Buying ETFs in Vanguard IRA Account Is Tricky

Well, maybe not exactly tricky, but the whole process isn’t as straightforward as one would expect at least.


I have an IRA account with Vanguard for years. The investments I have in that account until now are all Vanguard mutual funds and since I only buy Vanguard funds, it is pretty easy to buy, sell, or exchange shares. However, things started to become confusing when I tried to buy ETFs in the account, not just any ETFs, but Vanguard ETFs. Since Vanguard now offers commission-free Vanguard ETFs to its customers, I thought I’d buy something other than those boring low-cost mutual funds that have been in existence for decades. But as I found out the process is unnecessarily complicated. It could be only to me because I have never had a brokerage account with Vanguard and never bought anything else in my account.

I have IRA accounts at other brokers, such as Scottrade, and funding the account and trading stocks and ETFs are pretty straightforward, just like what I do with regular brokerage accounts. Apparently, that’s not the case with Vanguard. At first, I thought I could just add new money from my bank account that has already been linked to the IRA account and use the fund to buy Vanguard ETFs. But I can’t. All I can do with the IRA account is buying their funds, whether they are funds I already own or new funds. I can’t just add money to the account and use the money later for whatever I want. It turned out that to add money, if I don’t want to buy anything, I have to buy at least the Vanguard Money Market Fund. I can understand that money in the account has to be in a fund, but why can’t Vanguard do what most other brokers are doing these days:¬†automatically swap unused money in the account into an money market account. In this way, if I want to use the money to buy a mutual fund later, the money can swapped out of the Money Market Fund to buy the fund I want, skipping the process of manual fund exchange. This will get the job done in a much easier way.

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Even after I added new fund into the IRA account, I still can’t use the money to buy ETFs because the IRA account I have only allows me to buy mutual funds. To buy ETFs, or stocks, in the IRA account, I have to open another IRA brokerage account and link the brokerage account to the IRA account. Even though all the trades are done in the brokerage account, I still can’t fund the IRA brokerage account directly. All the funding has to be done through the Money Market Fund in the IRA account. That’s another layer of complication.

So here’s basically what you need to do in order to buy ETFs in Vanguard IRA account:

  1. Open an IRA account if you don’t already have one;
  2. Fund the IRA account by buying shares of Vanguard Money Market Fund ($1 per share);
  3. Open an IRA brokerage account and link it to the existing IRA account;
  4. Buy ETFs from the IRA brokerage account with money coming from the Money Market Fund in the IRA account;
  5. Depending on the type of the order (market or limit), trades will be executed either right away (for market orders) or when the conditions are met (for limit orders), but the actual transfer of money from the Money Market Fund in the IRA account to the brokerage account will take place 3 days later.

I mean, this is a rather complicated process in my option. I have many brokerage accounts and all of them are quite simple to use (fund the account and buy and sell stocks). I don’t know why Vanguard has to use the extra step to have me open an IRA brokerage account, but at the same doesn’t allow me to fund the account directly. Now that Vanguard has become a big player in the ETF industry and that it doesn’t charge commission for its customers to buy their ETFs, maybe it can make the process a little easier to handle?

Photo credit: Tripod Ape

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4 Responses to “Buying ETFs in Vanguard IRA Account Is Tricky”

  1. Madison |  Sep 13, 2010 at 5:05 pm

    Sun, I just spent hours trying to figure out how the heck to convert one of my mutual funds to an ETF in a Roth.

    I love Vanguard, but this is ridiculous!

    So now I have my new brokerage account set up, but can’t for the life of me figure out how to “link” it.

    Do you remember what you did?

  2. Brian |  Mar 04, 2011 at 7:24 pm

    I don’t know what is so complicated about buying Vanguard ETFs in an IRA, roth otherwise. The Vanguard money market mutual fund operates exactly like a sweep account. The problem of “buying” shares in a money market mutual fund is the same as depositing money in an account. When you buy shares of another ETF, the money sweeps from the money market fund to cover the cost of the new shares, exactly as it would if it were a cash account.

    • Sun |  Mar 09, 2011 at 11:41 pm

      I agree with you that the money market mutual fund is essentially a sweep account. However, comparing with other brokerage account, having to open a mutual fund account first then a brokerage account that links to the mutual fund account seems to be an exact step to me if the only way to fund the brokerage account is through a money market fund. I have account with other brokers which also use a sweep account for funds that are not invested, but I only need to open one account, not two. Why can’t Vanguard also let investors open just one brokerage account and then automatically link the brokerage account to the money market fund? This is what I complained about. To me, that extra step can definitely be saved.

  3. Luke |  Jun 17, 2012 at 6:08 am

    Is this procedure of investing in ETFs from Vanguard IRA still true?