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Vanguard Roth IRA: Should You Open One?

Vanguard Roth IRA, just like any other retirement savings accounts, is a tax-advantaged retirement plan. That means, a Roth IRA with Vanguard allows you to invest your money tax free. It also means that interest and dividends accumulate on a tax-deferred basis.

But should you open a Vanguard Roth IRA?

If you’re looking for safety and competitive yield, a Vanguard Roth IRA is the place for you. However, there are some situations in which you should not open one.

What is a Roth IRA?

Before we discuss whether you should open a Vanguard Roth IRA, we need to have an understanding of what a Roth IRA is.

A Roth IRA is a type of retirement account and one that is available to most people as long as they are working. That’s the primary requirement for contributing in a Roth IRA. This type of retirement plan was launched in 1998 and it is named after Senator William Roth. The earnings accumulate tax-free. After the age of 59 1/2 when you start making withdrawals, you will not pay taxes.

There is a difference between a Roth IRA and a traditional IRA. The difference is that a Roth IRA is funded after tax dollars. So, when you start withdrawing, the money is tax-free. By contrast, with a traditional IRA account, you fund it with pre-tax dollars. You get a deduction on your contribution and pay income tax when you withdraw money during retirement.

With a Vanguard Roth IRA, you are taxed once you make a contribution. But you don’t pay any taxes when you withdraw at retirement. Whereas when you make a contribution to a traditional IRA or a 401(k), you don’t pay taxes on that income initially; you pay taxes when you withdraw money in retirement.

The maximum yearly amount you can contribute as an individual in a Roth IRA, like Vanguard is $6,000 in 2021. If you’re age 50 and up, then the maximum is $7,000. However, if your adjusted gross income (AGI) is in the Roth IRA phase out range, you can make partial contribution . You cannot contribute to a Roth IRA, regardless whether you choose Vanguard or another brokerage firm, if your AGI is above $140,000 (single) or $208,000 (married).

Vanguard Roth IRA: the Benefits

Most people who max out their 401k and have money left to contribute to another retirement account stash their money in a Roth IRA.

1. Your money grows tax-free.

One of the major benefits of having a Vanguard Roth IRA account is the simple fact that the money invested within it grows tax-free.

2. You can make contributions after age 70

With a Vanguard Roth IRA account, you are not required to take money out of it at age 70, as you are with traditional IRA. You can simply leave the money in the account. You can also make contributions after age 70 if you wish to do so. This gives you the opportunity to invest tax free for a longer period of time since you are not required to withdraw money–ever.

3. All withdrawals after age 59 1/2 will be tax free

According to the Roth IRA rules, as long as you are 59 1/2 or older and have owned your account for 5 years, you can withdraw money when you wish to and you won’t pay any taxes.

4. You can withdraw in case of an emergency

It is never a good idea to withdraw money from your retirement. The reason is because by doing so, you may lose on the opportunity to earn on dividends, interests, capital gains, etc… But in case of an emergency, you can use your Roth IRA account as a savings account.

You withdraw whatever you contributed tax-free and penalty free. However, you may not withdraw your earnings. In other words, if you withdraw more than you have contributed, you will be subject to both taxes and penalties on the earnings portion of the withdrawal.

In comparison, withdrawal of your traditional IRA contributions before age 59 1/2 will result in a 10% federal penalty and regular income tax on the entire withdrawal.

Why choosing Vanguard to open your Roth IRA?

There are thousands of fund companies (such as Fidelity, Schwab, JP Morgan) where you can open a Roth IRA. Different companies have different experiences and expertise. So, it can be difficult to know which one is the best. 

Here are four main factors to consider when looking to open a Roth IRA account. 

  • The company: Is it a reputable and well-known company with a great track record?
  • Fees: Another major factor to consider in picking a fund company is its cost. Excessive fees have a negative effect on your investment return. These fees are deducted from your index fund’s balance every year. Other fees can apply as well. So always find a company with a low fee. 
  • Reasonable minimum investment: Will you be able to invest with as little as $1000?
  • Performance: Although past performance does not guarantee future performance, look for a fund company with a strong record of performing well against its competitors over the short and long term as well.

If you are an intelligent investor who has done his or her research, you will conclude that among the various fund companies out there to open a Roth IRA, Vanguard comes out on top.

Today, Vanguard is one of the World’s biggest and the best investment funds with approximately $5.6 trillion in assets.

Moreover, a Roth IRA with Vanguard makes sense because of their ability to keep their operating fees so low. Vanguard has all types of stock and bond index funds and their fees are the lowest.

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