if one opens a new roth ira account and invests it in some index fund, assuming initially 100% in that one index fund, can a second fund be added immediately? assume fidelity, t rowe price, vanguard etc. and assume a maximum contribution for that tax year opened the account. ie. 4000 for tax year 2006.
if a 2nd fund is added, does that mean the 100% is automatically allocated
50%/50% between the two funds?
or, does one have to sell the initial index fund first in a separate transaction and then purchase in another transaction the two funds?
The notions of "account" and the "funds (or stocks, or bonds, etc.) held in the account" are different.
No. You have to track what the first fund has done from the time of the first contribution to the time of the second contribution to know the percent breakdown. E.g. maybe by the time of the 2nd contribution, the first $4k (which was invested in say Fund X) has grown to $4.2k. Then you make your 2nd contribution of another $4k, buying Fund Y. The percent in Fund X will be a bit higher at 4.2/8.2.
You have to do a little arithmetic to determine how much of the 2nd contribution goes to each fund to ensure you have
50% in each fund.
Little caveat: With Fidelity and others, watch out for minimums required to be held in funds. Sometimes there is a penalty when we're talking about, say, under $10k in a fund.
Friend, you are over-thinking this one. A "roth" is just a shell around a bank or brokerage account. There is nothing more to it. When you establish a roth, you are just opening a new account. You then put money into the account, so it goes into the cash bucket. From there, you can invest the cash by buying CD's, stocks, bonds, and mutual funds, or you can leave it in the cash account and get money market rates.
So, if you open a roth and put in $2500, that $2500 goes into the cash bucket. You then give your banker or broker instructions on how to invest that money. Lets say you put $2000 into an index fund, that means your account now has $2000 in the index fund and $500 left in the cash bucket. You can then give instructions to invest that remaining $500 any way you want. You can leave it in cash, put it in another fund, or even break it up 5 ways and buy
5 different things. There are no restrictions on how you invest it as long as you buy approved investments (ie, cant buy real estate) and meet any minimums (some funds and CD's often have a minimum purchase).
I'm a Vanguard customer, so I can tell you how they do it. I imagine that the other companies are similar. I also do not guarantee that I have all the details right; if you want accurate information, you can visit their website
formatting link
and click the "Research funds and stocks" tab.
Each of their funds has a minimum initial investment. For most of their funds, it is $3,000; though it is as low as $1,000 for one of them. Some of them are $10,000 or $25,000. There is also a minimum balance, usually $500; if it falls below that, they may close out the fund.
So in principle, once you have $3,500, you can open a second fund and move $3,000 there. After that, you can allocate the money however you want, so long as you have at leas $500 in each fund. However, most funds charge a fee, typically $10/year *per fund*, if your balance in that fund is less than $10,000 and your total balance at Vanguard (including both taxable and retiremane accounts) is less than $50,000. There is an additional IRA custodial fee of $10/year for each fund account with a balance of less than $5,000.
Whenever you transfer money to Vanguard, you specify how you want it divided across your fund accounts. Once the money is there, you can move it around freely between fund accounts, subject to the minima and fees, with two other restrictions:
1) Each fund has a minimum purchase requirement per transaction, usually $100. 2) Once you have sold shares in a fund, you cannot buy shares in that same fund for 60 days via phone or web (but you can by US Mail).
So there is an incentive not to split your money across too many funds until you have built up a substantial balance.
I expect that other fund companies have policies that are similar, but not identical. I also expect that I have probably missed some details in the description above; if you care about accuracy, please visit the source.
Let's assume you opened a Roth IRA account for $4K, and put it all into the Vanguard Mid-Cap Index Fund (VIMSX).
The initial investment for this particular fund is 3K. I also believe that you can reduce your balance in a fund to as low as $500 once you've opened the account. And, of course, you can always sell *all* of your holdings in a fund, reducing the balance to zero. So once you had established this account, you could do any of the following:
1) Move the entire 4K into any other fund that has a minimum of 4K or less. (You can always reduce the balance to zero).
2) Move any amount between 1K and 3.5K into the STAR fund (VGSTX), which has a 1K minimum. You can't move less than 1K because of the 1K minimum. You can't move more than 3.5K because it would leave less than $500 in VIMSX.
3) Move between 3K and 3.5K into a fund that, like many Vanguard funds, has a 3K minimum. Again, you can't move less than 3K because of the 3K minimum. You can't move more than 3.5K because it would leave too little in VIMSX.
There is nothing about a Roth account that makes this true. Within a Roth, you are free to buy and sell as you please. Vanguard may have trading restrictions to keep you from going in and out of funds, but their restrictions will not be based on when you are eligible to put more money into a Roth. And it's unlikely that their trading restrictions would be as onerous as you describe above (only one trade per year per fund), but I haven't been a Vanguard investor in many years...
I believe that VIMSX charges $10/year if your balance falls below $10K. I don't think there are are any additional expenses for a Roth IRA: Vanguard's descriptions says that they charge an additional low-balance fee if your balance is less than $2.5K, but not for retirement accounts. The only other restriction I know of is that when you sell shares in a fund, you can't buy shares in that same fund for 60 days unless you do so by US Mail.
Yes; this is called an exchange. I don't think it incurs any extra charges or limitation beyond the 60-day limitation I mentioned earlier.
Of course, these comments are not necessarily accurate. If you want accuracy, go to vanguard.com and verify it for yourself.
Vanguard also charges $10/year for each IRA fund with less than $5K, until you have $50K invested at Vanguard. So you may not want to split your IRA too finely there.
I think they're both fine funds (and in fact I own shares in both of them, among others), but they don't cast their net as wide as the two I mentioned and I would therefore be less inclined to choose them as the first funds to open an IRA. On average, you'd probably do quite well with either one over the long term; but you'd be more likely to depart from the average than you might with a more diversified fund.
The point is that NAESX sticks exclusively to small-cap domestic companies, and VEURX is just large-cap European companies. In contrast, VTSMX covers the whole USA and VHGEX covers the whole world (albeit with more of an international bias than would make many people comfortable). So if you happen to hit a run of a few years when domestic small-cap or european large-cap underperform other asset categories, you won't be as unhappy. On the other hand, if you hit a run of a few years when those asset categories outperform the others, you might well be happier.
I'm sure you'll get lots of other opinions in this newsgroup. Ultimately, you have to make up your own mind.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.