I spent some time over the weekend getting caught up in Quicken. While updating our accounts, I discovered something interesting about the way in which Vanguard debits your bank account when processing automatic investments. Instead of making a single withdrawal and then partitioning it up into the various funds that you’re investing in, they make one withdrawal per mutual fund.
In our case, this means that my monthly SEP-IRA contributions result in four debits to our HSBC Direct savings account. This is because the money ultimately goes into four different mutual funds even though they’re all held within the same SEP-IRA.
This probably isn’t a huge deal for most of you, but it’s something to keep in mind. After all, Federal Reserve Board Regulation D limits electronic withdrawals from savings accounts to six per month. Violations of this policy can result in a warning, a service fee, or even being prevented from accessing your funds until the next month.
The six transfer limit with a savings account seems to be an anachronism that the banks have a vested interest (fees) in maintaining.
Just set up a money market account with Vanguard. Make one transfer into that, and then 4 from that into your IRA. That way you’ll get the treatment you like. There will be a slight timing delay, but I think it will work.
I just found out about the 6 transactions per month issue last month. My bank debited me with an “Excess Activity Charge”. Now, I just transfer my money over to my Checking account before Vanguard debits my account. That way, I don’t have too many transactions for my Savings Account.
Another way would be to open the Electric Orange account @ING as your checking/bill paying account. After I realized I haven’t written a paper check in over a year (no physical checkbook with ING), I’m in the process of doing this right now. Their check-less checking account earns 3.00% (The same as the Savings account option) with no minimum balance and no monthly fees.
If you can do it, one way around this would be (@ ING at least) to have more than one savings account, a process taking less than 5 minutes at ING. This way you could have one account ONLY for Vanguard (you could even nickname it VANGUARD), and move funds to that account as you wish. I now do this for my automatic investments, and no longer worry about the 6/month limit!
I use Quicken also, and have lots of accounts, but, again, ING downloads and sorts itself out effortlessly. The first download after setting up the extra savings accounts required me to set up the accounts in Quicken as everything was imported, so I needed to have all the new account numbers available.
Just my 2¢.
Interesting, I had no idea about the 6 transfers per month limit. I brush up close to that pretty much every month.
While that’s a fair opinion, I figure the difference in the interest earned on the float is not enough to make it worthwhile to worry about keeping under the 6 monthly withdrawals.
In other words, my average daily checking account balance is no more than $500, since I move the money to various investments and high yield savings pretty quickly after getting paid. If I used a high yield savings account that eanred 4% APY, I would earn just $20 in interest annually. But by keeping it in a checking account, I can make as many transfers and withdrawals as I want, without worrying about Regulation D. Further, my checking account is at a local credit union, rather than an Internet site, so I have easy and convenient access to my funds at all times.
These factors are definitely worth the $20 interest a year I’m forgoing by not using a high yield account.
Zachary: I don’t want money sitting around earning a pittance in a checking account. This money *is* long-term savings — I just need to move it from one location to another, and I’d like to earn the highest possible interest rate on it until that happens.
Hence why I use my checking account for all automatic debiting (Even IRA deposits)
Savings account is the untouchable. Money doesn’t exit it, just enters. It is withdrawn from only in dire straits.
Flexo: That’s a good idea, though it would require tracking additional transactions in Quicken. I’d much prefer they just do one debit and then split the money up. Given how their fund are structured, though, I’m not surprised that they do it this way. This way of doing things has the added benefit of encouraging people to hold their savings in a Vanguard Money Market fund.
In April, I had to plan my tax payments and investments very carefully, amongst all the other automated transfers, to avoid debiting the same account more than 6 times throughout the month. I noticed the same thing with Vanguard. I assumed that they would debit my bank account several times.
One way to get around this is to use Vanguard’s Money Market Fund as the go-between and distribute your asset allocation from there.