Investing Your Roth IRA in Vanguard Funds – Maximize Your Retirement

Let’s review the definition of a ROTH IRA, as well as the benefits, limitations and requirements of this type of account. After doing so, we’ll explain why investing your ROTH IRA in Vanguard Funds can be so powerful.

A ROTH IRA is an individual Retirement Account. The ROTH is funded with after-tax dollars. And the contributions are not tax-deductible. But when you withdraw these funds, the money is tax-free.

A ROTH is best when you believe that your taxes will be higher in retirement than they are right now.

Who can contribute to a ROTH? In 2021, this is defined as individuals making less than $140,000 as single filers. Fore married filers, the limit is $208,000. If you make more than this, you are out of luck and Uncle Sam won’t let you open an account.

How much can you contribute to a ROTH on an annual basis? If you are younger than 50, you can contribute $6,000 a year. If you are 50 or older, you can contribute $7,000.  The contribution limits are the same for traditional and ROTH IRAs. Note that the total amount of your contributions to a ROTH IRA and a traditional IRA, if you maintain both accounts, cannot exceed $6,000 (or $7,000) per annum when combined. Contributions must be made by the tax-filers deadline, which is generally April 15 of the following year.

More of the Roth IRA Basics

Like other qualified retirement plans, the money invested in a ROTH grows tax-free. And these contributions can be made at any age, so long as the account holder has earned income. Therefore, you can maintain a ROTH IRA indefinitely; there are no required minimum distributions (RMDs) like there are with 401(k)s or traditional IRAs.

You can fund a ROTH from a variety of sources, including: regular contributions, spousal IRA contributions, transfers, rollovers, and conversions. And you must fund contributions in cash. A variety of investment options exist within a ROTH, including: mutual funds, stocks, bonds and ETFs. Note, however, that some IRA providers have an expansive list of options, while others may be more limited. And different institutions will have different fee structures for your ROTH IRA., which can greatly impact your investment returns.

If you plan on active investing, you want to utilize a no fee brokerage. This should be easy enough to identify, as the vast majority of brokerage firms offer an option for a ROTH IRA, as do most banks and investment companies.  Your risk tolerance and investment style will largely impact your choice in choosing the best ROTH IRA provider for you. I personally maintain a ROTH IRA with Interactive Brokers. In that account, I make continuous contributions, on a monthly basis, into three Vanguard Index funds. These three index funds are the 1) Vanguard Bond Total Market Index Fund (VBTLX); the 2) Vanguard Total Stock Market Index Fund; and the 3) Vanguard REIT Index Fund (VGSLX).

Top Vanguard Funds for your ROTH IRA

Vanguard funds, as many of you are well aware, tend to be low-cost or ultra-low-cost options.  Choosing the right mix of Vanguard funds to include in a retirement portfolio is challenging given the wide variety of options they offer. Here are eight of the best Vanguard funds for retirement, according to the team at The Investor Weekly.

1. Vanguard Developed Markets Index Fund (VTMGX)
2. Vanguard Core Bond Fund (VCOBX)
3. Vanguard Dividend Growth Fund (VDIGX)
4. Vanguard 500 Index Fund (VFINX)
5. Vanguard US Growth Fund (VWUSX)
6. Vanguard Explorer Fund (VEXPX)
7. Vanguard Extended Marked Index Fund (VEXMX)
8. Vanguard Balanced Index Fund (VBIAX)

Top Vanguard ETFs for your ROTH IRA

Here is a list of additional Vanguard funds that trade as ETFs that are also worthy of a long-term buy and hold investment strategy within your ROTH IRA.

1. Vanguard Total Stock Market ETF (VTI)
2. Vanguard SP 500 ETF (VOO)
3. Vanguard Russell 2000 ETF (VTWO)
4. Vanguard Midcap ETF (VO)
5. Vanguard Total Bond Market ETF (BND)

You can also invest directly in a ROTH IRA through Vanguard. The company offers more than 3,100 no-transaction-fee mutual funds and all of the exchange-traded funds on its platform are offered commission-free.

The only disadvantage to owning a ROTH IRA sponsored by Vanguard, may be the fund minimums for the average retail investor, as well as trading fees that might be incurred if you are actively trading in your portfolio. We don’t, however, recommend active trading strategies in a ROTH IRA.

Instead, we recommend picking a handful of solid investments – a mix of Index funds and ETFs – and then making regular monthly contributions across these investments, at a predetermined ratio.

Investment Costs Matter… End of Story

Every investment has a cost, and most investors don’t realize they are paying it. Investment costs might not seem all that important, but they add up, compounding along with your investment returns. In other words, you not only lose the fees you pay—you also lose all the growth that money might have had for years into the future.Why do we recommend Vanguard? The answer lies in the low fees and diversity of investment options. Smart investors realize that expenses, or rather, minimizing them at all costs, is the key to long-term returns.

Take for example, that if you invested $100,000 and made a 4% annual return, you would have $30,000 more after 20 years if you paid a 0.25% expense ratio than if you paid 1%.

Here is another example with a higher rate of return for a longer period of investment. Imagine you have $100,000 invested. If the account earned 6% annual return for the next 25 years and had no costs or fees, you’d end up with about $430,000. If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about $260,000. The 2% you paid every year would reduce your final account value by 40%. Now that 2% doesn’t sound so small anymore, does it?

In conclusion, investing your ROTH IRA in Vanguard Funds can be a great long-term option.

For more in-depth articles to help you navigate your financial journey, check our Personal Finance page out!

Disclaimer: Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.