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Financial Planning - Financial planning in general. (Moderated)
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Posted by Jim on March 31, 2007, 8:27 am
how does this work?
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?
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Posted by Elle on March 31, 2007, 9:01 am
> how does this work?
>
> 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?
Sure.
The notions of "account" and the "funds (or stocks, or
bonds, etc.) held in the account" are different.
> 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?
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.
> or, does one have to sell the initial index fund first in
> a separate transaction and then purchase in another
> transaction the two funds?
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.
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Posted by John A. Weeks III on March 31, 2007, 9:13 am
> 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?
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).
-john-
--
======================================================================
John A. Weeks III 952-432-2708 john@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
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Posted by Andrew Koenig on March 31, 2007, 9:14 am
> 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?
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 (www.vanguard.com) 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.
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Posted by Jim on April 1, 2007, 7:35 am
Andrew Koenig wrote:
> I'm a Vanguard customer, so I can tell you how they do it. 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.
ok, so say for example my initial maximum 4k for roth ira in vanguard mid cap
index
fund, inv
I can *not* then touch that until next year, I mean, no sell, no buy orders
until it's
time for my next 4k ?
did I understand that correctly?
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