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Vanguard Rollover IRA Review
Rollover IRAs are individual retirement accounts into which one can move a 401(k) or another similar plan, usually upon changing jobs. These are offered by most major investment companies, each of which have different perks and drawbacks.
Although most aspects of various Rollover IRAs are similar, perhaps the greatest distinguishing factor for Vanguard's IRAs are their rock-bottom fees. Most popular investment companies have expense ratios of between 0.50 and 1.00 percent, meaning if you invest $10,000 in a certain fund, you'd pay between $50 and $100 per year to the company.
Vanguard's are much lower. When you first transfer your money, it will be placed in a safe Money Market account with an expense ratio of 0.16 percent. Other popular funds such as Target Retirement funds often have similarly low expense ratios. In fact, some funds have expense ratios of less than 0.10%, 1/5th to 10th of what you might find at similar companies.
Vanguard's Rollover IRAs also offer a huge variety of different index funds, including US, international developed and emerging markets funds. They even offer titled options such as small value, large growth, and so on. Granted, other major companies like Fidelity and T. Rowe Price offer a similar array of funds, but generally have a slightly smaller selection of index funds and higher expense ratios.
For those interested in trading, Vanguard also offers ETFs, which function similarly to index funds but can be bought and
sold in real time.
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Downsides of a Vanguard Rollover IRA
The one major downside of Vanguard Rollover IRA accounts is that Vanguard has very few actively managed mutual funds. Most of Vanguard's investment options are index funds, meaning they're passively managed and mostly run by a computer which mimics the index that the fund is tracking. Some investors, however, like to have their money actively managed by a professional investor, who will buy, sell and change his portfolio as he sees fit. Active managers sometimes greatly outperform the market, but often under perform as well.
Although the more and more people are converting to index funds from mutual funds, for those who are still interested in having their money actively managed, Vanguard has fewer options than similar companies. Furthermore, for those well-versed in investing, companies like Dimensional Fund Advisers offer more options if you want to get ultra-specific with your asset allocation.
The only other notable downside of a Rollover IRA with Vanguard is that some of their funds require a certain amount of money to “buy into”. In other words, you need to have a certain amount to invest to enter certain funds. For most investors this shouldn't be a problem, since their popular Target Retirement funds can be bought into for only $1000 invested, but most specific funds require at least $3,000. This can be troublesome if you have less than $20,000 or so to invest, because you may want to buy into five or six different funds in order to diversify. Some of the funds with the lowest fees, the Admiral Class funds, require a $10,000 buy in. In truth, this isn't a huge issue though because Vanguard's fees are already much lower than other companies.
Vanguard also has a $20 annual fee for sending statements, but this can be waived by electing to receive your statements
electronically.
Unlike many online brokers, there are no promotion offers at Vanguard to open new account. This is an important downside,
since competitor incentives allow investors to create portfolio free of charge.
Is a Vanguard Rollover IRA Right for Me?
Using a Rollover IRA is ideal for two kinds of people:
1. Those leaving their current job.
2. Those looking for better investment options than are offered by their company's 401k or other retirement account.
For those leaving their current job, it usually makes sense to move into a Rollover IRA. This makes it possible to keep all the money invested without paying taxes or early withdrawal fees that come with cashing a 401k out early. You'll also likely have more options to invest your money how you see fit.
Even if you're not leaving your job, it sometimes makes sense to roll over a company retirement account into a Rollover IRA. Most companies that offer 401k offer poor or at least limited options for allocating your investments. If you're looking to lower fees or exercise more control over your asset allocation, rolling over your 401k into a Rollover IRA will let you do that.
Converting to a Rollover IRA also makes it possible to subsequently convert to a Roth IRA. The difference between a 401k or Rollover IRA and a Roth IRA is that for the first two you'll pay no taxes upfront, but pay upon withdrawal, and with the Roth you'll pay initial taxes, but pay nothing upon withdrawal. The ability to convert to a Roth IRA from your Rollover IRA makes a lot of sense if you expect to be in a higher tax bracket later in life when you begin to withdraw your funds.
If a Rollover IRA makes sense for you, Vanguard is a great option, both because of its large variety of low-cost funds, and its great customer service. It's always worth
looking into multiple companies to see what's right for you, but unless you're looking for an actively managed portfolio or seeking extremely specific asset allocation
options, Vanguard may be your best bet.
Current Vanguard promotion/bonus offer details to open new account could change at any time without notice.
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