One of the things I realized recently that I’ve been spending more than I have to on fees inside of my IRA accounts. While Vanguard funds are low fee to begin with, did you know that Admiral funds (which require $10k minimum investment per fund vs $3k) still have significantly lower fees?
Fees can significantly eat away at your investments, especially over time in your retirement accounts. I know for a fact my old 401k that I haven’t rolled over is wasting money with some of its funds at .90% fees or higher! I’m holding off on rolling that over in the case I will do a Roth IRA conversion if/when I go to grad school on about $100k of other IRA investments, but for all my other accounts I want to be as fee-efficient as possible.
Expense Fees Add Up Fast!
Here’s a little experiment… (try your own out in this expense ratio calculator) say I invest 100,000 today and plan to keep that money invested for 30 years. I earn an average of 10% each of those 30 years (woohoo.)
If my fund has a low .10% expense ratio then I’ll see a 2.96% reduction of my future value due to fees (costing $51,596.) This sounds like a lot, but it really isn’t compared to the cost of most funds.
Say you have a still relatively low-cost fund at .20% expense ratio. You are then spending 5.83% of your future value on fees ($101,716!)
Some funds have high expense ratios too. If you are investing in a fund that has an expense ratio of .80%, 21.51% of your future value is gone thanks to this fee ($373645.77!!) So you see how a little expense ratio can quickly add up.
After reading a bit more about taxes and what funds to hold in Roth IRAs vs traditional IRAs I decided to shift around funds in my Vanguard accounts. I also changed things up over at Sharebuilder because my $10500 basis Roth over there is significantly underperforming, but I’ll cover those changes in another post.
Also, I read that high-dividend funds make sense in your Roth IRA but not in your traditional IRA. Why? Because dividends have two purposes — to provide you income today at low(ish) capital gains tax rates, or to compound over time in your investments and to be taken out tax free upon retirement (in a Roth.) Going high dividend in a traditional IRA is silly because you have to pay income tax on it when you retire and take it out — i.e. those proceeds would be cheaper today in a taxable account!
Until today, my Vanguard IRA accounts looked like this:
VDAIX / .20%
VHDYX / .19%
VGSIX / .24%
VTTSX / .18%
VGTSX / .22%
VFIFX / .18%
VTSAX / .05%
Updates to my Portfolio
While there was nothing wrong with this breakdown, per se, I had high-dividend REIT and dividend growth funds in my traditional IRA while I had index growth funds in my Roth. I also had certain funds split between my Roth and Traditional IRA where because I had $10k split between two accounts I couldn’t qualify for the lower admiral fund rates.
Luckily at Vanguard it’s free to trade your funds inside your account, so rebalancing is easy (unlike at Sharebuilder where I’m wasting tons of money trading and will eventually give in and just move my “fun money” to Vanguard.)
I made quite a few (free) trades at Vanguard to fix my portfolio. Here is what I have now, which, as you can see is greatly simplified:
VIGAX / growth index fund admiral shares .09% expense
VTIAX / admiral version of VGTSX — .14% expense vs .22%
VDADZ / dividend appreciation index fund — .10% expense ratio
VGSLX / admiral REIT fund — .10% expense to .24% of VGSIX
I also killed off all of my “target retirement date” funds because I’ve read they are too conservative and at my ripe young age of 30 I want to be aggressive but not stupid (working on the not stupid part.)
Why keep my Sharebuilder account open at all?
Good question! Mostly I keep it open so I can trade precious metals in my Roth IRA (i.e. GLD) since they are taxed at a collectible rate (high tax) unless they’re in an IRA, and I can’t buy gold or silver in my Vanguard fund. I also have some specific REITs which I like to watch to learn more about REITs because they are interesting — especially since I do not actually own any tangible real estate. More on that later.