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Sunday, July 9, 2017

Betterment versus Vanguard Target Fund for a small Roth IRA

 I'm currently weighing a shift from Betterment to Vanguard Target Fund for my Roth IRA. I was wondering if anyone has made a switch from Betterment to Vanguard and what there thoughts were.

My retirement strategy is a combination of three things.

1. Pension: I have a pension plan that I'm 14 years away from qualifying for. There is a caveat. I can't collect the pension until I'm 59.5. But I would have the option in 14 years of retiring early and knowing that money is coming down the road. I don't think I want to retire in 14 years. But it would be nice to have the option.

2. Dividend Growth Investing: Just knowing my personality, I will find more money to save with this style of investing. I like the control that comes with it, and the research behind it. I also like the predictability that comes with it. That you can produce a certain income while keeping a principle of stable blue chip companies that should appreciate over time.

3. Low Cost Index Funds: At my core I'm an educator and not a finance expert. I've learned a lot. But a year of being a dividend growth investor doesn't make me an expert. On my budget I also know that I'm not going to achieve the level of diversification investing in individual stocks that I can by putting a good junk of my money in index funds. (I also have a good chunk of change trapped in a Roth IRA from back when I was young and dumb).

Right now I'm weighing option No. 3. I currently have my Roth IRA and a portion of my house savings in a Betterment account. Both accounts have been performing well. The original plan was to wait until I had 10k in the Roth IRA and switch into a Vanguard Admiral fund. Right now I'm not paying a lot to Betterment. It's only .25% in account fees. The combination of the house fund and the Roth is over 10k.  But the Roth is less than 10k. My question is would I be better off not paying the management fee and moving my IRA to a Vanguard Target Fund? It would also allow me to take advantage of Tax Loss Harvesting in my Betterment house fund. It doesn't seem like I'm paying very much at all to Betterment. But my thoughts are why pay any fees that aren't necessary.

Please share your thoughts? Should I make the move now. Or wait until I have more saved and move into an admiral fund.

3 comments:

  1. Hi Dividendseedling,

    There's no extra value in waiting until you've saved more to buy an admiral fund. You can 1) probably transfer the ETFs from Betterment to Vanguard in-kind and then sell to buy the admiral shares later on. Or else 2) exchange them into an investor fund initially and convert at a later date. Either option will be cheaper than the 0.25% fees charged by Betterment.

    The 0.25% fee is low by itself, but it's a constant drag on the account (on top of the ETF / fund fees) and it can add up over 20 or 30 years. On the other hand, if having the portfolio managed by someone helps you then that fee might be worth it.

    Vanguard does have a management service (0.3% I think but fixed regardless of the account size) but doesn't do some of the tax-loss harvesting that Betterment does. As your accounts grow at Vanguard you gain access to other benefits and services too.

    Depending on your house fund assets you can also do tax loss harvesting yourself if you're so inclined. Remember that this only works (even at Betterment) if your fund has negative capital gains (I'd imagine most of your investments would be in the black if they were purchased a few years ago). I wrote a post on this earlier.

    Best regards,
    -DL

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    2. DL,

      Thank you for the comment. It was extremely helpful.

      DS

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