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I'd like to 1st thank the "lord of the boards" JBKing for accelerating my learning process by about ten-fold here. My question this time relates to a question he actually answered.

I was thinkin of starting off with 2 IRAS VTMSX and the Total bond market fund, and then later on the REIT fund. My question is that when the IRA is being used, or I believe when I will be 59, how does one go about to reap the dividends from the Vanguard REIT fund for example. Does Vanguad automatically convert it to a taxable fund? Does it remain "tax free" until I die? I hope the answer the question is simple. Thanks
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Belgoboy,

You need to read the rules on IRAs. IRS Publication 590 is wordy but understandable.
http://www.irs.gov/pub/irs-pdf/p590.pdf

When you are past the allowable age (59.5) * , you may direct Vanguard how you want to withdraw the money from the IRA. You can withdraw the money on demand, ask Vanguard to just direct deposit/send you checks for the dividends or ** leave it in the IRA to continue compounding tax-free. Vanguard can tell you all about the options if you call them.

You can also withdraw assets from the IRA and put them in a taxable account, but only some people are able to benefit from doing this.

[P.S. minor note of terminology -- according to the government you have exactly one Individual Retirement Arrangement, and it may be distributed among different custodians. According to common usage you have one Individual Retirement Account per custodian. That custodian may then subcategorize that IRA into accounts, sub-accounts, funds, etc.]

* Exceptions apply! There are ways to get money out before then.
** If you start a Traditional IRA, you must begin withdrawing money from it the year after you turn 70.5. If you start a Roth IRA, there is no such restriction.
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Greetings Belgoboy,

No question is stupid here first of all especially since noone I know is born with an understanding of how various retirement accounts work.

I'd like to 1st thank the "lord of the boards" JBKing for accelerating my learning process by about ten-fold here.

You're welcome and I'm glad to be of help.

I was thinkin of starting off with 2 IRAS VTMSX and the Total bond market fund, and then later on the REIT fund.

You want to put Tax-managed Small-cap(VTMSX not VTSMX) into an IRA? I have one IRA with Vanguard and 2 funds in it since the IRA is simply an account from my view. I filled out one form to establish the IRA but noted that I wanted my contribution to be divided amongst two funds.

My question is that when the IRA is being used, or I believe when I will be 59, how does one go about to reap the dividends from the Vanguard REIT fund for example.

Let's say I have a Total Stock Market(TSM), Total Bond Market(TBM), and REIT fund in an IRA with dollar amounts of A, B, and C for the sake of an example. Now, I can without tax consequences shift monies around from C to A or A to C as I wish. One example of where I'd want to do that is for rebalancing where I try to keep a certain ratio between the amount of monies in the fund, e.g. 50% in TSM, 30% in TBM, and 20% in REIT. So, if at the end of a year my balance looks like 40% TSM, 35% TBM and 25% REIT(Bonds and REITs did well and TSM went down) then I could exchange some of each TBM and REITs for more shares in TSM to get back to that balance I initially set. Make sense?

Now, at retirement I could shift some of the money into a taxable account, bank account or something else to use the money and this is where the funds shift accounts I think and I draw down the IRA.

As for reaping the dividends of the REIT this is done all the time by a combination of the fund having a lower volitility compared to a Total Stock Market fund for example as well as the distributions being somewhat large from those dividends that the fund passes on that I choose to either buy more shares of that fund or something else, e.g. a money market fund.

Does Vanguad automatically convert it to a taxable fund?

No, it is my understanding that you'd have to withdraw $x from the IRA and I would check on the IRS website for details on rules as well as with Vanguard to see what options you'd have as for example I think they may have an Automatic Withdrawal Plan that is the reverse of an Automatic Investment Plan.

Does it remain "tax free" until I die?

If you're talking about a Roth IRA then I think it is IF you follow the RULES of which the most current are found at http://www.irs.gov/pub/irs-pdf/p590.pdf and are subject to change like in the increased contribution limits that happened recently.

I hope the answer the question is simple.

It is if all the side factors are known I think. For example, which IRA do you mean: Tradtional or Roth? I'll assume a Roth but I could be in error.

Regards,
JB
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