you plan to fund your new account—using either your bank account or by rolling over an account from another investment account.
You’ll be asked to select which type of account you’d like to open, and for this purpose, you will select “brokerage IRAs” and then “Roth IRA.”
You’ll then be asked to complete the online application, inputting your mailing address and contact information.
After reviewing your online details for accuracy, you’ll be prompted to set up an online account, choose a username and password, answer security questions, and agree to the terms and conditions.
Next, the form will ask you to add a bank account from which you will transfer funds into your Roth IRA. You can select from a list of popular banks or search for your bank, and then you'll log in right through the Vanguard website.
After logging in, you’ll be asked which account you want to use and whether you’d like to transfer the money now or at a later time.
Should you choose to transfer now, you’ll be asked to provide a dollar amount.
On the following several pages, you’ll provide details about your employer and some final questions about your account and how you plan on using it.
After that, all that’s left to do is review your information one last time and accept Vanguard’s agreement. If everything went according to plan, you should soon receive a confirmation, and you'll be well on your way to securing a tax-efficient retirement account that could eventually make you a millionaire.
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.