If investments in a 401(k) have lost money, can you use the current value
to convert to a Roth?
100% of people found this answer helpful
Converting
your 401(k) retirement account to a Roth IRA when the value of your
investments are down is a compelling tax strategy since you will only pay taxes
on the current value. Although there are some restrictions:
Currently,
most anyone can take all of their traditional IRAs and retirement plans and convert
them to a Roth IRA. The amount you convert will be taxed.
You
will want to do a rollover and not a distribution, otherwise your 401(k)
provider will send you a distribution check from your 401(k),
then they will hold around 20% for taxes. If you prefer a direct
401(k) rollover to a Roth IRA, you will want to indicate that you want a
rollover and provide all the appropriate forms. If you do receive a
distribution check, you will have 60 days to redeposit the check back into an
IRA or convert to a Roth IRA.
If
you employer offers a Roth 401(k), the rollover will be much easier. When
you are converting one Roth product to another, there is simply no need
for a conversion. You would simply roll the Roth 401(k) directly into the Roth
IRA with the help of your plan provider.
Also,
please consider the following before making the decision:
Rolling
your 401(k) into a Roth IRA, especially while your investments are down in
value, makes sense but it is still wise to consult with your CPA and Financial
Advisor to make certain taking into consideration your personal financial
situation.
How
can I determine if converting an IRA to a Roth IRA will be worthwhile?
100% of people found this answer helpful
As
you are aware, one of the benefits to converting to a Roth is the
avoidance of having to take the required minimum distributions (RMD) after the
age of 70.5 each year. Converting a traditional IRA to a Roth gives you
this flexibility after you reach retirement age. Contributions to a Roth IRA
come from after-tax income, so there are fewer restrictions on how you use
these assets. Unlike a traditional IRA, which has a required mandatory
distribution (RMD), a Roth IRA has no required mandatory distribution (RMD), so
you may continue to use your Roth IRA as an investment fund for as long as you
like. With a traditional IRA, you must begin to collect distributions by the
age of 70.5 through annual RMDs. The RMD for each year is calculated by
dividing the IRA account balance as of December 31 of the prior year by the
applicable distribution period or life expectancy. Again, this rule does not
apply to Roth IRAs.
Keep
in mind that the IRS also allows you to re-characterize your Roth IRA back to a
traditional IRA which may be valuable if your investment value declines or if
your financial situation changes and you do not want to pay your tax bill that
year, as you can recoup the taxes paid for the conversion.
Converting
while in the 15% tax bracket can be a smart money move at any age. The critical
element is that you will pay income tax on the amount you convert, this allows
Roth IRA holders the opportunity to eliminate future taxes on their retirement
plans, thereby compounding their total return. There is no minimum dollar
amount for a Roth IRA conversion, so you may choose to convert a small portion
of your account every year if appropriate. Therefore, individuals on
disability, students, or unemployed may be suitable for a conversion. Another
case for a partial conversion done over a period of years is when someone
retires early before taking Social Security.
A
conversion may also be appropriate if you are well into your retirement. From
an estate planning perspective, if your estate is large enough by converting to
a Roth IRA, you could reduce estate taxes as well. Depending on your individual
tax bracket, income tax on the converted amount may be less than the estate tax
for that amount.
Your
heirs will also receive Roth funds tax-free versus at their top tax bracket.
One
precaution of converting is that taking on that extra income could push
you into a higher tax bracket. More income could result in more taxes, or it
could affect eligibility for tax deductions or credits. As always, it is best
to consult with your CPA and Investment Advisor before making any
decisions that pertain specifically to
What
could I gain from rolling over a 401(k) into an IRA while already in
retirement?
100% of people found this answer helpful
Most
401(k) plans have limited choices primarily focusing on mutual funds versus if
you were to rollover your 401(k) to a IRA rollover. Another factor is the
401(k) administrative fees you may be paying for the plan and also the
management fees. There are better investment options in an IRA that could
potentially give you better diversification. Consolidating may have the convenience
of reviewing your retirement plan with one statement, but then you would
have your entire retirement account under one firm, although it sounds
like this is already the case. It may be prudent to meet with a couple of
respectable Investment Advisors to analyze where you are and where you want to
be.
Another
factor you may want to consider and discuss with your Financial Advisor
and CPA is if and when a Roth conversion may be appropriate for
your retirement plans. Once you reach the age of 70.5, you will be required to
take required minimum distributions each year.
There
are also considerations depending on the age you have retired.
If you have retired in a calendar year in which you turn the age of 55 or
older, then distributions from your 401(k) with that employer will not be
subject to the additional 10% tax that normally comes with retirement
account distributions before age 59.5.
Another
factor would be if your 401(k) includes employer stock. There are net
unrealized appreciation rules you may be able to take advantage of if so.
In
summary, if you rolled over your 401(k), you could gain access to a broader
range of investment choices, giving you better diversification of choices your
401(k) would not allow that could protect you from volatility in the
markets. Also, you may be able to reduce your fees.
How
would rolling over my 401(k) to a Traditional IRA affect my contribution limit
for 2017?
100% of people found this answer helpful
Yes,
you may rollover your 401(k) to your traditional IRA without affecting your
contribution limit for 2017 Roth IRA. As long as your modified adjusted
gross income is $186,000 or less in 2017 (married filing jointly), you can
contribute up to the full amount in a Roth. Although, as your income increases
above $186,000, your ability to contribute phases out. You may
also have your financial institution or plan administrator directly
transfer the payment to another plan or IRA.
A
retirement plan distribution paid directly to you is subject to a mandatory
withholding of 20% even if you intend to roll it later. Withholding does not
apply if you roll over the amount directly to another retirement plan or IRA.
Additionally, a distribution sent to you in the form of a check payable to the
receiving plan or IRA is also not subject to withholding.
Usually,
your plan administrator will give you instructions of your rollover options.
Are
profits from options trading subject to a FICA tax?
100% of people found this answer helpful
No,
FICA taxes are payroll taxes withheld from employees paychecks and paid by
employees and employers for Social Security and Medicare.
There
are many different options strategies that are all taxed differently. Whether
you are buying or selling puts and/or calls, covered call writing,
straddles or any other sophisticated options strategy. For the basic
holders of puts and calls:
As
always, when making any investment decisions based on the tax consequences of
your investment, it is best to consult with your CPA to make certain that all
of your personal financial information is taken into account.
What
is considered a good NAV for a mutual fund?
100% of people found this answer helpful
When researching
whether to buy or sell stock in a company, you should have a sense of the
market value of each share, as well as shares of mutual funds, closed end
funds, and exchange-traded funds. All have market value that is
represented by the net asset value (NAV).
Mutual
funds calculate their net asset value on a daily basis, after the close of the
stock market. All buy and sell orders are then processed using the net
asset value as of the trade date. Net asset value is an indication of how much
one share of a mutual fund is worth.
The
NAV is not necessarily the best way to determine a mutual fund's
performance. Looking at a fund's total annual return is a better way to measure
its potential than looking at changes in its net asset value. Evaluating a
fund's net asset value can help you determine whether it's an investment worth
pursuing. Although, it is just one of many factors you should take
into consideration. Fees, management strategy, and the specific needs of your
portfolio are equally important.
When
buying closed end funds, the shares that are trading at a discount to the NAV usually
have more value and you may also be able to get a larger dividend if it is an
income fund. However, that is only one element of determining whether it will
be a good investment
Should
I be buying stocks or options?
100% of people found this answer helpful
Options can
be good for position trading and risk management. Choosing the right
strategy to your advantage is important. Picking the proper options strategy to
use depends on your market opinion and what your goal is.
An
option gives its holder the right, but not the obligation, to buy or sell the
underlying asset at a specified price on or before its expiration date. There
are two types of options: a call, which gives the holder the right to buy the
option, and a put, which gives its holder the right to sell the option. A call
is in-the-money when its strike price (the price at which a contract can be
exercised) is less than the underlying price, at-the-money when the strike
price equals the price of the underlying and out-of-the-money when the strike
price is greater than the underlying. The reverse is true for puts. When you
buy an option, your level of loss is limited to the option’s price referred to
as premium. When you sell a naked option, your risk of loss is theoretically
unlimited.
There
are many pros and cons to consider. The time value with options or their
expiration versus a stock with no expiration. The amount of funds you have to
invest since you can leverage yourself by buying the option, not to mention the
multitudes of differing options strategies. For example, a covered call
writing strategy would allow you to buy the stock and write (or sell)
calls against your position in order to receive income or a premium from the
option. Holding a long position on the stock and generating income from
the option premium.
If
you are a novice options investor, it would be wise to find a financial advisor
that specializes in options in order to start slow and learn the complexities
of option trading.
What
is considered enough diversification?
100% of people found this answer helpful
The
purpose of having a diversified portfolio is
not necessary to increase the total return, but to reduce the
volatility and potential downside. Initially, you should clarify your
level of risk based on your investment goals, time horizon, and risk tolerance.
In
order to build a diversified portfolio, you should look for assets:
stocks, bonds, cash, and/or alternative investments. Assets that are
non-correlated and whose returns have not historically moved in the
same direction. Also, to be diversified within each asset class.
Not
only do you need to be diversified within stock sectors, but also by small,
mid, or large cap stocks. Caps, sectors, and geography. The standard rule
of thumb is not to be exposed to any more than 5% of any one stock. This can better
be achieved through a managed portfolio for asset allocation. Then there is the
diversification within growth, value, or income style of investing.
When
and if you decide to invest in bonds, consider laddering or varying
maturities, credit qualities, and durations, which measure sensitivity to
interest-rate changes. There are many differing fixed income funds that would
be an attractive diversification for your stock exposure.
For
the cash exposure, it is advisable to keep at least six months worth of
living expenses in cash in the event of any unforeseen financial setback.
Obviously, this would be outside of your retirement account, but also an
important component to a diversified portfolio.
100% of people found this answer helpful
An
Individual Retirement Account (IRA) is a tax deferred account available for
anyone of any age as long as you have earned income. Once you open your
account, you may invest the funds in your IRA in, but not limited to stocks,
bonds, mutual funds, and/or even CDs. An IRA is an account set up at a
financial institution that allows an individual to save for retirement with
tax-free growth or on a tax-deferred basis. A traditional IRA is tax deferred
which you make contributions with money you may be able to deduct on your tax
return, and any earnings can potentially grow tax-deferred until you withdraw
them in retirement.
A
Certificate of Deposit (CD) is a type of fixed interest rate deposit over
a specified period of time. When that term ends, you can withdraw your money or
roll it into another CD. Withdrawing before maturity can result in a penalty.
It is low risk and low return. CDs are among the safest investment a
person can make. The interest rate is determined ahead of time, and you’re
guaranteed to get back what you put in, plus interest once the CD matures.
What’s more, if the bank fails or goes under, your deposit is most
probably insured by the FDIC for
up to $250,000.
The
difference being that an IRA is a type of account in which you may leave in
cash or invest in differing securities or CDs. Whereas a CD is a time deposit
at a financial institution which may be bought in either a qualified (IRA)
account or a non qualified (cash) account.
Can
I trade commodities in an IRA account?
100% of people found this answer helpful
The
law only prohibits IRA funds not be invested in life insurance or
collectibles. The law discourages the holding of collectibles in IRAs.
There are exceptions though and may be bought if it is in the physical
possession of a bank or an IRS approved non-bank trustee for certain commodities. Commodities
are categorized in 1) hard: typically natural resources like gold, rubber, and
oil, or 2) soft: agricultural products or livestock like corn, wheat, coffee,
sugar, soybeans, or pork.
Additionally,
you may trade futures in your IRA. Futures trading is
not prohibited in retirement accounts, there are a number of things to
consider before executing trades. Even though the IRS does not prohibit trading
in an IRA, what you can and cannot do in your IRA will be determined by the
custodian you use. Many custodians or plan sponsors do not allow futures
trading in your IRA and some just restrict trading certain commodities.
There
are differing ways you may invest in commodities through ETFs, mutual
funds, or even unit investment trusts all within your IRA.
By
the way, UWTI is defunct. After delisting from the NYSE, the VelocityShares 3x
Long Crude Oil ETN (UWTI) is a shell of its former self. Abandoned by Credit
Suisse, the former billion-dollar product has been left to trade
over-the-counter. Volume on recent days has only been a few hundred thousand
shares, compared with more than 20 million shares before the
delisting.Following their delisting, the ETNs will remain outstanding, though
they will no longer trade on any national securities exchange. The ETNs may
trade, if at all, on an over-the-counter basis.
Will
my wife be allowed to take the full deduction on her Traditional IRA
contributions?
100% of people found this answer helpful
Yes,
she will be able to take the full deduction on her traditional IRA
contribution. An unemployed wife can contribute to an IRA by borrowing her
husband’s income (this is not the type of borrowing she has to pay back).
The husband needs to share the income by filing a joint tax return with
the wife.
A
nonworking wife can use the taxable compensation of her husband to make an IRA
contribution up to the maximum of $5,500 per year (or $6,500 if she is 50 or
older) for 2017. Her IRA contribution cannot exceed the husband’s taxable
compensation less his IRA contributions. As long as he earns enough taxable
compensation, both of them can contribute the maximum to their IRAs. The
husband is not required to make an IRA contribution for the wife to make
one using his taxable compensation.
The
eligibility requirements for the spousal IRA are straightforward:
Understand
that IRAs must be held separately (not jointly). This means that the non-working
spouse owns the assets in the IRA. Once your working spouse contributes to the
IRA, the money becomes hers. The IRA is in her name and opened with
her social security number, and it remains hers even if you divorce.
Do
ETFs provide greater returns than stocks?
100% of people found this answer helpful
If
you are currently using Robinhood, you understand the ease of use is what
attracts young people, but it could also be expensive not from fees since the
app is free but from your investment portfolio. An app that allows
you to trade in the stock market, with no knowledge, could get more
expensive versus paying the fees from an experienced financial advisor.
Especially if you are buying individual stocks unless you are spending more
time following them.
ETFs
would be a good supplement to your individual stocks. You could also look at
Unit Investment Trusts since they would give you more diversification in your
portfolio and have set terms, usually 12 to 24 months.
The
only way to potentially increase your investment returns is by diversifying
your portfolio, utilizing an investment discipline, and doing your
homework. If you want to increase your return or become more speculative, I
would advise using the services of a financial advisor.
Adding
ETFs to a portfolio of stocks may or may not increase your overall return.
Increasing the performance of your portfolio is dependent on actively
managing your portfolio. It is important to identify your investment
risk tolerance, your time horizon, and investment goals. It sounds like you are
young enough to build a successful portfolio although starting out without
any experience and then having to rebuild would not be worth the savings from
Robinhood.
Which
is the better strategy when dealing with my rental homes?
100% of people found this answer helpful
I
do not know your age although I have had many clients approaching
retirement sell their rental properties because of the experiences you
mentioned, as well as not wanting to deal with the three Ts: Tenants, Toilets,
and Trash.
If
you are looking for an alternative that would save on taxes, I would recommend
a 1031 Exchange. Sell both properties then do a 1031 Exchange. The
purchase or sale of a beneficial interest in a Delaware Statutory Trust
qualifies for tax-deferred exchange treatment under Section 1031 of the
Internal Revenue Code ("1031 Exchange"). Investors can sell
their existing investment property and 1031 Exchange into a beneficial interest
in one or more Delaware Statutory Trusts. They can also sell their
beneficial interest in a Delaware Statutory Trust and 1031 Exchange into
another DST or into other property selected through the assistance of their
financial advisor.
The
following sequence represents the order of steps in a typical 1031 exchange:
The
target market for 1031 exchange ownership are taxpayers with a net worth
in excess of $1,000,000 who are seeking a monthly cash flow without the
headaches of being a landlord. You may also upgrade your real
estate to say ownership of a class A office building and receive a monthly
check from the DST sponsor. Picking the right property and sponsor with a
good track record will afford you better success than you have had and take
away all the headaches.
Are
mutual fund performance numbers reported net of fees (operating expenses and
12b-1)?
100% of people found this answer helpful
Most
times they are. You may go onto the mutual fund's web site and read the fine
print to make certain. Sometimes they quote with and without operating expenses
and 12b-1 which is referred to as their "expense ratio". Other
sources like Morningstar will have an analysis of the portfolio, performance,
and fees net of the expense ratio.
Please
feel free to read the attached article that will go over in greater detail what
is important when buying a mutual fund: http://www.investopedia.com/advisor-network/articles/consider-these-fees-when-evaluating-mutual-funds/
Looking
at its track record or performance history is not always the best indicator of
the best mutual fund to buy.
As
I mentioned above, the annual cost of a owning a mutual fund is called the
expense ratio. The expense ratio is the percentage of the fund’s assets
that go toward running the fund. Management fees, administrative costs, and
12b-1 fees.
Using
the services of a financial advisor would give you more details into the fund
as well as working with you and identifying your individual investment goals
and risk tolerance.
Can
I return funds to my Traditional IRA after taking a distribution?
100% of people found this answer helpful
You
may take what is referred to as an IRA Rollover once every 12 months. And
yes, you may return the funds to your traditional IRA as long as it
is within the 60 day period. Once you have taken possession of your funds you
only have 60 days to return the funds, otherwise you will be taxed on the
distribution.
If
you are under the age of 59.5 then you will also have a 10% early withdrawal
penalty unless you qualify for an early withdrawal.*
*The
distribution is not subject to the 10% early withdrawal penalty in
the following scenarios:
1)
After IRA owner reaches 59.5 years of age
2)
After death of the IRA owner
3)
Total and permanent disability of the IRA owner
4)
Qualified higher education expenses
5)
First time homebuyers up to $10,000
6)
Amount of unreimbursed medical expenses
7)
Health insurance premiums paid while unemployed
8)
Certain distributions to qualified military reservists called to duty
9)
Rollovers: In-plan Roth rollovers or eligible distributions contributed to
another retirement plan or IRA within 60 days
10)
There is a little known section of the IRS tax code: Section 72t that allows
you to take substantially equal periodic payments (SOSEPP) on an annual basis
before the age of 59.5 without paying the 10% early withdrawal penalty. The IRS
stipulates that you take money out of your IRA for five years or until the age
of 59.5, whichever is longer.
How
much should I have allocated in international equities?
100% of people found this answer helpful
Keep
in mind that there is a distinction from an international mutual fund
that invests in assets around the world excluding the home
country and a global mutual fund invests in assets around the
world including the home country. Most financial analysts recommend
putting a range of 15% to 25% of your money in foreign stocks. If you are a
long term/low risk investor that would like some international
exposure I would recommend a smaller allocation to an international fund.
Alternately,
but with more risk, you may get some international exposure in your portfolio
with American Depositary Receipt (ADR) is a certificate that
represents shares of a foreign stock owned and issued by a U.S. bank.
The foreign shares are usually held in custody overseas, but the certificates
trade in the U.S. Through this system, a large number of foreign-based
companies are actively traded on one of the three major U.S.
equity markets.
ADRs
give U.S. investors the ability to easily purchase shares in foreign firms, and
they are typically much more convenient and cost effective for domestic
investors (versus purchasing stocks in overseas markets). And because many
foreign firms are involved in industries and geographical markets where U.S.
multinationals don't have a presence, investors can use ADRs to help diversify
their portfolios on a much more global scale.
Consulting
a financial advisor in order to identify your individual risk tolerance
and overall investment goals prior to investing would be advantageous.
Where
should I be investing money within my Roth IRA?
100% of people found this answer helpful
If
you are 23 years old and you just opened your Roth IRA you most likely have less
than $11,000 in your account since you are limited to $5500 annual
contributions. Regardless of whether you have contributed one year with only
$5500 or two for that size of an account a fund would be advisable.
The
power of diversification is important for those funds. Diversifying a portfolio
in order to reduce exposure to risk by combining a variety of
different investments, such as stocks and bonds/fixed income which are
unlikely to all move in the same direction. The goal of diversification is
to reduce the risk in a portfolio. Volatility is limited by the fact that
not all asset classes or industries, sectors or individual
companies move up and down in value at the same time or at the same
rate. Diversification reduces both the upside and downside potential
and allows for more consistent performance under a wide range of
economic conditions.
And
the best way to diversify a small account or portfolio is through a basket of
securities. Mutual funds have many different choices that would be appropriate
for a Roth IRA with a long term investment horizon.
100% of people found this answer helpful
Investing
in individual stocks is dependent on the size of your investment portfolio.
Keeping your portfolio diversified with a mix of stocks, bonds, and/or other
fixed income investments would increase the likelihood of a successful
portfolio. Also, looking at alternative investments that are non correlated
with the markets.
If
investing in individual stocks you would need to have enough funds to buy a
diversified portfolio of different stocks. There are large cap, small cap, mid
cap then you would want to look at diversifying by industry and sector. The
most successful way to do this is by buying funds or hiring a professional
money manager. The best way to determine this is to consult with a financial
advisor in order to identify your investment goals and risk tolerance. Picking
the right stocks requires in depth analysis and requires daily monitoring. The
stock market can be volatile and unpredictable so having your risk spread over
a basket of individual stocks and other investments would be the best way to
potentially increase the growth of your portfolio along with taking some
additional exposure.
Mutual
funds, unit investment trusts, closed end funds, and ETFs are all
ways of investing in stocks that would give you the diversification you
need along with professional management.
Will
taking a large IRA withdrawal increase my income and put me in a higher tax
bracket?
100% of people found this answer helpful
Yes,
taking a large withdrawal from your traditional IRA could potentially put you
in a higher tax bracket and it could also increase the threshold for
provisional income which could cause your Social Security to be taxed. This
would be an issue you should discuss with your CPA for your personal financial
situation.
Here
are the differences between IRAs:
I
have attached an article addressing this very issue below:
Depending
on your view of where you believe taxes are headed, it might be a concern when
making your retirement investment decisions. We have all been advised to put
money away for retirement in tax deferred accounts like 401(k)s and IRAs. As
your 401(k) and IRAs grow, so does the government’s share since they are your
uninvited partner. Unlike most business partnerships, the IRS can increase
their percentage of your hard-earned tax deferred savings at their discretion.
Look
at where federal income tax rates have historically ranged:
History
of Tax Rates: 1913 – 2014
Tax
Rates Throughout History
In
1913, the United States endorsed the 16th Amendment and instituted the
federal income tax. That year the top tax bracket was 7% on income over
$500,000 (in today’s dollars that amount would equal approximately $11
million). Conversely, the lowest tax bracket in 1913 was 1%. Lawmakers use
taxes to stimulate a sector of the economy or to raise revenue. You have
heard the saying that the two things you can count on are death and taxes? Well
death does not get any worse (to my knowledge) every time Congress meets.
To
finance World War I, Congress passed the 1916 Revenue Act and thereafter the
War Revenue Act of 1917, which increased the highest federal income tax rate
from 15% in 1916 to 67% in 1917 and 77% in 1918. We all know war is very
expensive. After the war in the roaring 1920s, federal income tax rates
decreased to 25% from 1925 to 1931.
Then
came the Great
Depression, and Congress decided to raise
federal income tax rates again in 1932 from 25% to 63% for those in the top tax
brackets. Then came another war, WWII, and in 1944 the top rate was 94% on
income over $200,000 (in today’s dollars that amount would be approximately
$2.5 million). Top tax rates didn't decrease below 70% through the 1950s,
1960s or 1970s. (For related reading, see: The History of Taxes in the U.S.)
The
Economic Recovery Tax Act of 1981
In
1981, the Economic Recovery Tax Act of 1981 decreased the top bracket from 70% all the way
down to 50%, indexing the brackets for inflation. Then in 1986, lawmakers
enacted the Tax Reform Act of 1986, expanding the tax base and dropping the top
income tax rate to 28% beginning in 1988. The theory was that having a broader
base had fewer deductions and would bring in the same revenue. That 28% income
tax rate only lasted three years.
In
the 1990s, federal income tax rates went to 39.6%. Then the Economic Growth and
Tax Relief and Reconciliation Act of 2001 decreased the top income tax rate to
35% where it stayed from 2003 through 2012.
More
recently, the American Taxpayer Relief Act of 2012 raised the top federal income tax rate to 39.6%. Then
the Patient Protection and Affordable Care Act added another 3.8%, making the
total maximum income tax rate 43.4%.
In
summary, I find it imperative to look at history to predict the future since
these changes can affect your investments. Higher taxes mean less money for
your retirement years. Moving your tax deferred funds from accounts that are
forever being taxed to accounts that are never taxed is one solution.
Converting
to a Roth IRA
Converting
your traditional IRA or 401(k) (or at least a portion of these funds
depending on what taxes could easily be paid on those dollars that year or over
a series of years) into a Roth
IRA is a simple solution. By
converting your traditional IRA into a Roth IRA you will:
Converting
from a traditional IRA to a Roth could be a useful tool. By paying taxes today
you can take advantage of historically low rates. Also, if you are young enough
you may still have plenty of deductions that could potentially help offset the
taxes. Additionally, our new White House administration’s tax plan could
potentially make it an even more attractive time.
*In
1983, President Ronald Reagan and House Speaker Tip O’Neill passed a law that
would tax Social Security benefits in order to ensure the long-term viability
of the program. The IRS created income limits, or thresholds, that determine
whether or not your benefits will be taxed. Now we understand what actions the
IRS will take if you do not take your RMDs from your traditional IRA, if you
take out too much you will pay higher taxes on your Social Security benefits.
How
do companies initially sell stock?
100% of people found this answer helpful
In
order to buy a publicly traded stock you must buy the stock listed on one
of the stock exchanges such as the NYSE, AMEX, or NASDAQ. Either when it first
goes public (IPO) or thereafter in the secondary market.
When
a private company goes public it is referred to as an Initial Public Offering,
or IPO, by selling shares of stock to the public usually to raise additional
capital. After its IPO, the company will be subject to public reporting
requirements and its shares often become listed on a stock exchange. Then the
shares trade openly in the secondary market.
There
is one simple reason why most private business owners decide to sell ownership
in their company in order to trade on the stock market: to raise
money. Going public is often the best way for an already successful
business to raise capital.
There
are two major options for businesses to raise money:
When
a company goes public they are selling ownership in their company.
They
may want to expand their business, hire new talented individuals, open more
locations or any number of reasons that require obtaining more capital at the
risk of giving up ownership in their business.
One
process of taking a company public involves hiring a large investment bank, who
acts as underwriter for an initial public offering. The underwriter decides how
much money investors are willing to offer for shares in the company. An initial
public offering (IPO) is then planned out and the company shares hit the stock
market at a predetermined price.
While
ultimately the initial capital raised for the company through the IPO will come
from individual investors who purchase shares, the underwriter will usually
finance the transaction, providing capital to the issuing company in advance of
the stock going public.
What
is the most common initial cost for a mutual fund investment?
100% of people found this answer helpful
The
most common initial or upfront cost of a mutual fund depends on what share
class you buy. Class A are considered upfront or loaded funds, therefore this
would be the most common initial cost. I have listed the other share
classes below:
The
upfront fee for Class A shares varies with each mutual fund company. Using the
services of a financial advisor could help identify which fund is best for you
and your personal financial situation.
Please
see the attached article on buying mutual funds below:
There
is a common belief that investing in mutual
funds is a conservative way to
accumulate wealth in the stock market. We have all seen the cover of financial
magazines that read: “Our 100 Best Mutual Funds for 2017.” Yes, magazine
companies are in the business of selling their magazines.
If
you are looking at whether or which fund to buy you usually look at its track
record or performance history. Although we all know at the bottom of every
mutual fund brochure is the disclaimer: "Past performance is not
indicative of future results." Since most investors are dazzled by
performance, I beg to differ.
The
first question should be: What are the costs? The annual cost of owning a
mutual fund is called the expense
ratio. There is also a separate charge
called the sales
load which I will cover later. The
expense ratio is the percentage of the fund’s assets that go toward running the
fund. But there are three additional components to be aware of:
Management
fees or investment advisory fees go to pay the portfolio manager. You know it
keeps up his Hampton beach house. Seriously, that is how he gets paid as well
as from firm bonuses.
Administrative
costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the
fund.
Lastly,
there is the 12b-1 fee. This fee is for marketing and advertising. Think about
this fee when you see your fund advertised during Super Bowl half time. It also
includes trailer commissions paid to the broker of record as an incentive to
sell the fund. It works like an annuity for the sales person over the life of the fund. It is
usually paid to the broker quarterly as it is taken out of the net
asset value of the fund fractionally. I
have even seen some funds that are closed to new investors and are still
charging 12b-1 fees
Regarding
the sales load, mutual funds come in different share classes and this will
determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. The expense ratio usually differs with which share class
you buy. Sounds confusing, doesn’t it? That is the way the mutual fund industry
prefers it.
The
bottom line is that these fees are rising as funds shift away from the up-front
loads that are driving away sales and into the annual expense ratios where they
are not as detectable. And these fees are charged every year whether or not the
fund has performed. I have seen mutual fund holdings that have been held for
years and the only one who has profited is the mutual fund company.
Other
Issues
The
other issue with mutual funds is the high turnover of assets in the fund.
Buying and selling stocks have transactional costs which cut into the net return.
A fund with a high turnover will end up distributing yearly capital
gains to their shareholders and that
will generate a tax bill for the investor thereby reducing net returns.
Additionally,
mutual funds are required to maintain liquidity and the capacity to accommodate withdrawals. Funds
typically have to keep a portion of their portfolio as cash. The funds are
keeping cash balances of usually around 8% of the fund, which is not generating
any returns. The average fund is charging around a 1.5% expense a year on the
8% that it is keeping in cash.
Mutual
fund companies aggressively market funds awarded 4 or 5 stars by rating
agencies. But the rating agencies merely identify funds that have performed
well in the past. It provides no help in finding future winners. Historically,
mutual funds have not outperformed the market. Research indicates that around
72% of actively-managed large
cap funds failed to outperform the
market over the last 5 years.
Mutual
Fund Alternatives
There
are alternatives to mutual funds that are structured differently and will also
give you diversification. Unit
investment trusts (UITs) are a fixed portfolio
of securities usually with a 12 to 24 month term, therefore, no annual expenses
only an upfront commission. Additionally, exchange-traded
funds (ETFs) offer diversification
and liquidity with lesser fees relative to mutual funds.
The
bottom line is that mutual funds are not always the safe haven that they have
been touted. The companies that manage mutual funds face a fundamental conflict
between producing profits for their owners and generating superior returns for
their investors. The best way to evaluate a fund is by digging a bit deeper
into the fees and also looking at the turnover ratio prior to investing. It is
important to understand the good and bad points. The probability of a
successful portfolio increases dramatically when you do your homework.
What
is the best way to manage and maximize a sudden sum of money?
100% of people found this answer helpful
I
would initially consult with a CPA for tax planning then with a financial
advisor in order to properly analyze your current portfolio for diversification
within all of your accounts.
By
utilizing the services of a financial advisor you would be able to identify
your individual investment goals, time horizon, tax strategies, and risk
tolerance. Once that is in place, there are many options to choose from taking
into consideration what is suitable for you individually. Also, an advisor
would be able to make certain that you are properly diversified in order to
minimize any potential downside.
Just
to clarify:
Retaining
the services of an experienced financial advisor far outweigh the services of a
robo advisor or even a discount firm. There are many variables and personal
financial differences that cannot be evaluated by mathematical algorithms.
Also, your financial advisor is a trusted advisor available for consulting with
you during the ups and downs of the market. Dealing with a small
independent advisor will enable you to customize a portfolio specifically for
you and your family.
Which
financial securities license is the best bet for me?
100% of people found this answer helpful
If
you are going to school for the Series 65 and 6 are you being sponsored by a
firm? Before you make up your mind which exam or exams are the
best for your future career, I would advise interviewing with some different
types of investment firms.
Starting
out with a large firm that offers an intensive training program that will
expose you to securities and/or insurance. Also a firm that is geared
more toward financial planning and insurance. Or if you know a successful
financial advisor that concentrates on either field then you could look to work
as an intern. Any of these firms then would be able to require which exam is
best for your future financial career. They would also be able to sponsor you
on each exam. Providing you proper study material and fees for each exam.
There
are many different specialties and approaches so that identifying what area of
concentration you prefer and enjoy would be advisable before taking an exam
that may or may not be useful down the road.
Can
I apply the Five-Year Rule to my Roth 401(k)?
100% of people found this answer helpful
I
would recommend transferring your Roth 401(k) into your Roth IRA. And no, you
would not incur any taxes and the funds would be available immediately since
you are 62 years old.
The
five year rule applies if you do a Roth conversion before you are 59.5
years of age, is that you have to wait five years or until you are 59.5,
whichever comes first, before you can withdraw the principle without tax
and penalty. If you are already 59.5 when you make the conversion, you can
withdraw the principle immediately but have to wait five years before you
withdraw any of the earnings without penalty.
An
investor may withdraw his or her contributions to a Roth IRA at
any time without tax or penalty. But, that is not the same case for
any earnings or interest that you have earned on your Roth
IRA investment. In order to withdraw your earnings from a Roth IRA tax and
penalty free, not only must you be over 59.5 years old, but your initial
contributions must also have been made to your Roth IRA five years before the
date when you start withdrawing funds. If you did not start contributing in
your Roth IRA five years before your withdrawal, your earnings would not be
considered a qualified distribution from your Roth IRA because of its
violation of the five year rule.
The
five year rule for your Roth IRA earnings starts on January 1st of the year you
make your first contribution. That is when your clock starts. Because you can
make a Roth IRA contribution up to April 15th of the next year, your five years
technically would not have to be five calendar years. The clock for earnings
could count as having started on January 1st as long as you designated
contributions up until April 15th for the previous tax year.
The
clock only starts with regular Roth IRA contributions in the very beginning
with the first contribution ever to be placed into the Roth. However, this is
not the case with a Roth IRA conversion; the five year rule clock restarts with
every conversion with the amount and date it was converted.
How
long will it take for me to receive the money that I profited from the stock
market?
100% of people found this answer helpful
Once
you buy a stock, ETF, mutual fund or any liquid security that trades on the
stock market that increases in value after you have bought it will have
what is called paper profit. A paper profit means you have unrealized capital
gain in your stock or investment. It is the current market price of your stock
compared to what you paid for it. Your gain will only be realized once you sell
your stock.
Conversely,
if your stock has gone down in value after you have bought it then you have a
paper loss. Which is an unrealized capital loss in your stock or investment. It
is the difference between what you paid for it and where it is currently
trading. You will only realize your loss once you sell your stock while it is
down in price from what was paid.
If
you have not sold your stock position then you do not have a capital gain or
loss for tax purposes, although there is a gain or loss in value.
Once
you sell your stock or investment in your brokerage account then there a three
days until the funds have settled in your account. At that time you will have
access to the funds to reinvest or perhaps have a check or wire sent out to
you.
The
Securities and Exchange Commission (SEC) requires trades to be settled within a
three-business day time period, also known as T+3. When you buy stocks, the
brokerage firm must receive your payment no later than three business days
after the trade is executed. Conversely, when you sell a stock, the shares must
be delivered to your brokerage within three days after the sale. In other
words, if you make a purchase trade on Monday, the shares would actually have
to arrive in your account, and your money would have to arrive in the seller's
account, on Thursday.
In
addition to stocks, the T+3 rule also covers bonds, municipal securities,
mutual funds (if traded through a broker), and some other securities
transactions.
The
fact that it takes three days for trades to settle can affect your ability to
sell a stock, buy another stock, and then sell that stock in a period of less
than three days. In other words, it may create a problem if you attempt a
selling transaction on a stock you own, but whose purchase has not settled yet.
How
liquid are Vanguard mutual funds?
100% of people found this answer helpful
All
mutual funds are liquid, although they may have different redemption schedules
which would require a fee be charged in the case of liquidity needs.
At
the end of each trading day, all mutual fund orders are executed at the fund's
net asset value. Vanguard or any other mutual fund will be just as liquid as a
stock. The only difference being that a stock is sold at different prices over
the course of a trading day whereas a mutual fund is sold at the end of
the day at the fund's net asset value.
There
are different redemption fees according to which share class of the fund
you buy and this will determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. (The expense ratio usually differs with which share class
you buy as well.)
If
you are using Vanguard there is no need to invest in a particular share
class. No-load funds are not technically a "share class."
Four
of the best no-load fund families include Vanguard Investments,Fidelity Investments, T. Rowe Price,
and PIMCO.
Additionally,
mutual funds are required to maintain liquidity and the capacity to accommodate withdrawals. Funds
typically have to keep a portion of their portfolio as cash. The funds are
keeping cash balances of usually around 8% of the fund.
Which
is the more tax-friendly account to distribute from?
100% of people found this answer helpful
All
Roth IRA distributions are tax free giving investors the most tax friendly
distributions. I have attached an article on the benefits of converting your
traditional IRA into a Roth IRA which would be a more tax friendly account to
take your distributions from, although when you convert from a traditional IRA
to a Roth IRA you are required to pay taxes at the time of conversion.
Additionally, with a Roth IRA you are not required to take your required
minimum distributions. Which would give you more control of your distributions.
Converting
your traditional IRA or 401(k) (or at least a portion of these funds
depending on what taxes could easily be paid on those dollars that year or over
a series of years) into a Roth
IRA is a simple solution. By
converting your traditional IRA into a Roth IRA you will:
Converting
from a traditional IRA to a Roth could be a useful tool. By paying taxes today
you can take advantage of historically low rates. Additionally, our
new White House administration’s tax plan could potentially make it an even
more attractive time.
When
is it safe to transition my investments from equities to bonds?
100% of people found this answer helpful
Whether
you want to take profits on your equities or lighten up your exposure to
equities, in a rising interest rate environment you may want to
consider shorter duration bonds. This reduces your sensitivity to movements and
U.S. interest rates. You can take on more credit risk so you add some yield
cushion to your portfolio. If you are investing in high yield bonds, you are
already shortening duration versus investment grade corporate bonds, and you
are increasing the yield cushion. You can also look for less correlated
asset classes that also provide yield. This may include equity income type
strategies or emerging market debt type strategies.
There
are a number of different ETF solutions for investors to target rising interest
rates. One might be on the credit side on the high yield space or a high
yield bond ETF. On the opposite side of the spectrum is an interesting credit
opportunity with short duration is an investment grade floating rate note.
If
you think interest rates are headed up, you can protect yourself by investing
in debt securities whose interest payments adjust regularly. Floating-rate
funds invest in bank loans made to low-quality companies. The rates on these
loans usually reset every 30 to 90 days at a few percentage points above a
benchmark of short-term rates. Until the financial crisis struck, bank-loan
funds had done a superior job of delivering above-average yields with minimal
movements in their share prices. In 2008, the average bank-loan fund
surrendered 30%, although the sector has rebounded strongly, gaining 42% on
average in 2009 and 9% last year.
Can
I rollover securities in-kind from a traditional IRA to a Roth?
100% of people found this answer helpful
Yes,
you may do a Roth conversion with your entire traditional IRA or even do a
partial conversion. And no, you need not sell any postions in order to
facilitate the conversion. Actually, taking advantage of any price depreciation
is a good strategy since you will be paying taxes at your current tax rate then
once it is in the Roth IRA it may continue to grow tax free.
You
may also undo your conversion. The IRS also allows you to re-characterize your
Roth IRA back to a traditional IRA, which may be valuable if your investment
value declines further down after you have done the conversion or if your
financial situation changes and you do not want to pay your tax bill that year,
as you can recoup the taxes paid for the conversion. If you do need to undo
your conversion it has to be the entire account, therefore opening more than
Roth IRA to convert or doing a conversion could be options if this is a concern.
Another
benefit to converting to a Roth is the avoidance of having to take the required
minimum distributions after the age of 70.5 each year. Your heirs will also
receive Roth funds tax-free versus at their top tax bracket.
Due
to the Tax Increase Prevention and Reconciliation Act of 2005, all holders
of IRAs (SEP,
SIMPLE and traditional) can convert to a Roth IRA regardless of their income.
Previously, in order to be able to convert from an IRA to a Roth IRA your
income needed to be under $100,000. Many IRA holders may not be aware of this
strategy and as a result may be missing out on an opportunity to eliminate
future taxes on their retirement plans, thereby compounding their total return.
Through
a Roth conversion, you simply elect to be taxed at current individual tax rates
for the total amount that you convert to a Roth IRA. You may do a full or a
partial conversion. Once it is converted, any withdrawals from the Roth account
after five years and achieving the age of 59.5 will be tax-free. Additionally,
IRA investments in private holdings that are anticipating a step up in
valuation could afford a significant tax advantage.
Converting
from a traditional IRA to a Roth could be a useful tool. By paying taxes today
you can take advantage of historically low rates. Also, if you are young enough
you may still have plenty of deductions that could potentially help offset the
taxes. Additionally, our new White House administration’s tax plan could
potentially make it an even more attractive time.
What
does it mean when you are waiting for a bond to settle?
100% of people found this answer helpful
The
Settlement Date is an industry term describing the date on which a bond
or an equity/stock settles. The actual day on which transfer of cash or
assets is completed and is usually a few days after the trade was done. Investors
must complete or "settle" their security transactions within three
business days. This settlement cycle is known as "T+3," shorthand for
"trade date plus three days."
T+3
means that when you buy a security (bond), your payment must be received by your
brokerage firm no later than three business days after the trade is executed.
Whereas when you sell a security (bond), you must deliver to your brokerage
firm your securities certificate no later than three business days after the
sale (only if the bond is not held in your account). Proceeds will be
available in your brokerage account on the settlement day as well.
The
three-day settlement date applies to most security transactions, including
stocks, bonds, municipal securities, mutual funds traded through a brokerage
firm. Government securities and stock options settle on the next business day
following the trade.
For
many years, markets operated on a "T+5" settlement cycle. In 1995,
the U.S. Securities and Exchange Commission reduced the settlement cycle from
five business days to three business days, "T+3", which in turn
lessened the amount of money that needs to be collected at any one time and
strengthened our financial markets for times of stress. On September 5, 2017
the T+3 goes to T+2 shortening the settlement by one day.
Is
it legal for my stock broker to request a percentage of a non-commissioned
trade?
100% of people found this answer helpful
Your
stockbroker has been working for you on a commissioned basis and has now
decided that since his advise has been profitable he wants to participate in
your profits. This sounds like a conflict of interest. The paragraph below
is an excerpt from the SEC/FINRA on sharing of profits in accounts:
"(c)
Sharing in Accounts; Extent Permissible (1)(A) Except as provided in paragraph
(c)(2), no member or person associated with a member shall share directly or
indirectly in the profits or losses in any account of a customer carried by the
member or any other member; provided, however, that a member or person
associated with a member may share in the profits or losses in such an account
if: (i) such person associated with a member obtains prior written
authorization from the member employing the associated person; (ii) such member
or person associated with a member obtains prior written authorization from the
customer; and (iii) such member or person associated with a member shares in
the profits or losses in any account of such customer only in direct proportion
to the financial contributions made to such account by either the member or
person associated with a member."
There
needs to be full disclosure of all fees and commissions prior to hiring a
financial advisor. Nevertheless, 70% of firms say their pricing is
simple and easily understood by their clients. Yet only 30% of clients agree
that they completely understand the fees and commissions they are charged.
And 25% of clients think they do not pay any fees at all.
Look
for an advisor who is transparent. An advisor who is changing how
they bill their clients will work only if they make sure clients
understand what they are being billed for and why your billing practice is
changing. As an uninformed client you may simply misunderstand what
is happening and think you are being taken advantage of.
In
each of these cases, there is a good chance your investment
philosophies are incompatible. Working with an incompatible financial advisor
is not in your best interest. If your financial advisor is not forthright about
their compensation and the exact cost of their advice, you may want to
start looking for a new advisor. All the compensation an investment advisor
receives should come directly from his clients. Any other sources of income
should be insignificant and fully disclosed. Brokers can earn commissions
on trades, trailer fees for mutual funds and annuities, and bonuses tied to
their firm’s proprietary investment products or trading. These other sources of
income create lots of conflicts. There is nothing wrong with paying your
financial advisor. They work hard to ensure your money works for
you. But you deserve to know how your advisor gets paid and which
option benefits you in the long run.
This
related answer may be of interest:
How do I determine if I am being fairly charged by my
financial advisor?
100%
of people found this answer helpful
If
you financial advisor is not giving you full disclosure of all fees you are
paying then I would seriously consider another advisor. Whether you have asked
him and not received a straight answer or if you do not feel comfortable enough
to ask would be reason enough.
The
following are differing structures most financial advisor use:
There
are times that the percentage of assets is appropriate then there are other
times that a commission is to your advantage. Personally, I use both. It
depends on the client and the client's assets. This is a subject that should be
discussed prior to investing or entering into a relationship with an
advisor.
It
is important to always ask a financial advisor for a clear explanation of how
they will be compensated before you hire them. This is one question
you would want to ask any potential financial advisor. Look for an honest,
straight-forward answer and avoid "advisors" who try to avoid
the question.
Can
I do an in-kind transfer from my 401(k) into an after-tax brokerage account?
100% of people found this answer helpful
Yes,
you may although it would be to your advantage to transfer your 401(k) into a
traditional IRA at your brokerage firm. This would not be a taxable event and
you should be able to maintain all of your positions. Then you may convert
all or partial positions into a Roth IRA as you please and will be taxed on
each conversion. One advantage is that you may re-characterize your
Roth IRA conversion back to your traditional IRA, but may not re-characterize
back if done directly from a 401(k).
Converting
your traditional IRA or 401(k) (or at least a portion of these funds
depending on what taxes could easily be paid on those dollars that year or over
a series of years) into a Roth
IRA is a simple solution. By
converting your traditional IRA into a Roth IRA you will:
Is
it better to hold a REIT in a taxable account or a Roth IRA?
100% of people found this answer helpful
I
like REITs regardless of whether you hold them in a taxable account or a Roth
IRA account. Investing the maximum contribution in each year in your Roth IRA
should take priority since those assets will grow tax free. And you could
easily buy a REITs in your ROTH IRA account once you have funded it. You are
not allowed to transfer assets from a taxable account to a Roth IRA. The
contribution must be in cash and the limit is $5500 per year and $6500 if
you are over the age of 50.
If
you also have a traditional IRA you may want to consider converting your
traditional IRA to a Roth IRA. Converting your traditional IRA (or at
least a portion of these funds depending on what taxes could easily be paid on
those dollars that year or over a series of years) into a Roth IRA is
a simple solution. By converting your traditional IRA into a Roth IRA you will:
For
related reading please see the attached article outlining another strategy
involving real estate limited partnerships and Roth IRA conversion:
Tax
Savings with a Roth IRA and Real Estate
Due
to the Tax Increase Prevention and Reconciliation Act of 2005, all holders
of IRAs (SEP,
SIMPLE and traditional) can convert to a Roth IRA regardless of their income.
Previously, in order to be able to convert from an IRA to a Roth IRA your
income needed to be under $100,000. Many IRA holders may not be aware of this
strategy and as a result may be missing out on an opportunity to eliminate
future taxes on their retirement plans, thereby compounding their total return.
Through
a Roth conversion, you simply elect to be taxed at current individual tax rates
for the total amount that you convert to a Roth IRA. You may do a full or a
partial conversion. Once it is converted, any withdrawals from the Roth account
after five years and achieving the age of 59.5 will be tax-free. Additionally,
IRA investments in private holdings that are anticipating a step up in
valuation could afford a significant tax advantage.
Real
Estate Limited Partnerships
In
IRAs, investors may hold different types of investments such as real estate limited partnerships, stocks and/or bonds. By purchasing a private real estate
development partnership in your IRA you could potentially receive a significant
valuation discount upon a Roth conversion with an appealing tax advantage.*
Once purchased during the first quarter of each year, a third-party
evaluation is determined for ERISA requirement. The partially completed
property often values at 35–50% of the original investment during the
construction phase. This creates a structured tax benefit. The private placement
must receive an annual valuation under the ERISA guidelines. During the reduced fair market value per
unit, there is an opportunity for a Roth conversion. In a Roth, the future
growth and gains are tax-free.
Take,
for example, an original IRA investment of $100,000 in a real estate limited
partnership. After one to two years the real estate company provides for an
independent third-party LP evaluation of the investment. Assume a 40% valuation upon which a Roth conversion will be made. The actual
value of the investment moved to the Roth IRA was $100,000 and will be taxed at
an assumed 40% tax bracket, then a $16,000 tax bill would be due (40% of
$40,000 valuation).
These
are the taxes due after the revaluation process and because of the IRA
conversion. Assuming a hypothetical 28.86% average annual return on investment
and a 5.33 years holding period, the approximate value of the tax-free
investment would be $253,920. (These hypothetical numbers of average return and
holding period are based on past performance of a partnership. Past performance
is no guarantee of future results.)
The
IRS also allows you to re-characterize your Roth IRA back to a traditional IRA,
which may be valuable if your investment value declines or if your financial
situation changes and you do not want to pay your tax bill that year, as you
can recoup the taxes paid for the conversion. Another benefit to converting to
a Roth is the avoidance of having to take the required minimum distributions
after the age of 70.5 each year. Your heirs will also receive Roth funds
tax-free versus at their top tax bracket.
*The
amount of taxable income on a Roth conversion is based on the fair
market value (FMR) of the IRA assets subject to
the conversion. The lower the FMV of the IRA assets, the lower the taxes that will
be due on the Roth IRA conversion. Pursuant to case law, the standard of FMV is
an objective test using hypothetical buyers and sellers. In determining the
valuation of an LLC the assets to be valued must be the interests in the
entity. This allows a discount when determining the FMV of the IRA assets
subject to the conversion, thereby reducing the amount of tax you pay on the
conversion. The Roth conversion strategy is based on tested case law. The
valuation discounts applicable to an LLC with IRA assets typically fall into
two categories: 1) a discount for lack of control, and 2) a discount for lack
of marketability. This could potentially allow you to take a discount of
anywhere from 35% to 50% on the value of the IRA assets subject to the Roth conversion.
The Roth conversion valuation discount strategy can save you thousands of
dollars in taxes is based on established case law.
Why
should I invest in consumer cyclical stocks?
100% of people found this answer helpful
A
properly diversified portfolio will have varying allocations to consumer
cyclical stocks. When the U.S. economy is growing and looks to be expanding
then consumers are more confident in the future and should spend more. In this
environment, the consumer cyclical sector should do well.
When
consumers believe they will keep their jobs or think they will get a raise
then they are more likely to spend money.
Sentiment
apparently has recently grown stronger after Trump's election. Regardless of
whether he will keep his promises, consumers seem to be fairly confident in the
future.
The
other indicator toward a strong economy is the unemployment rate, which
continues its strong trend downwards, and new housing starts, which are rising
consistently:
While
there is still room for improvement in the case of housing starts to reach the
pre-2008 crash level, both metrics are clearly heading in the right direction.
When you have the three factors combined (low unemployment rate, more housing
starts and strong consumer confidence), you can expect people to spend more
money in the years to come. In this scenario, the consumer cyclical sector
should have a proper allocation to your portfolio.
100% of people found this answer helpful
There
are exceptions to the 10% IRS early withdrawal penalty and that includes when
an employee separates from service during or after the year the employee
reaches age 55 (age 50 for public safety employees of a state, or political
subdivision of a state, in a governmental defined benefit plan). This exception
applies to 401(k) retirement plans only.
Qualified
public safety employees: Effective for distributions after December 31, 2015,
the exception for pubic safety employees who are age 50 or over is
expanded to include specified federal law enforcement officers, customs and
border protection officers, federal firefighters and air traffic controllers.
Also, the restriction that only defined benefit plans qualify for the exemption
is eliminated. Thus, an exemption is allowed for distributions from defined
contribution plans or other types of governmental plans, such as the TSP. As
amended by the Defending Public Safety Employees’ Retirement Act.
For
more details, please see attached article:
How
to Avoid the 10% IRA Early Withdrawal Penalty
Have
you ever wondered how you could get money out of your traditional IRA pre-59.5
years of age without paying the 10% early withdrawal penalty? There is a little
known section of the IRS tax code: Section 72t that allows you to take substantially
equal periodic payments (SEPP) on
an annual basis before the age of 59.5 without paying the 10% early withdrawal
penalty. The IRS stipulates you take money out of your IRA for five years or
until the age of 59.5, whichever is longer.
According
to the IRS, funds contributed to investment vehicles such as IRAs or non-qualified annuities are locked into the
investment until the money matures. Money in these accounts mature when the
investor turns 59.5 years of age. Any and all funds taken out of these accounts
prior to 59.5 are subject to a 10% early withdrawal penalty fee in addition to
any income tax incurred by the withdrawal. Section 72t essentially allows
investors to forgo the 10% fee by making SEPPs.
This
allows investors access to those dollars for many differing personal financial
reasons and mitigates the size of their traditional IRA, thereby decreasing
their RMD (required minimum distribution) after age 70.5.
Keep
in mind that any distributions coming out of your traditional IRA will count as
provisional income, possibly increasing the likelihood your Social Security may
be taxed, contrary to Roth IRAs, which have no taxation from distributions and
are free from federal, state and capital gains tax as long as you are over 59.5
years of age. Roth IRAs also have no Social Security tax. Roth IRA distributions
do not count against income thresholds that may cause Social Security benefits
to be taxed.
Set
up SEPPs Before Retirement
In
order to calculate the proper balance when taking advantage of the 72t you may
need to act before retirement. By postponing until retirement you may risk tax
rates being higher than they are today. And you may find you have to shift
larger amounts of money because your assets by that time will have grown
and compounded.
When
you shift assets during retirement, the additional provisional income causes
your Social Security to be taxed.
The
amount you can withdraw by way of a 72t fluctuates based on a number of criteria, including
the age of the account holder and interest rates. All of your future payments
will be exactly the same until the SEPP is no longer in effect. It is important
to know the amounts you have calculated will be the exact figures for your
payments from the account. You cannot name your own amount to take each year.
How
to Raise or Lower SEPP Amount
The
way to impact the amount of the payment is to adjust the balance in the IRA. If
you have more than one IRA available, you can transfer funds into one account
to increase or decrease your payment. This must be done before
establishing the SEPP. You cannot deposit money into or remove funds from
your IRA while the SEPP is in place other than the required payments from the
account each year. Any deviation from the prescribed payments will cause the
SEPP to be canceled which can result in negative consequences.
Exceptions
to the 10% Early Withdrawal Penalty
The
following are specific circumstances that will allow exceptions to the 10%
penalty under IRS Section 72t:
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Setting
up a trust is worth considering in this case since
the beneficiary is a minor. As you want to keep the
money out of the hands of creditors (such as divorcing spouses) or control the
cash distributions to a heir you may regard as a spendthrift. The trust
may force your beneficiary to take advantage of the stretch-out. By
naming a minor as the beneficiary, he or she will be able to stretch the life
of the IRA by making (smaller) required withdrawals based on his or her
(longer) life expectancy. After the time of death, a guardian will be
needed for the minor beneficiary which you should indicate, if you do not
indicate then one will be appointed by the courts.
Heirs
can draw out the required minimum required distributions over their own
expected life spans. The stretch-out is a financial strategy to extend the
tax advantages of an IRA. Stretching out the IRA gives the funds extra
years and possibly decades of income tax deferred growth in a traditional
IRA or tax free growth in a Roth IRA. This is an excellent investment
opportunity. Minimum required distributions are based on life expectancy. The
longer the life expectancy, the smaller (as a percentage of the IRA balance)
each payout must be. From an income tax perspective, the best designated
beneficiary would be a young person or in this case a minor.
Are
high yield bonds a good investment?
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High
yield bonds are riskier than investment grade bonds. Although doing your
research will make you a better high yield investor, but it will not
necessarily eliminate the risk. High yield bonds should be a
part of a diversified portfolio, one that includes a mix of various
kinds of investments over several industries. The more you
allocate to high yield bonds, the more aggressive your portfolio
would be considered.
Timing
is everything. More conservative investors typically buy them during
economic booms. Whereas a more aggressive investor will buy them during a
reccession when they predict the economy is about to rebound.
High
yield bonds have grown in the past 25 years and are now an asset
class on their own. Some well-known high yield bonds currently available are
issued by companies including Sprint Corp., Revlon and J.C. Penney Co.
Several
mutual fund providers, including DoubleLine, Pimco, Fidelity, T. Rowe
Price and Putnam offer high yield products. There are also ETFs and Unit
Investment Trust that all have exposure to high yield bonds while providing for
diversification.
For
investors who want income and can tolerate more volatility than
traditional bonds, high yield bonds may be a good investment.
What
are my options to avoid the pitfall of tax deferring IRAs?
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I
have attached two articles that pertain to your situation. The first article
addresses the power of Roth conversions and the second article listed below
goes over a real estate investment stategy ideally for Roth conversions:
1)
Income Taxes and Your Retirement Accounts
Depending
on your view of where you believe taxes are headed, it might be a concern when
making your retirement investment decisions. We have all been advised to put
money away for retirement in tax deferred accounts like 401(k)s and IRAs. As
your 401(k) and IRAs grow, so does the government’s share since they are your
uninvited partner. Unlike most business partnerships, the IRS can increase
their percentage of your hard-earned tax deferred savings at their discretion.
Look
at where federal income tax rates have historically ranged:
History
of Tax Rates: 1913 – 2014
Tax
Rates Throughout History
In
1913, the United States endorsed the 16th Amendment and instituted the
federal income tax. That year the top tax bracket was 7% on income over
$500,000 (in today’s dollars that amount would equal approximately $11
million). Conversely, the lowest tax bracket in 1913 was 1%. Lawmakers use
taxes to stimulate a sector of the economy or to raise revenue. You have
heard the saying that the two things you can count on are death and taxes? Well
death does not get any worse (to my knowledge) every time Congress meets.
To
finance World War I, Congress passed the 1916 Revenue Act and thereafter the
War Revenue Act of 1917, which increased the highest federal income tax rate
from 15% in 1916 to 67% in 1917 and 77% in 1918. We all know war is very
expensive. After the war in the roaring 1920s, federal income tax rates
decreased to 25% from 1925 to 1931.
Then
came the Great
Depression, and Congress decided to raise
federal income tax rates again in 1932 from 25% to 63% for those in the top tax
brackets. Then came another war, WWII, and in 1944 the top rate was 94% on
income over $200,000 (in today’s dollars that amount would be approximately
$2.5 million). Top tax rates didn't decrease below 70% through the 1950s,
1960s or 1970s.
The
Economic Recovery Tax Act of 1981
In
1981, the Economic Recovery Tax Act of 1981 decreased the top bracket from 70% all the way
down to 50%, indexing the brackets for inflation. Then in 1986, lawmakers
enacted the Tax Reform Act of 1986, expanding the tax base and dropping the top
income tax rate to 28% beginning in 1988. The theory was that having a broader
base had fewer deductions and would bring in the same revenue. That 28% income
tax rate only lasted three years.
In
the 1990s, federal income tax rates went to 39.6%. Then the Economic Growth and
Tax Relief and Reconciliation Act of 2001 decreased the top income tax rate to
35% where it stayed from 2003 through 2012.
More
recently, the American Taxpayer Relief Act of 2012 raised the top federal income tax rate to 39.6%. Then
the Patient Protection and Affordable Care Act added another 3.8%, making the
total maximum income tax rate 43.4%.
In
summary, I find it imperative to look at history to predict the future since
these changes can affect your investments. Higher taxes mean less money for
your retirement years. Moving your tax deferred funds from accounts that are
forever being taxed to accounts that are never taxed is one solution.
Converting
to a Roth IRA
Converting
your traditional IRA or 401(k) (or at least a portion of these funds
depending on what taxes could easily be paid on those dollars that year or over
a series of years) into a Roth
IRA is a simple solution. By
converting your traditional IRA into a Roth IRA you will:
Converting
from a traditional IRA to a Roth could be a useful tool. By paying taxes today
you can take advantage of historically low rates. Also, if you are young enough
you may still have plenty of deductions that could potentially help offset the
taxes. Additionally, our new White House administration’s tax plan could
potentially make it an even more attractive time.
(For
more from this author, see: Tax Savings with a Roth IRA and Real Estate.)
*In
1983, President Ronald Reagan and House Speaker Tip O’Neill passed a law that
would tax Social Security benefits in order to ensure the long-term viability
of the program. The IRS created income limits, or thresholds, that determine
whether or not your benefits will be taxed. Now we understand what actions the
IRS will take if you do not take your RMDs from your traditional IRA, if you
take out too much you will pay higher taxes on your Social Security
benefits
2) Tax Savings with a Roth IRA and Real Estate
Due
to the Tax Increase Prevention and Reconciliation Act of 2005, all holders
of IRAs (SEP,
SIMPLE and traditional) can convert to a Roth IRA regardless of their income.
Previously, in order to be able to convert from an IRA to a Roth IRA your
income needed to be under $100,000. Many IRA holders may not be aware of this
strategy and as a result may be missing out on an opportunity to eliminate
future taxes on their retirement plans, thereby compounding their total return.
Through
a Roth conversion, you simply elect to be taxed at current individual tax rates
for the total amount that you convert to a Roth IRA. You may do a full or a
partial conversion. Once it is converted, any withdrawals from the Roth account
after five years and achieving the age of 59.5 will be tax-free. Additionally,
IRA investments in private holdings that are anticipating a step up in
valuation could afford a significant tax advantage.
Real
Estate Limited Partnerships
In
IRAs, investors may hold different types of investments such as real estate limited partnerships, stocks and/or bonds. By purchasing a private real estate
development partnership in your IRA you could potentially receive a significant
valuation discount upon a Roth conversion with an appealing tax advantage.*
Once purchased during the first quarter of each year, a third-party
evaluation is determined for ERISA requirement. The partially completed
property often values at 35–50% of the original investment during the
construction phase. This creates a structured tax benefit. The private
placement must receive an annual valuation under the ERISA guidelines. During the reduced fair market value per
unit, there is an opportunity for a Roth conversion. In a Roth, the future
growth and gains are tax-free.
Take,
for example, an original IRA investment of $100,000 in a real estate limited
partnership. After one to two years the real estate company provides for an
independent third-party LP evaluation of the investment. Assume a 40% valuation upon which a Roth conversion will be made. The actual
value of the investment moved to the Roth IRA was $100,000 and will be taxed at
an assumed 40% tax bracket, then a $16,000 tax bill would be due (40% of
$40,000 valuation).
These
are the taxes due after the revaluation process and because of the IRA
conversion. Assuming a hypothetical 28.86% average annual return on investment
and a 5.33 years holding period, the approximate value of the tax-free
investment would be $253,920. (These hypothetical numbers of average return and
holding period are based on past performance of a partnership. Past performance
is no guarantee of future results.)
The
IRS also allows you to re-characterize your Roth IRA back to a traditional IRA,
which may be valuable if your investment value declines or if your financial
situation changes and you do not want to pay your tax bill that year, as you
can recoup the taxes paid for the conversion. Another benefit to converting to
a Roth is the avoidance of having to take the required minimum distributions
after the age of 70.5 each year. Your heirs will also receive Roth funds
tax-free versus at their top tax bracket.
*The
amount of taxable income on a Roth conversion is based on the fair
market value (FMR) of the IRA assets subject to
the conversion. The lower the FMV of the IRA assets, the lower the taxes that
will be due on the Roth IRA conversion. Pursuant to case law, the standard of
FMV is an objective test using hypothetical buyers and sellers. In determining
the valuation of an LLC the assets to be valued must be the interests in the
entity. This allows a discount when determining the FMV of the IRA assets
subject to the conversion, thereby reducing the amount of tax you pay on the
conversion. The Roth conversion strategy is based on tested case law. The
valuation discounts applicable to an LLC with IRA assets typically fall into
two categories: 1) a discount for lack of control, and 2) a discount for lack
of marketability. This could potentially allow you to take a discount of
anywhere from 35% to 50% on the value of the IRA assets subject to the Roth
conversion. The Roth conversion valuation discount strategy can save you
thousands of dollars in taxes is based on established case law.
What
is a long-short mutual fund?
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Long-short
mutual funds are market neutral, dividing their exposure equally between long
and short positions in an attempt to earn a modest return that is not tied to
the market's swings. Other long-short portfolios that are not market neutral
will shift their exposure to long and short positions depending upon their
macro outlook or the opportunities they uncover through research.
The
strategy seeks capital growth and income. For example, one
strategy will invest in a diversified group of assets, such
as investing 55-65% of its assets in equity securities (including
stocks and equity funds) and 35-45% in fixed income securities (including bonds
and fixed income funds), and cash and cash equivalents (including money market
funds). For temporary defensive purposes during unusual market conditions or
for liquidity purposes, the fund has the option to invest up to 100% of
its assets in cash, money market instruments, and other short-term
obligations.
Long-short mutual
funds, which bet for and against stocks at the same time, offer ways to seek profits,
protection or some of both. Many of them do not try to beat the stock
market, they try to lock in most of the market's gains while paring losses
when it falls; although typically with higher fees.
There
are many different kinds of long-short funds. The example I used
above uses a middle-of-the-road approach. On the conservative end, a
"market neutral" fund uses positions designed to negate market
movements entirely. Investors make money only if the manager buys and shorts
the right stocks.
Market-neutral
funds are not designed to generate big gains. They aim for low
correlation, or for moving independently of the broad market rather
than with it, a benefit during market volatility when all assets can
trade similarly.
There
are plenty more strategies than these that extend to different asset classes or
use different tools, like options, to achieve their targets.
The
biggest drawback are usually the fees. The average expense for the long-short
category as a whole is more than 2% of assets per year, compared with an
average of 1.3% for U.S. stock funds.
Long-short
strategies are best suited to investors who expect low returns from stocks in
coming years, because these strategies do not rely solely on market returns. In
this environment, the best funds might be those that seek to reduce stock
market exposure without eliminating it. The goal is to get most of the market's
returns when stocks go up, while paring the losses when stocks tumble.
The
problem with these funds is that ambivalent investors might find comfort
in them, whereas any investor who is bullish or bearish could likely have
better options elsewhere.
Should
I rent out inherited property?
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Deciding
on whether to sell real estate has many factors. The location of your property
and the corresponding value. Location would be attributed to what type of real
estate market. If it is a home for $200,000 then it does not sounds like you
are not in a high growth market. Do you live close to the property or will you
have to travel to the property for maintenance, etc. Or what is the condition
of the home. How much will you potentially need to put into it to upgrade or
maintenance costs. I have worked with clients who have owned rental homes or
apartment buildings and after a thorough analysis their returns were much lower
than they realized. I would advise you to consult with a financial advisor or
your CPA to evaluate your potential return on a rental.
On
the other hand, you would have a broader array of investment choices with much
higher diversification investing in more liquid investments. You could even
have exposure to real estate within REITs along with other asset classes that
would give you a more stable predictable cash flow.
Should
I invest more into saving for a down payment on a house or saving for
retirement?
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You
are still young enough to have to time to contribute to your Roth IRA,
which you may want to continue to contribute to. If it is not performing well
then that needs to be confronted and perhaps you should look at some better
performing long term investments alternatives. You can leave it in cash or
CDs in the interim if you like until you make those decisions. I would look at
some discounted no load index mutual funds.
Saving
for a down payment in order to buy a home is also important. If you could
achieve that goal early in life then you would essentially be contributing to
your net worth over time with mortgage payments versus paying rent. Especially
if it is important to you to own your own home. That is if you plan on staying
in the same area for the long term.
I
would make the down payment a higher priority but continue making Roth IRA
contributions.
What
advantages do exchange-traded funds have over mutual funds?
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Having
a diversified portfolio in order to minimize risk by buying shares of
a mutual fund or an exchange-traded fund that is reflected to several
companies under a market index, industry sector or market cap. So for instance,
if you wanted to invest in the S&P 500 or a basket of large cap growth
stocks, there is most likely a mutual fund or ETF for you. If you had to choose
between a S&P 500 ETF or S&P 500 index mutual fund, what would be the
advantages. Although they mirror the same index, here are
differences:
Do
Trump's words/speeches affect the markets?
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Unfortunately,
most information in the media will affect the market at the very least for the
short term. Perceptions and emotions move individual stock prices and the
overall market in the near term. If investors feel that good times are ahead
for the economy and/or an individual company, the prices of those securities
will probably go up until that perception changes. Investors’ perceptions and
emotions are heavily influenced by news and the media. So when the government
reports one day that unemployment is dropping, the market could do well that
day.
But
if another negative report is released the very next day on a
potential increase in inflation, the market may decline. Additionally,
there are quite a few news stories that are released throughout the
day with many different forces at work which may move the market and stock
prices at any given time including but not limited to the White House or
President Trump.
Over
the long term, feelings, thoughts and emotions have almost nothing to do
with the market. It is all about real profits and interest rates. When you
own stock in a company you really own a small percentage of a business. As
the business becomes more profitable, the value rises. What people think
or feel about the future of a company will impact its stock price over the
short term. But the actual profits of the company will determine the stock
price over the long term.
Has
the recommended stock/bond mix changed throughout the years?
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Your
individualized asset allocation would be best determined by doing a
personalized portfolio analysis with a financial advisor. The market turmoil
that began in 2007 forced all investors to question the investment
theories, along with the asset allocation model of stocks, bonds, and
cash that investors had relied on to preserve and grow their wealth. The
stock, bond and cash allocation is antiquated and alternate investments have
shown to increase returns over the long term as well as to potentially decrease
volatility. So yes, the stock, bond and cash mix has changed to include a small
allocation to alternative investments although the stock, bond and cash allocation.
Also amoung each asset class should be adjusted according to the market,
interest rates and the economy; as well as your age and how close you are to
retirement and your risk profile.
The
endowment model, sometimes referred to as the Yale model, is highly influenced
by Yale’s long serving Chief Investment Officer, David Swensen, who was a
pioneer in the use of alternative investment strategies. The
endowment model emphasizes adding higher returning illiquid asset
classes to the traditional stock, bond, and cash allocation.
Should
I seek a new financial advisor?
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There
are no standard procedures. It all depends on the investments, your risk
tolerance, etc. The following are differing structures most financial advisors
use:
There
are times that the percentage of assets is appropriate then there are other
times that a commission is to your advantage. Personally, I use both. It
depends on the client and the client's assets. It looks like you are being
charged on the high end of percentage of assets perhaps because of the amount
of your account. Is this your only account? Usually an advisor will give you a
lower rate contingent on all assets under management or accounts. At times it
is not in the client's best interest to be paying an ongoing fee specifically
when their account activity demonstrates that they would be better served
by being in a commission/transaction based account. This is a subject that
is usually discussed prior to investing or entering into a relationship with an
advisor. Or in your case, you may want to revisit the question with your
advisor to see if you have any alternatives.
It
is important to always ask a financial advisor for a clear explanation of how
they will be compensated before you hire them. If your current advisor
is not willing to work with you regarding your concerns, I would look to interview
other advisors that may have a more flexible compensation plan that puts your
interests first. A broker's recommendation should be consistent with their
client's best interests.
100% of people found this answer helpful
What
fees are you paying for the portion of the estate that is being managed outside
of your IRA? If you have more than one account, you should be able to negotiate
a lower fee for the accounts depending on the total assets you have with
your current advisor. If you are not happy with the return relative to the fees
you are paying then yes, it is in your best interest to try to negotiate a
better rate. Whether that is with your current advisor or looking
elsewhere.
There
are many different investment choices that may be appropriate so a low
cost dividend stock is not your only option and there are also different fee
structures:
There
are times that the percentage of assets is appropriate then there are other
times that a commission is to your advantage. Personally, I use both. It
depends on the client and the client's assets. At times it is not in the
client's best interest to be paying an ongoing fee specifically when
their account activity demonstrates that they would be better served by
being in a commission/transaction based account. This is a subject that
should be discussed prior to investing or entering into a relationship with an
advisor. Or in your case, this is a subject you should have with your current
advisor to make certain you are getting the performance and service you
deserve. A broker's recommendation should be consistent with their client's
best interests.
Should
I start investing in a Roth IRA at 70 years old?
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You
could start investing in a Roth IRA as long as you have earned income,
unfortunately your RMDs do not qualify as earned income.
That
certain amount of money you are being told that you will need to start taking
out of your retirement plan is according to the Internal Revenue Service
(IRS) your required minimum distributions (RMDs). RMDs
begin at 70˝, and if you do not take your RMDs there is a 50% tax penalty which ensures
the government gets tax revenue from tax sheltered retirement accounts.
The
accounts subject to RMDs are:
There
are no required minimum distributions for a Roth IRA (unless you inherited
the account), though RMDs are required for Roth 401(k)s.
You
have to take your first required minimum distribution no later than April 1 of
the year after the year you turn 70˝. After your first RMD year, you need to
make your required distributions by December 31 of each successive year.
You do not want to wait until April 1 of the year after you turn 70˝,
because then you will have to take two distributions in the same
year, and that could elevate you into a steeper tax bracket, increasing your
taxes due.
Additionally,
if you are 70 or older, still working and do not own more than 5% of
the company you work for, you can delay your RMD from a 401(k) until you
retire.
The
financial firm that holds your IRA should let you know a RMD
will be due and send you a 1099-R form reporting the distribution. Although you
have to calculate the RMD separately for each IRA, you can take the total RMD
due from either a single IRA or from a combination of them but not from a Roth
IRA.
Also,
although you can withdraw more than the required minimum, you cannot use the
excess to meet the RMD requirements in future years.
For
employer-sponsored retirement plans and inherited IRAs, you must not only
calculate their RMDs separately, you must make the distributions from their
respective accounts.
Can
an advisor move to a different firm and take your account with him without your
consent?
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No,
if an advisor decides to leave his or her current investment firm and go to a
competitor, the client would need to fill out all new account documentation.
This would include a new account form, transfer form, etc. Even if the new firm
used the same clearing firm you would be required to execute all new documents
then be assigned a new account number for each account that is transferred to
the new firm.
Always
read any documents before signing or ask your advisor to explain in detail what
you are signing. Any transfer can be rescinded or transferred back to the
previous firm so you always have control of your assets.
How
can you borrow from a Roth IRA?
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Loans
are not allowed from IRAs or from IRA-based plans such as SEPs, SARSEPs
and SIMPLE IRA plans. Loans are allowed from qualified plans that satisfy the
requirements of 401(a), from annuity plans that satisfy the requirements of
403(a)s or 403(b)s, and from governmental plans.
That
said, with a Roth IRA, the principal amount may be withdrawn without any
tax consequence because you have already paid taxes on those funds.
You may borrow the principle from a Roth IRA although the appreciation is
different. The amount that your IRA has appreciated is not available for
withdrawal without paying certain types of taxes and fees.
Keep
in mind, there is an instance where you may not directly
withdraw the original investment from a Roth IRA. In this scenario, if you
have converted the funds over from your traditional IRA into a
Roth IRA, the amount converted over may not be available for a penalty
free withdraw for five years.
As
always, please refer to your CPA before making any personal tax decisions.
How
aware of my girlfriend's finances should I be?
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Yes,
a mutual sharing of both of your finances would be advised. You should not
assume anything without communication. Assuming is when communication starts to
break down regardless of the topic. Communication is the foundation of a solid
relationship and that includes finances. I would consider exchanging credit
reports to get a more accurate picture of each other's credit history. This is
especially important if you are going to be renting an apartment with both
of your names on the lease. It would be helpful to know each other's income and
savings. Also, it would be wise to know each of your expectations of all
expenses to be shared that are incurred when living together, such as rent,
grocery bills, restaurant, house cleaning expenses, etc. It is not always an
easy transition to go from dating to living together once reality sets in, but
having this conversation is essential and shows her that you are including her
in the financial decisions. The important element is that you are a team
and if either of you encounter any financial setbacks while living
together, then the more knowledge you have of each other's financial situation
would help you both be better prepared.
What
is the difference between a REIT and a real estate fund?
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A
REIT is a Real Estate Investment Trust that may be either a common or
preferred stock that trades publicly on the stock exchange. Publicly traded
REITs must meet stock exchange requirements that they trade on and make
disclosures to the SEC. To qualify as a REIT, one of the requirements is that
they must distribute at least 90% of taxable income to shareholders which is
why they make such attractive income investments. The fact that they are
publicly traded makes them much more liquid than a private real estate fund.
REITs pay a high level of distribution and most REITs focus on large properties
in their sector and geography of expertise. A preferred REIT is not
as volatile as the common although you may get a higher dividend on the common
stock of the same REIT.
Whereas,
a private real estate fund is an investment in the fund's assets. The fund
manager's income comes from their carried interest. Carried interest in finance
is a share of the profits of an investment paid to the investment manager in
excess of the amount that the manager contributes to the partnership. A
performance fee rewarding the manager for enhancing performance. Private
real estate funds may also buy different types of properties sometimes using
leverage which creates the opportunity to enhance their returns. Most pay
distributions and are non liquid with an expected exit strategy
designed a higher total return for investors. These type of funds
may invest in multifamily housing including student and senior housing,
office properties, senior mortgage loan mezzanine debt, or grocery store anchor
retail centers.
There
are also private REITs that pay monthly or quarterly distributions, have a
stated redemption date, and some with attached warrants to the company's
publicly traded common REIT. These can be attractive since they do not trade
with the market so they are not as volatile, pay income, have redemption
options, and have upside potential with the attached warrants to the
common.
What
can an in-person Financial Advisor provide that a Robo-Advisor cannot?
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In
the financial industry's dilemma of humans over machines, I am predicting that
people will prevail. I do not believe machines will be taking over portfolio
management using little human intervention. Robo-advisors is a one size fits
all financial solution. Everyone gets the same portfolio which means everyone
owns the same stock, when they all decide to sell you could experience
selling your position with added downside volatility.
Let’s
first make a distinction:
1)
Robo-advisors offer financial services with minimal human intervention.
They provide digital financial advice based on mathematical rules or
algorithms. These algorithms are executed by software and thus
their financial advice does not require a human advisor. The software
utilizes its algorithms to automatically allocate, manage and optimize clients’
assets. Most robo-advisor services are instead limited to providing portfolio
management without addressing issues such as estate and retirement planning and
cash-flow management, etc. which are also the domain of financial planning.
2)
A discount brokerage is a business that charges clients significantly
lower fees than a traditional full service brokerage firm but without
providing financial advice. Discount brokers typically allow investors as well
as consumers of financial services to buy and sell on-line while
offering comparatively fewer services and/or support.
3)
A full service brokerage financial advisor is a licensed financial
broker-dealer firm that provides a large variety of services to its clients,
including research and advice, retirement planning, tax investing strategies,
and much more. Full-service brokers can provide expertise for people who do
not have the time to stay up-to-date on complicated issues such as tax or
estate planning.
Depending
on what your individual needs are would determine your choice of financial
advice. Retaining the services of an experienced financial advisor far outweigh
the services of a robo advisor or even a discount firm. There are many
variables and personal financial differences that cannot be evaluated by
mathematical algorithms. Also, your financial advisor is a trusted advisor
available for consulting with you during the ups and downs of the market.
Dealing with a small independent advisor will enable you to customize a
portfolio specifically for you and your family.
What
is the minimum amount of money that I can invest in a mutual fund?
86% of people found this answer helpful
Mutual
funds are either closed-end or open-ended funds.
Open
ended mutual funds have a minimum initial investment which can vary with most
in the $1,000 - $5,000 range. The minimum initial investment may be
substantially lowered or waived altogether if the investment is for a retirement
account such as a 401K, traditional or Roth IRA, and/or the investor
agrees to automatic, reoccurring deductions from a checking or savings account
to invest in the fund.
Closed
end funds typically get priced on the IPO somewhere between $20 and $25 per share.
So depending on the current selling price the minimum investment is usually
around 100 shares.
How
do I determine if I am being fairly charged by my financial advisor?
85% of people found this answer helpful
If
you financial advisor is not giving you full disclosure of all fees you are
paying then I would seriously consider another advisor. Whether you have asked
him and not received a straight answer or if you do not feel comfortable enough
to ask would be reason enough.
The
following are differing structures most financial advisor use:
There
are times that the percentage of assets is appropriate then there are other
times that a commission is to your advantage. Personally, I use both. It
depends on the client and the client's assets. This is a subject that should be
discussed prior to investing or entering into a relationship with an
advisor.
It
is important to always ask a financial advisor for a clear explanation of how
they will be compensated before you hire them. This is one question
you would want to ask any potential financial advisor. Look for an honest,
straight-forward answer and avoid "advisors" who try to avoid
the question.
What's
the difference between a savings account and a Roth IRA?
83% of people found this answer helpful
A
savings account is a deposit account held at a retail bank that pays
interest, but usually cannot be used directly as money in a checking account
with check writing privileges. Savings accounts let customers set aside a
portion of their liquid assets while earning a monetary return versus other
types of accounts such as a checking account or money market account.
Whereas
a Roth IRA is a type of IRA (Individual Retirement Account) in which you pay
taxes on money going into your account and then all future withdrawals are
tax-free. There are annual contribution limits each year dependent on personal
variables. IRA contributions are the lesser of your taxable income and the
published limit amounts dependent on age, filing status, and income each year.
This total may be split up between any number of traditional and Roth IRAs. You
may contribute to a Roth IRA at any age as long as you have income.
Your
Roth IRA can be invested in, but not limited to stocks, bonds, mutual funds,
unit investment trusts, ETFs, and/or real estate limited partnerships. As with
all IRAs, the IRS mandates specific eligibility and filing status requirements.
A Roth IRA's main advantages are its tax structure and the additional
flexibility that this tax structure provides.
How
should I prepare for the "biggest tax cut in history?"
83% of people found this answer helpful
Trump's
tax plan is still in the works, but could potentially allow for even lower tax
rates. This would also allow for conversions from your traditional IRA to
a Roth IRA since you are taxed on the funds upon conversion. It would depend on
your view of where you believe taxes are headed since we are taxed on all
distributions taken out of traditional IRAs and 401(k)s. If you look
historically where tax rates have ranged, we are currently at some of the
lowest tax rates in history, even before or if the new administration's tax
plan is implemented. Higher taxes mean less money for your retirement years.
Moving your tax deferred funds from accounts that are taxed to accounts that
are not taxed is one solution, or at least a portion of those funds. By paying
taxes today, you can take advantage of historically low rates. And if you are
young enough, you may have plenty of deductions that could potentially help
offset the taxes. Until more details are known, it is difficult to know exactly
how some taxpayers will fare. The White House will need to work with Congress
on the final plan, which could look very different if lawmakers push back
against some of the proposed changes.
Can
I get 10% growth in my income every year from dividends?
80% of people found this answer helpful
No,
a 10% growth in income from dividends is not realistic. I would recommend
researching some funds that have an investment strategy of investing in
dividend paying stocks that have had a history of dividend increases. That
would give you a more realistic idea of how companies have
historically increased their dividends. Although, there are some funds
that have this investment discipline that may make up the difference in appreciation
of their stocks so that a total return of 10% could be realistic. Or
conversely, holding a fund over a period of time that buys dividend paying
securities with a history of increasing dividends, and after a period of time,
you could more likely come closer to that growth, but not in one year.
You
may be confused on whether you are seeking a 10% income growth, 10% income, or
a 10% total return. You may invest for 1) income by receiving dividends, 2) for
growth/capital appreciation, or 3) income and growth. I would recommend meeting
with a financial advisor in order to clarify what your true investment goals
are and how realistic it would be to achieve them.
Where
do investors tend to put their money in a bear market?
80% of people found this answer helpful
If
you are still working, a bear market can be an opportunity to buy more
stocks at cheaper prices. The best way to invest during bear markets is to
put small amounts in every month. You invest a fixed amount, say
$1,000, in the stock market every month regardless of how bleak the headlines
are. The strategy is called dollar-cost averaging.
Investing
every month doesn't work all the time especially if the market is in a
long-term uptrend, it is best to have every dime invested as long as
possible. But in bear markets regular monthly investing works.
Also
investing in stocks that have value and that also pay dividends. Since
dividends account for a big part of stock market gains then the bear
markets would be shorter and less painful if dividends were included.
It
is important to have a financial advisor to “hold your hand” during market
downturns. An advisor can help you by preventing you from selling out at the wrong
time based on your fear or emotion.
Additionally,
having a diversified portfolio in stocks, bonds, cash, and alternative
investments is important in a bear market. Alternative investments are non-correlated
with the stock and bond market so over time having this type of asset
allocation has proven to outperform the older more traditional stock,
bond and cash portfolio asset allocation model.
Can
I perform a 1031 exchange?
75% of people found this answer helpful
A
successful 1031 exchange is dependent on complying with the rules set forth in
the applicable Treasury Regulations. The essential requirement is to not
receive principal from the sale. It is the receipt of principal that triggers
capital gains which would prohibit you from a 1031 exchange in this case.
Additionally, both
properties exchanged must be held for productive use in a business or for
an investment. The properties exchanged must be of like kind (of the same
nature or character). To comply with the 1031 recognition, a taxpayer
must 1) identify the property for exchange before closing, 2) identify the
replacement property within 45 days of closing, and 3) acquire the replacement
property within 180 days of closing. Also, a Qualified
Intermediary must be used to facilitate the transaction by holding
all the profits from the sale, then disbursing those monies at the
closing or for fees associated with acquiring the new property.
Consequentially,
a Deferred Sales Trust (DST) may be an alternative to a 1031 exchange in order
to defer capital gains. This tax code compliant strategy reduces the capital
gains tax impact while creating the potential to earn investment income on your
money you would have paid to the IRS. The DST is first structured as an
installment sale under IRC Section 453 with the seller becoming a creditor and
note holder. There are a variety of investments that can be selected to secure the
principal and the return specified in the note, as opposed to a 1031 exchange
where only compliant, like-kind property (generally real estate) may be
acquired with the pre-tax proceeds. This creates an opportunity to exit real
estate, diversify investments, to create the potential for liquidity within the
selected investments, and to satisfy different taxpayer risk tolerances.
Investments can include stocks, bonds, managed accounts, alternative
investments, mutual funds, annuities, and/or life insurance.
These
two unique tax deferral structures are not governed by the same section of the
tax code. Section 1031 is a continuity structure, requiring reinvestment in
replacement real estate within a fairly short period of time. The DST is an
exit strategy for which the tax deferral effect is achieved under Section 453,
governing installment sales. It does not require the taxpayer to acquire like
kind replacement property. As a result, this strategy can be used to achieve
tax deferral where the taxpayer does not want to reinvest in real estate (or
other like kind property) or cannot reinvest in real estate during the time
period required by a 1031 exchange.
How
is a savings account taxed?
75% of people found this answer helpful
A
savings account is taxed by the IRS on form 1099-INT. Your financial
institution that holds your savings account mails these forms to their
customers in late January for the previous year's interest. You are only taxed
on any interest earned in the account over a minimum of $10, although the
IRS requires you to report all taxable interest in your income.
Keep
in mind that some banks offer cash incentives to open a new savings account,
those bonuses are also taxable and need to be reported once a year as
well.
This
only applies to traditional savings account or an online savings account which
would generate taxable interest income. Not to be confused with an IRA savings
account which are tax deferred and you pay taxes when the funds are
withdrawn. IRAs have contribution limits, but with a traditional savings
account, there are no limitations on contributions.
If
your taxes are not paid on the interest earned in your savings account, the IRS
will enforce penalties and fees.
What
is the highest achievable FICO score?
67% of people found this answer helpful
The
highest attainable FICO score is 850. The best way to get your score over 800
is to obviously pay your bills on time, but also to have a variety of credit
mix. High maximum credit limits help, but at the same time, keeping these
balances low on the revolving credit cards will also help to raise your
score. Keeping your account balances as low as possible can have a positive
impact on your credit. It is difficult to determine what day of each
month the credit agencies will review your history so paying down your
balance early on in the month would be helpful to increasing your FICO score
along with increasing the credit limit for each account. As long as you are in
good standing, most credit card companies will increase your credit card limit
without generating a credit report inquiry.
1)
No missed payments; 2) recent credit card usage: a mix of credit cards,
installment loans, and mortgages; 3) not seeking new credit, not actively
seeking credit poses less risk to lenders; 4) accounts paid on time, an average
of 6 accounts currently being paid as agreed is optimal.
Will
investing in index funds protect me against paying too many fees?
67% of people found this answer helpful
Are
you more interested in a professionally managed portfolio designed for your
specific investment goals, time horizon, diversification, tax benefits and risk
tolerance. Or, are you more interested in saving on fees.
There
may be a reputation that the S&P 500 is hard to beat.
At the start of 2000, the S&P 500 represented the most widely held asset
class, large-cap U.S. stocks. This index had compounded at nearly 18% for the
previous 20 years. And in the last half of the 1990s, it had compounded
at 28.6%.
At
that particular time, the index looked very compelling, although many who
invested had regrets. Two major bear markets were among those reasons. But some
important numbers will show others. The 15-year track records for the 10
Vanguard equity fund. All but two of those funds have 15 years of history; the
exceptions are Vanguard FTSE All-World ex-US Small-Cap Index
Fund investing in international small-cap stocks, and Vanguard Global
ex-US Real Estate Index investing in international REIT.
Vanguard's
500 Index Fund at 4.1% (annualized), was the poorest 15-year performer among
the five U.S. Vanguard funds. Only the Vanguard Developed Markets Index Fund
(large-cap international stocks) did worse, at 2.6%.
Here
are the 15-year returns for the other six funds:
The
first two of those numbers show that value stocks and small-cap stocks
were better to investors than the S&P 500. This is consistent with the
long-term performance for these asset classes. The third item on that list
demonstrates that putting small and value together into the small-cap
value asset class can potentially make a great combination.
While
small-cap value stocks' annualized returns were 2.5 times as high as the
S&P 500, the difference was much greater. The REITs fund had even higher
performance at six times the gain from the S&P 500. I am not
suggesting investors abandon the S&P 500, nor should they put everything
into REITs or small-cap value stocks. I believe in diversification. Future
asset class performance is unpredictable. I reiterate my recommendation
for diversification.
Chasing
recent returns is one of the biggest mistakes in the mutual
fund investment process dating back to early 2000. Many investors
expected the S&P 500 to grow at 20% to 30% over the following decade.
Whereas, if you diversify properly, you will not have to rely on any single
fund or asset class.
Please
read the attached article on mutual funds:
There
is a common belief that investing in mutual
funds is a conservative way to
accumulate wealth in the stock market. We have all seen the cover of financial
magazines that read: “Our 100 Best Mutual Funds for 2017.” Yes, magazine
companies are in the business of selling their magazines.
If
you are looking at whether or which fund to buy you usually look at its track
record or performance history. Although we all know at the bottom of every
mutual fund brochure is the disclaimer: "Past performance is not
indicative of future results." Since most investors are dazzled by
performance, I beg to differ.
The
Costs
The
first question should be: What are the costs? The annual cost of owning a
mutual fund is called the expense
ratio. There is also a separate charge
called the sales
load which I will cover later. The
expense ratio is the percentage of the fund’s assets that go toward running the
fund. But there are three additional components to be aware of:
Management
fees or investment advisory fees go to pay the portfolio manager. You know it
keeps up his Hampton beach house. Seriously, that is how he gets paid as well
as from firm bonuses.
Administrative
costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the
fund.
Lastly,
there is the 12b-1 fee. This fee is for marketing and advertising. Think about
this fee when you see your fund advertised during Super Bowl half time. It also
includes trailer commissions paid to the broker of record as an incentive to
sell the fund. It works like an annuity for the sales person over the life of the fund. It is
usually paid to the broker quarterly as it is taken out of the net
asset value of the fund fractionally. I
have even seen some funds that are closed to new investors and are still
charging 12b-1 fees.
Regarding
the sales load, mutual funds come in different share classes and this will
determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. The expense ratio usually differs with which share class
you buy. Sounds confusing, doesn’t it? That is the way the mutual fund industry
prefers it.
The
bottom line is that these fees are rising as funds shift away from the up-front
loads that are driving away sales and into the annual expense ratios where they
are not as detectable. And these fees are charged every year whether or not the
fund has performed. I have seen mutual fund holdings that have been held for years
and the only one who has profited is the mutual fund company.
Other
Issues
The
other issue with mutual funds is the high turnover of assets in the fund.
Buying and selling stocks have transactional costs which cut into the net
return. A fund with a high turnover will end up distributing yearly capital
gains to their shareholders and that
will generate a tax bill for the investor thereby reducing net returns.
Additionally,
mutual funds are required to maintain liquidity and the capacity to accommodate withdrawals. Funds
typically have to keep a portion of their portfolio as cash. The funds are keeping
cash balances of usually around 8% of the fund, which is not generating any
returns. The average fund is charging around a 1.5% expense a year on the 8%
that it is keeping in cash.
Mutual
fund companies aggressively market funds awarded 4 or 5 stars by rating
agencies. But the rating agencies merely identify funds that have performed
well in the past. It provides no help in finding future winners. Historically,
mutual funds have not outperformed the market. Research indicates that around
72% of actively-managed large
cap funds failed to outperform the
market over the last 5 years.
Mutual
Fund Alternatives
There
are alternatives to mutual funds that are structured differently and will also
give you diversification. Unit
investment trusts (UITs) are a fixed portfolio
of securities usually with a 12 to 24 month term, therefore, no annual expenses
only an upfront commission. Additionally, exchange-traded
funds (ETFs) offer diversification
and liquidity with lesser fees relative to mutual funds.
The
bottom line is that mutual funds are not always the safe haven that they have
been touted. The companies that manage mutual funds face a fundamental conflict
between producing profits for their owners and generating superior returns for
their investors. The best way to evaluate a fund is by digging a bit deeper
into the fees and also looking at the turnover ratio prior to investing. It is
important to understand the good and bad points. The probability of a
successful portfolio increases dramatically when you do your homework.
Why
would a person choose a mutual fund over an individual stock?
67% of people found this answer helpful
If
an investor does not have enough funds to buy a diversified portfolio of
individual stocks then a mutual fund could provide for diversification, which
would spread the risk over the entire portfolio. Also, if an investor wants a
specific investment strategy or theme that is professionally managed by
a portfolio manager then a mutual fund would be a good choice.
Whereas
if someone has enough funds to buy a basket of individual stocks and has a
financial advisor to manage their portfolio (and/or has an interest in picking
specific individual stocks) then buying individual stocks would be a good
choice. Given that they have identified their risk tolerance.
When
buying a mutual fund it is important to analyze the track record but also the
fees and commissions. The annual cost of owning a mutual fund is called
the expense ratio.
There is also a separate charge called the sales
load. The expense ratio is the
percentage of the fund’s assets that go toward running the fund. But there are
three additional components to be aware of:
Management
fees or investment advisory fees go to pay the portfolio manager.
Administrative
costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the
fund.
Lastly,
there is the 12b-1 fee. This fee is for marketing and advertising.
Regarding
the sales load, mutual funds come in different share classes and this will
determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. The expense ratio usually differs with which share class
you buy.
Does
parental income affect a dependent child's Roth IRA contributions?
67% of people found this answer helpful
First
off, there is no minimum age that a person must be in order to establish a Roth
IRA. Although the missing factor to your question is that your child must
have earned income in order to invest in a Roth IRA. A child, or anyone
else for that matter, can only contribute to a Roth IRA an amount equal to what
they earn for the year. If your child earns only $2,500 babysitting this
summer, he or she can only invest up to $2,500 in a Roth IRA despite the full
contribution limit being $5,500 for someone under the age of 50. If your
child is currently younger than 18, the brokerage company may want the parent
to set this up as a custodial IRA.
According
to the IRS, earned income is not any allowances from parents. Only if your
child has earned money through mall jobs, babysitting, lawn mowing,
commercials, modeling, etc., he or she may have income that qualifies as
earned income. Your child will have to file a tax return even though they would
most likely owe no taxes if they earned very little for the year. As long
as a child has earned income, the child can use money from someone else (your
father-in-law) to fund an IRA. The only stipulation is that your
child must have earned income that was at least equal to the amount
of the contribution. You should consult with a financial advisor for more
detailed answers for your particular situation.
If
your father-in-law did not want to go the route of a Roth IRA.
There are other options such as a Custodial Account in the child's name. A
minor child’s custodial account must be established under your state’s Uniform
Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Under
applicable state law (most states have UTMA regimes these days), your child
will gain full legal control over the account once he or she ceases to be a
minor. This will happen somewhere between age 18 and 21 (in most states it’s
21). Also, you could benefit from the compounding tax free effects of
a 529 College Savings Plan. Although, in order for the investment and its
earnings to be withdrawn tax free, you would need to use the money on a
qualified educational expense.
While
a Roth IRA is a good investment option for your child, it is not the only one.
There are many investing options available to parents in order to help their
children or grandchildren's financial future. Discussing the alternatives with
a Financial Advisor with your specific investment goals in mind would be
recommended.
Why
have mutual funds become so popular?
67% of people found this answer helpful
Mutual
funds are popular because they have low minimum investment amounts. Most start
out with a minimum investment of $1000. They are also popular because investors
are able to add or reinvest with even lower amounts. Making them accessible for
most any investor.
Index
mutual funds have gained popularity as of late since the market indices have
performed exceedingly well. These index funds follow the indices such as the S
& P. The fact that they are diversified across different variables makes
them attractive as well.
Please
see the attached below for related reading:
There
is a common belief that investing in mutual
funds is a conservative way to
accumulate wealth in the stock market. We have all seen the cover of financial
magazines that read: “Our 100 Best Mutual Funds for 2017.” Yes, magazine
companies are in the business of selling their magazines.
If
you are looking at whether or which fund to buy you usually look at its track
record or performance history. Although we all know at the bottom of every
mutual fund brochure is the disclaimer: "Past performance is not
indicative of future results." Since most investors are dazzled by
performance, I beg to differ.
The
Costs
The
first question should be: What are the costs? The annual cost of owning a
mutual fund is called the expense
ratio. There is also a separate charge
called the sales
load which I will cover later. The
expense ratio is the percentage of the fund’s assets that go toward running the
fund. But there are three additional components to be aware of:
Management
fees or investment advisory fees go to pay the portfolio manager. You know it
keeps up his Hampton beach house. Seriously, that is how he gets paid as well
as from firm bonuses.
Administrative
costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the
fund.
Lastly,
there is the 12b-1 fee. This fee is for marketing and advertising. Think about
this fee when you see your fund advertised during Super Bowl half time. It also
includes trailer commissions paid to the broker of record as an incentive to
sell the fund. It works like an annuity for the sales person over the life of the fund. It is
usually paid to the broker quarterly as it is taken out of the net
asset value of the fund fractionally. I
have even seen some funds that are closed to new investors and are still
charging 12b-1 fees.
Regarding
the sales load, mutual funds come in different share classes and this will
determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. The expense ratio usually differs with which share class
you buy. Sounds confusing, doesn’t it? That is the way the mutual fund industry
prefers it.
The
bottom line is that these fees are rising as funds shift away from the up-front
loads that are driving away sales and into the annual expense ratios where they
are not as detectable. And these fees are charged every year whether or not the
fund has performed. I have seen mutual fund holdings that have been held for
years and the only one who has profited is the mutual fund company.
Other
Issues
The
other issue with mutual funds is the high turnover of assets in the fund.
Buying and selling stocks have transactional costs which cut into the net
return. A fund with a high turnover will end up distributing yearly capital
gains to their shareholders and that
will generate a tax bill for the investor thereby reducing net returns.
Additionally,
mutual funds are required to maintain liquidity and the capacity to accommodate withdrawals. Funds
typically have to keep a portion of their portfolio as cash. The funds are
keeping cash balances of usually around 8% of the fund, which is not generating
any returns. The average fund is charging around a 1.5% expense a year on the
8% that it is keeping in cash.
Mutual
fund companies aggressively market funds awarded 4 or 5 stars by rating
agencies. But the rating agencies merely identify funds that have performed
well in the past. It provides no help in finding future winners. Historically,
mutual funds have not outperformed the market. Research indicates that around
72% of actively-managed large
cap funds failed to outperform the
market over the last 5 years.
Mutual
Fund Alternatives
There
are alternatives to mutual funds that are structured differently and will also
give you diversification. Unit
investment trusts (UITs) are a fixed portfolio
of securities usually with a 12 to 24 month term, therefore, no annual expenses
only an upfront commission. Additionally, exchange-traded
funds (ETFs) offer diversification
and liquidity with lesser fees relative to mutual funds.
The
bottom line is that mutual funds are not always the safe haven that they have
been touted. The companies that manage mutual funds face a fundamental conflict
between producing profits for their owners and generating superior returns for
their investors. The best way to evaluate a fund is by digging a bit deeper
into the fees and also looking at the turnover ratio prior to investing. It is
important to understand the good and bad points. The probability of a
successful portfolio increases dramatically when you do your homework.
What
does it mean to "liquidate and move to cash"?
67% of people found this answer helpful
To
liquidate stocks, as in making your stock liquid, or making those
funds readily available in the form of cash. You technically do not have
to move to cash whereby selling your stocks upon the three day settlement day
will be available in the form of cash.
Most
articles suggesting this term ("liquidate stocks and move to
cash") are recommending investors sell all or a good portion of their
portfolio and sit on the sidelines in cash. The theory is that you will avoid a
falling market if your timing is good. The fundamental question is where to put
those funds in the interim. Timing is one of the most complex components to
investing so liquidating an entire portfolio may be a bit extreme. That is why
working with a seasoned financial advisor would be advantageous if you are
having concerns with your stock holdings and the current economic environment.
What
should I be looking for in a qualified advisor as I am approaching retirement?
67% of people found this answer helpful
In
most businesses, such as medicine, if all three surgeons agree on how to
perform an operation then that is the correct procedure. If three engineers
agree on how to build a bridge then that is the correct design. If three
financial advisors agree on how to structure your portfolio that is not always
the best route. What I am saying is you need a seasoned financial advisor who
has actual experience of dealing with many different clients in different
markets over the years. If someone has only accomplished certifications and
exams does not necessarily mean they are able to put that into action for you
with all the other variables such as the economy, interest rates, your personal
individualized financial picture, etc. And frankly, if someone was touting
them self as having more integrity because of a certification I would waiver.
You have to seek out an advisor you like and trust, as well as someone who has
the experience and referrals to back that up.
Working
with an advisor who is commissioned or fee only is more complicated than face
value. If you had your assets under a fee only advisor and we were in a bear
market and you were still paying the fees would not be to your advantage.
Working with an advisor who crunches the numbers for you and giving you a
choice of what would be in your best interest over the long term. I work on
both depending on the client’s needs. At times you may want part of your assets
under a fee based plan, and other under a commissioned. Just because you are
paying a commission does not mean every transaction will entail a commission.
It is a long term relationship where there needs to be flexibility.
Before
investing with a Vanguard representative, I would look under Vanguard's web
site career opportunities to realize the level of education and/or
experience that you would potentially be working with.
What
is the difference between a stock broker and a financial advisor?
57% of people found this answer helpful
When
I first began my career with PaineWebber back in 1985, all entry level advisors
were referred to as 'Investment Executive'. Years later when I was recruited to
Merrill Lynch Pierce Fenner & Smith (back when it was really Merrill and
not BankAmerica), their title was 'Financial Consultant" (or F.C. for
short being the usual in house reference). So the professional titles
designated to brokers has evolved over the years.
A
stockbroker has a Series 7 exam license whereas a financial advisor may not
have the Series 7 exam but the Series 6. The Series 6 license only allows a
representative to sell a limited set of investment products, whereas the Series
7 license allows a representative to sell a variety of investment products.
Professional
titles similar to that of stockbroker include investment advisor and
financial advisor. A financial advisor may or may not be a stockbroker, since
some Series 6 licensed individuals who are prohibited from selling stock
have that as their professional title. An investment advisor, registered
investment advisor, or investment advisor representative has training and
capabilities similar to that of a stockbroker, but different licensing and
different regulatory oversight. Many individuals hold both licenses, and might
typically manage commission-based accounts as a stockbroker and fee-based
accounts as an RIA investment advisor, or investment advisor representative
(IAR).
The
term formerly known as stockbroker is still in use, although more common
terms are broker, financial advisor, registered rep or simply rep, the
latter being abbreviations of the official (FINRA) designation Registered
Representative obtained by passing the FINRA General Securities Exam (also
known as the Series 7 exam) and being employed with a registered broker
dealer, also called a brokerage firm or (in the case of some larger money
center broker/dealers) a wirehouse, typically a FINRA member firm. Other FINRA
licenses or series exams exist. Individuals holding some of those licenses,
such as the Series 6, cannot be called stockbrokers since they are prohibited
from selling stock and are not trained or licensed in the full array of
capabilities of a Series 7 stockbroker. Selling variable products (such as a
variable annuity contract/insurance products) typically requires the
broker to also have one or another state insurance department licenses.
Once
you have the experience and expertise, you are usually promoted to Vice
President of Investments, then Senior Vice President of Investments.
What
would you recommend for an aggressive investment strategy?
50% of people found this answer helpful
The
arbitrary word is aggressive. What does that mean to you relative to what.
Without knowing your other investments or lack thereof, your income, or if you
own any real estate, etc. it would be difficult to make a recommendation.
You
would first need to determine how much risk or how aggressive you would be
comfortable with. With $10,000 a fund of some sort such a unit investment
trust, mutual fund, closed end fund or ETF. An equity fund would be more
aggressive than a fixed income fund. Check out www.cefconnect.com for some
deeply discounted closed end funds that pay high dividends.
The
Senior Loan sector has some decent yields that may not be as affected or
volatile if interest rates go higher since the loans in the portfolio are all
short term floating rate. REITs (real estate investment trusts) or BDCs
(business development companies) also may be worth a look. There are some unit
investment trusts offered as alternative income funds that invests in a
combination of REITs, BDCs, and energy MLPs (master limited partnerships). MLPs
that invest in the energy sector which has been hit hard so a small
exposure may be a good time to buy. With a UIT (unit investment trust) you will
get a balance of all those sectors.
Another
more aggressive sector that may be timely is emerging markets. Which you could
buy into via a fund.
How
can I prevent commissions and fees from eating up my trading profits?
50% of people found this answer helpful
Depending
on what you are investing in and where you are trading would determine
whether you are paying commissions, fees, or both at the same time. If you are
trading stocks and paying both that is excessive. Without more information it
would be hard to advise. Perhaps hiring a financial advisor or money manager
who could produce returns net of fees with better track records and
returns.
Also,
depending on the size of your portfolio you may be able to combine some
accounts to get a better fee schedule. When you are working with an advisor
there is the possibility of negotiating a better rate with commissions or fees
in light of your return.
If
you are trading stocks on your own and not receiving positive returns net of
fees and commissions then you may want to consider changing your investment
strategy.
Financial
advisor fees vary. Some advisors charge fees in the form of commissions; others
in the form of an hourly rate, or percentage of your account value. Here are
some common ways financial advisors charge fees.
*Many
advisors today can collect fees and commissions. They often use the term
fee-based. It is important to understand the difference between a fee-only
advisor, and a fee-based advisor. Fee-only advisors cannot collect commissions.
Make certain you have full disclosure and ask questions, know what all the fees
are before investing.
Is
a financial advisor required to have a degree?
50% of people found this answer helpful
No,
having a college degree is not a prerequisite to become a financial
advisor although there are many firms who will require it before hiring a new
applicant. The firms with the best training programs most likely will require a
college degree, although there are firms who are willing to hire an applicant
and provide access to and sponsor the trainee with getting his or her series of
licenses that are required by FINRA ( the financial service regulatory board).
To
become a financial advisor you must complete FINRA registration and take
certain exams. Typically, this will be the Series 6 (for selling ‘packaged’
investment products like mutual funds or variable annuities) or the more
comprehensive Series 7 (for selling everything a Series 6 covers, plus almost
any other securities-related product including direct stocks, bonds, options,
and more), along with a Series 63 (in most states) to affirm the individual
understands applicable state securities laws as well.
The
process is generally accomplished by engaging initially with a broker-dealer,
which will sponsor the individual to take the Series exams, after which the
person becomes formally registered with FINRA.
50% of people found this answer helpful
If
your income is so low as to not qualify for a mortgage then I would agree that
renting may be the preferable option at this point. Also, where you are living
would be another variable to consider. If your job is in the city then you pay
for access to jobs. I would put together a financial plan in order to be able
to buy a home when you are more confident and possibly in a higher income job.
There are always first time home buyer incentives that you may be able to take
advantage of later down the road if this is your first time as a homeowner.
Investing your inheritance conservatively and saving around three months of
living expenses in case of any unexpected financial burdens. By adding to your
inherited funds that you have invested, over time you could then
re-evaluate the pros and cons of buying versus renting. I would not use your
inheritance to upgrade to a more expensive rental. The rule of thumb with
renting is not to use more than 25% to 30% of your annual income on rent.
Again, this is predicated on where you are buying or renting since demographics
will have a huge impact on this decision. Owning your own home creates
financial stability over the long term with proper financial planning.
Is
it worth Investing in penny stocks?
50% of people found this answer helpful
There
is no "perfect" penny stock. Buying a penny stock is comparable
to buying lottery tickets. You do not really know what you are buying since
their reporting requirements are limited due to their low market
capitalization. Some penny stocks are shell companies as well.
The
SEC defines a penny stock as a security that trades below $5-per-share, is
not listed on a national exchange, and fails to meet other specific criteria
such as market capitalization and exchange reporting requirements. Low market
price inevitably leads to low market capitalization. They can be
highly volatile and subject to manipulation by stock promoters
and/or pump and dump schemes. These promoters are paid with the stock they
are promoting and may be selling their shares which they are paid to
promote with shares of the penny stocks when you are buying and the price is
increasing. Penny stocks are often traded over the counter on the OTC Bulletin
Board or Pink Sheets.
Another
problem with the penny stock market is that it has limited liquidity, so
holders of shares in penny stock companies may find it difficult for them
to sell their positions or get a fair price.
There
are rare circumstances where you might have a profitable penny stock but your
chances are about the same with buying a super lotto ticket.
Can
I still contribute after rolling over my 401(k) to an IRA?
Yes,
you may rollover your 401(k) into a new traditional IRA and still make your up
to $5500 annual IRA contribution and up to $6500 if you are 50 years of age.
Make certain that you have filled out all the appropriate forms in order to
have your 401(k) funds transferred directly to another financial
institution.
Most
preretirement payments you receive from a retirement plan or IRA can be “rolled
over” by depositing the payment in another retirement plan or IRA within 60
days. You can also have your financial institution or plan directly transfer
the payment to another plan or IRA.
You
have 60 days from the date you receive an IRA or retirement plan distribution
to roll it over to another plan or IRA.
You
generally cannot make more than one rollover from the same IRA within a 1-year
period. You also cannot make a rollover during this 1-year period from the IRA
to which the distribution was rolled over.
Beginning
after January 1, 2015, you can make only one rollover from an IRA to another
(or the same) IRA in any 12-month period, regardless of the number of IRAs you
own.
The
one-per year limit does not apply to:
Retirement
plans: You can roll over all or part of any distribution of your retirement
plan account except:
Distributions
that can be rolled over are called "eligible rollover distributions."
Of course, to get a distribution from a retirement plan, you have to meet the
plan’s conditions for a distribution, such as termination of employment.
If
you have not elected a direct rollover, in the case of a distribution from a
retirement plan, or you have not elected out of withholding in the case of a
distribution from an IRA, your plan administrator or IRA trustee will withhold
taxes from your distribution. If you later roll the distribution over within 60
days, you must use other funds to make up for the amount withheld.
Please
see the attached which pertains to you as well:
Yes,
you may rollover your 401(k) to your traditional IRA without affecting your
contribution limit for 2017 Roth IRA. As long as your modified adjusted
gross income is $186,000 or less in 2017 (married filing jointly), you can
contribute up to the full amount in a Roth. Although, as your income increases
above $186,000, your ability to contribute phases out. You may
also have your financial institution or plan administrator directly
transfer the payment to another plan or IRA.
A
retirement plan distribution paid directly to you is subject to a mandatory
withholding of 20% even if you intend to roll it later. Withholding does not
apply if you roll over the amount directly to another retirement plan or IRA.
Additionally, a distribution sent to you in the form of a check payable to the
receiving plan or IRA is also not subject to withholding.
Usually,
your plan administrator will give you instructions of your rollover options.
How
should a young professional look to invest his savings?
Not
knowing what other investments you are invested in would make it difficult to
generalize and make a recommendation. First off, I would recommend visiting
with a financial advisor that offers a complementary consultation. You do
need to accurately measure your investment goals and risk tolerance relative to
what you own currently.
There
are some investment products that have no upfront fees and some with and
without management fees. There is a myriad of investment products that would be
suitable for you. Whether it is a Unit Investment Trust that would give you a
diversified portfolio with no management fees but it would charge a small
upfront fee. This would be less expensive than most mutual funds.
The
annual cost of owning a mutual fund is called the expense
ratio. There is also a separate charge
called the sales
load. The expense ratio is the
percentage of the fund’s assets that go toward running the fund. But there are
three additional components to be aware of:
Management
fees or investment advisory fees go to pay the portfolio manager. .
Administrative
costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the
fund.
Lastly,
there is the 12b-1 fee. This fee is for marketing and advertising. It also
includes trailer commissions paid to the broker of record as an incentive to
sell the fund. It works like an annuity for the sales person over the life of the fund. It is
usually paid to the broker quarterly as it is taken out of the net
asset value of the fund
fractionally.
Regarding
the sales load, mutual funds come in different share classes and this will
determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. The expense ratio usually differs with which share class
you buy.
These
fees are rising as funds shift away from the up-front loads that are driving
away sales and into the annual expense ratios where they are not as detectable.
And these fees are charged every year whether or not the fund has
performed.
There
are alternatives to mutual funds that are structured differently and will also
give you diversification. Unit
investment trusts (UITs) are a fixed portfolio
of securities usually with a 12 to 24 month term, therefore, no annual expenses
only an upfront commission. Additionally, exchange-traded
funds (ETFs) offer diversification
and liquidity with lesser fees relative to mutual funds.
With
$35,000 you would want to have some sort of diversification as well. You should
be able to do better than your savings account if you realize that value an
experienced financial advisor could provide for you.
Is
selling covered calls considered a high risk strategy to generate retirement
income?
No,
selling covered calls can be more conservative than buying a stock outright.
Selling covered calls or covered call writing is the only option strategy
allowed in retirement accounts as well. This strategy is most profitable when
stocks trade in a range and as a result the call option expires worthless. Thus
an investor who can correctly predict that a stock would not experience
significant price swings over a certain period in the future, could achieve
extraordinary results over time. Investors are also always free to purchase the
covered call back from the market at any time if they change their opinion on
the direction of the stock price. Even if stock prices decline after a covered
call has been written, the investor is still better off, because their losses
are smaller due to the options premium collected. If the option expires
worthless or is sold profitably and the investor still owns the underlying,
they can generate more income by selling more covered calls.
Conversely, if the stock price rises above the strike price at which the call
was written, one would not be able to participate in any upside gains in the
stock, because they are required to sell it to the call buyer to whom the call
option was written in the first place. The only scenario in which the investor
will keep the stock and the premium is when the stock price does not increase
above their strike price.
How
should I approach my student loans?
Congratulations
on your graduation. The way I recommend approaching student loans or any debt
is to make it your priority before investing, especially with that interest
rate. Paying down your debt is paramount then secondarily having at least 3 to
6 months of cash reserve on hand. That is once you start your new career and let’s
hope for the higher salary. Perhaps you will be able to find a part time job
with another pharmacy which would give you even more experience for future
opportunities.
Good
luck with your new career. Once you have more breathing room, I would look at
some discounted mutual funds to start out gradually and keep all costs low so
that all your money is working for you.
What
is the difference between investing and speculating?
Investing
is when you have a financial plan in place to grow your earned capital through
a process of investments in a diversified portfolio of securities or asset
classes. It may include converting your cash to stocks, bonds, mutual funds,
ETFs and/or alternative investments with a disciplined approach to risk
management and time horizon.
This means
managing a diversified portfolio that takes into account your specific risk
tolerance, liquidity needs and investment goals. Your portfolio will
then be managed/adjusted over time as your life changes, you accumulate or
redeem capital, or your philosophy takes on a different form.
Whereas
speculation adds the element of taking more risk to your portfolio. There are
differing levels of risk but speculating is taking on more risk with the best
information available. Or more specifically, on anticipated information.
Whether you are predicting that a stock may have improved earnings on its next
earning report or that a bio tech stock has a high likelihood of getting a
drug approved. You are basically taking the risk that this information may or
may not come to fruition.
Can
I sell one rental property and reinvest the profits into another rental
property I own?
Real
estate investors must sell a rental or investment property and must acquire an
interest in rental or investment real property in order to qualify for a 1031
exchange. The pay down of a debt on other property is not an acquisition of an
interest in real estate but a payment toward a debt or personal property versus
real property. Additionally, a 1031 requires like kind property and in
terms of real estate, is defined as any interest in real property as long as it
was held for rental or investment use. A mortgage or other type of debt on
property is not a real estate interest. If cash is received from sale of
property, taxes are due.
Depending
on the amount of funds you will be receiving from the sale of one of your
rental properties, you may be able to engage in a bifurcation of a 1031 and/or
a Deferred Sales Trust (DST). The DST is a tax code compliant strategy which
reduces the capital gains tax impact while creating the opportunity to earn
investment income on your money you would have paid to the IRS.
One
of the most significant benefits of using a Deferred Sales Trust is that there
are a broad variety of investments that can be selected to secure the principal
and return specified in the note, as opposed to a 1031 exchange where only
compliant, like kind property can be acquired. This creates an opportunity to
exit real estate, to diversify investments, to create the potential for
liquidity within the selected investments, and to satisfy a variety of taxpayer
risk tolerances. Investments can include, but are not limited to, mutual funds,
ETFs, REITs, stocks, bonds, managed accounts, annuities, life insurance, etc.
What
are the oldest and newest additions to the DJIA index?
The
oldest addition is General Electric (GE) added in 1907 and the newest
addition is Apple (AAPL) added in 2015.
When
the Dow changes the companies it tracks (as it does every few years), it does
so in order to attempt to reflect the current behavior of the
American economy and the stock market more efficiently. Deciding factors would
be what the true state of American business climate is, which
industries are having the most growth, which companies are scaling
back, and/or which companies are primarily the core of American
corporate businesses.
Apple,
for instance, is one of the great technological turnaround stories of the
21st century. Its co-founder, Steve Jobs, oversaw the company's transformation
into a niche computer manufacturer to a consumer electronics and media
powerhouse. With the iPod, iTunes, iPhone, and iPad (as well as the continued
success of its Mac lines), Apple became one of the richest companies in the
world. Sometimes, it's the largest company in the world in terms of market
capitalization.
As
the largest company in the world, Apple is a great fit for the Dow. Though the
DJIA is well established, keeping up with the times, reflecting how important
consumer mobile devices are to the modern world, represents how the index
attempts to reinvigorate itself.
Can
I take money out of my Individual Retirement Account (IRA) while working?
Yes,
you may take distributions from your IRA at any time you like, and that would
also include an SEP IRA and SIMPLE IRA. It is not required to show a hardship
in order to take a distribution; nevertheless, your distribution is required to
be included in your taxable income and it could potentially have an 10%
additional tax if you are under the age of 59.5. If the distribution is taken
from your SIMPLE IRA within the first two years, then the additional tax is
25%.
Most
retirement plans distributions are subject to income tax and could be subject
to an additional 10% tax. As a rule, the amounts that are withdrawn from an IRA
before reaching the age of 59.5 are referred to as early or premature
distributions. Therefore, they are subject to an additional 10% early
withdrawal tax unless an exception applies.
The
distribution will not be subject to the 10% additional early tax in the
following:
1)
After IRA owner reaches 59.5 years of age
2)
After death of the IRA owner
3)
Total and permanent disability of the IRA owner
4)
Qualified higher education expenses
5)
First time homebuyers up to $10,000
6)
Amount of unreimbursed medical expenses
7)
Health insurance premiums paid while unemployed
8)
Certain distributions to qualified military reservists called to duty
9)
Rollovers: In-plan Roth rollovers or eligible distributions contributed to
another retirement plan or IRA within 60 days
10)
There is a little known section of the IRS tax code: Section 72t that allows
you to take substantially equal periodic payments (SOSEPP) on an annual basis
before the age of 59.5 without paying the 10% early withdrawal penalty. The IRS
stipulates that you take money out of your IRA for five years or until the age
of 59.5, whichever is longer.
I've
come into a large amount of money. Should I invest it or pay off my mortgage?
This
can be a subjective question, therefore, there are many things to consider with
this dilemma:
I
would recommend discussing your decision with your CPA and weigh all the
options to make certain you make the right decision for your personal
situation.
Do
mutual funds invest only in stocks?
No.
There are generally the following types of funds: 1) money market funds, 2)
bond funds, 3) stock funds. Each type of mutual fund has different features,
risks, and rewards that allow investors to customize portfolios to their
specific needs.
1)
Money market funds have relatively low risks. By law, they can invest only in
certain high-quality, short-term investments issued by U.S. corporations, and
federal, state, and local governments.
2)
Bond funds have higher risks than money market funds because they
typically aim to produce higher returns. Because there are many different types
of bonds, the risks and rewards of bond funds can vary dramatically. Ranging
from government bonds, investment grade corporate bonds, high yield corporate
bonds, to tax free municipal bonds.
3)
Stock funds invest in corporate stocks. Not all stock funds are the same.
Some examples are:
Also,
mutual funds can be balanced and have any combination of the above for asset
allocation.
Should
I sell a stock that's down 70% for income tax purposes?
It
can be a good idea to sell a stock in your portfolio that is down 70% if you
can take advantage of the capital loss to offset profits for tax purposes, and
if you have determined that the possibility of a rebound in your stock is
highly unlikely. It may be prudent before selling to get a second opinion
and/or doing more research to make certain that your stock is not undervalued.
At times, a stock that is down may really be a buy if there are fundamental or
technical reasons to buy more and average down. When investing or speculating
in stocks, there is always the chance of a loss. Also, if there is a
chance that you could see further decline in the stock, selling could be a good
option. The remaining equity you have in your position could be reinvested to
try and get back all or a portion of your loss. Take heart in that few people
have success at buying stock at the low and selling at the high.
What
is the difference between a ROTH, SEP and Traditional IRA?
All
of the terms refer to differing types of IRAs (Individual Retirement Accounts):
The
term SEP-IRA is short for Simplified Employee Pension IRA. The two main kinds
of IRAs are the traditional IRA and the Roth IRA. With the traditional
IRA, you contribute pre-tax money that reduces your taxable income and as a
result, your tax bill for the year. When you withdraw the money in retirement,
it is taxed as ordinary income to you, therefore, your tax
obligation was deferred. With the Roth IRA, you contribute post-tax money.
Those sums do not offer any up-front tax break. Although, you do get a tax
break when you withdraw from the account in retirement because you get to take
all the money out of the account tax-free.
The
SEP-IRA rules are similar to those of the traditional IRA, with a few
variables. While traditional and Roth IRAs are accounts most of us set up on
our own, SEP-IRAs are tied to our jobs. A SEP is set up by an employer as well
as a self-employed person and permits the employer (not the
employee unless you are self-employed) to make contributions to the
SEP-IRA accounts of eligible employees. The employer gets a tax deduction for
contributions made, and the employee is not taxed on those contributions,
though their eventual withdrawals will be taxed at their income tax rate.
A self-employed person is both employer and employee so he or she funds
their own account.
Can
I transfer my portfolio to a different broker penalty-free?
It
all depends on the type of account you are transferring. Most full service
brokerage firms retirement accounts will have varying fees for closing
out but may not if you are doing a partial transfer. I would call the full
service broker and ask. If there are account exit fees, and they will not
waive any of the fees then the receiving firm may be able to make up the
difference going forward as a courtesy.
If
you are selling any securities in your portfolio there most likely will
be fees to liquidate, 1) if you plan on selling out any positions
beforehand or, 2) if you are required to sell any holdings in the
portfolio because the new firm is not able to hold certain securities. I would
clarify this with the receiving broker ahead of time.
A
Hybrid type broker is registered as both an RIA and a broker/dealer. This
dual registration allows advisors to operate both a on a fee and/or a
commission-based practice. This may be important to clients, particularly
high net worth clients, who are becoming more sophisticated, and their
needs are becoming increasingly complex. A hybrid advisor is better suited to
offer a broad range of advice driven strategies and solutions. A hybrid advisor
can provide guidance on all aspects of a client’s financial
position. One of the most common hybrid advisor setups is for an advisor
to affiliate with an “independent broker-dealer”. Many independent
broker-dealers allow for this arrangement which allows the advisor to have
greater independence and able to offer their clients a broader range of
investment products and options than what they may be receiving at a full
service broker. Affiliating with a financial advisor who may tailor the investment
portfolio to each individual client versus the cookie cutter approach a lot of
the larger full service brokers are limited to offering. The smaller
independent advisors are also able to implement strategies that include
alternative investment products as well.
What
is the five-year waiting rule for Roth IRAs?
The
five year rule if you do a Roth conversion before you are 59.5 years of age, is
that you have to wait five years or until you are 59.5, whichever comes
first, before you can withdraw the principle without tax and penalty. If
you are already 59.5 when you make the conversion, you can
withdraw the principle immediately but have to wait five years before you
withdraw any of the earnings without penalty.
An
investor may withdraw his or her contributions to a Roth IRA at
any time without tax or penalty. But, that is not the same case for
any earnings or interest that you have earned on your Roth
IRA investment. In order to withdraw your earnings from a Roth IRA tax and
penalty free, not only must you be over 59.5 years old, but your initial
contributions must also have been made to your Roth IRA five years before the
date when you start withdrawing funds. If you did not start contributing in
your Roth IRA five years before your withdrawal, your earnings would not be
considered a qualified distribution from your Roth IRA because of its
violation of the five year rule.
The
five year rule for your Roth IRA earnings starts on January 1st of the year you
make your first contribution. That is when your clock starts. Because you can
make a Roth IRA contribution up to April 15th of the next year, your five years
technically would not have to be five calendar years. The clock for earnings
could count as having started on January 1st as long as you designated
contributions up until April 15th for the previous tax year.
The
clock only starts with regular Roth IRA contributions in the very beginning
with the first contribution ever to be placed into the Roth. However, this is
not the case with a Roth IRA conversion; the five year rule clock restarts with
every conversion with the amount and date it was converted.
What's
the difference between an index fund and an ETF?
An
index fund is any investment fund that attempts to replicate the performance of
a given index of stocks, bonds, or even a narrow subset of a financial
market such as small-cap biotech companies for example. Most index funds work
by identifying an already well known index, then building a fund that either
owns every asset in the index or by holding similar securities. Index
funds own all of the investments in that particular index, so there
is less work in maintaining or managing an index fund.
An
ETF is an Exchange-Traded Fund. These types of investments have been
around since 1993, but they gained more attention about a decade later.
Currently, the net assets held by ETFs amount to $1.34 trillion. They generally
trade on the market like an individual stock. An ETF is a form of index
fund, in the sense that is has the same goal; to provide investors with a
benchmark return. Not all ETFs are designed to mimic index funds as some
have become trading tools.
Whereas,
a mutual fund is a portfolio of securities managed by a portfolio manager.
These may be actively managed or passively managed (an index fund would qualify
as passively managed since the portfolio manager only rebalances the index
versus trading). In 1976, the first index fund was launched by the
investment firm Vanguard Group. It was known as "Bogle's Folly," for
John C. Bogle, the founder of Vanguard. Bogle created a fund that tracked
the S&P 500. It was the Vanguard 500 (VFINX). It promised to keep up with
the broad index of stocks.
What
happens to a coupon bond’s duration if its yield to maturity increases?
After
a bond is issued and is trading in the secondary market, the price of the
bond fluctuates with the direction of interest rates. The price of the bond
has an inverse relationship with interest rates. So if your YTM (yield to
maturity) increases, that is because interest rates have gone up and the bond
is now trading at a discount to its par value. Duration is expressed in
terms of years, but it is not the same thing as a bond’s maturity date. The
maturity date of a bond is one of the key components in figuring duration, as
is the bond’s coupon rate. As in the case of a zero coupon bond, the bond’s
remaining time to its maturity date is equal to its duration. When a coupon is
added to the bond, then the bond’s duration number will always be less than the
maturity date. The larger the coupon, the shorter the duration number becomes.
Generally,
bonds with long maturities and low coupons have the longest durations. These
bonds are more sensitive to a change in interest rates and are more
volatile in a changing interest rate environment. Conversely, bonds with
shorter maturity dates or higher coupons will have shorter durations. Bonds
with shorter durations are less sensitive to changing rates and thus are less
volatile in a changing rate environment. The maturity of a
fixed-income investment is simply how long the instrument lasts. For example, a
10 year Treasury bond has a 10-year maturity.
Duration is
a slightly more complicated concept. The duration of a bond is the weighted
average period of time before the cash flows involved are received. For
most investors, the primary importance of bond duration is that it predicts how
sharply the market price of a bond will change as a result of changes in
interest rates. When interest rates rise, a bond’s price will fall by an amount
approximately equal to the change in the applicable interest rate, times the
duration of the bond.
What
will be the impact of rising interest rates on junk bonds?
There
is the risk that there could be a run on the bond funds,
causing downward price movement. A lot of investors do not like
Treasuries, so they have been searching for yield. With higher rates, the
scramble for yield diminishes because investors can get relatively richer
returns with less risk, and that could lead to widening spreads on
high-yield bonds.
Investing
in risky debt could also potentially face major liquidity risks if they
are forced to exit positions amid investor redemptions. Because some funds
operate with leverage, those who do not redeem could be left with losses far
more severe than their marks indicate. As the Federal Reserve raises
rates, redemptions combined with tightening credit
conditions could create major pricing dislocations.
Many
people seem to think that because junk bonds had a great 2016 that they
are not vulnerable to interest rate hikes. The junk bond market has
decent interest rate risk on it, it is just that they were depressed with
commodities so low. If and when interest rates move higher from here,
junk bonds will not be going up in price. The spread has tightened to the
point where the cushion of safety is eliminated.
That
would depend entirely on what type of services you require. If you are
inquiring about the securities brokerage services of a bank or a discount
brokerage, then you must be shopping with the cost of doing business at each
firm in mind. Are you looking for mutual funds or to trade lower priced stocks?
There are a lot of variables to consider before answering that question.
If
you are starting out with a small account, then I would advise paying
particular attention to diversifying with a no load fund or perhaps unit
investment trusts. If you are only investing $20,000, it would be difficult to
buy individual stocks or bonds.
I
do not have experience with Chase's website or services, but I have been
informed that the discount brokerages website are superior to a Chase brokerage
website. Like Wells Fargo, they seem primarily focused on asset management and
not on self-directed brokerage accounts. Not certain even if they
are advertising self-directed accounts.
I
do know that Vanguard and Fidelity have a variety of no load index funds that
might be worth a look.
How
much gold should I have allocated in my portfolio?
There
is no one size fits all when it comes to investing in gold. Some investors may
want to hold precious metals simply for potential scenarios that will likely
never come to fruition. These are scenarios like currency collapses and
financial institution collapses which are few and far between. In terms of what
financial professionals may recommend, we have seen numbers that are all over
the board anywhere from 1 percent to 20 percent.
Most
advisors would think that 10 percent is the very upper limit because gold is
considered to be an insurance policy. A more realistic allocation would be 5%
or less. Gold gives investors insurance against geopolitical events,
uncertainty, and inflation. Owning gold is not about upside potential. It is
about minimizing risk to the downside.
One
way to add gold to a portfolio is through an ETF called SPDR Gold Shares, its symbol is GLD. It does a great job of tracking price.
Also,
you could call your broker and buy the actual physical bars of gold. That only
makes sense for investors who have a significant portfolio and can afford to
buy gold in bulk and pay to store it in a depository bank.
Do
the dividends earned from a single stock outweigh the opportunity to diversify?
That
question could be answered only with more detailed information. Do you own any
other stock or investments? Are there redemption fees to sell? What industry is
the company and is that a result of the diminishing returns on the price stock?
What percent of your total investment portfolio is in this single stock? What
percent dividend are you receiving? Why are you expecting a stock split if the
stock price is going down?
Those
are a few of the questions that would be considered before a recommendation.
Keeping your investments diversified is an initial concern with holding one
single stock. And is the dividend a competitive distribution relative to other
investments in the same sector would be another element to evaluate. Also, how
secure is the dividend. Looking at the financials to determine the coverage on
the quarterly dividend.
Having
a financial advisor to go over your personal investment goals and risk
tolerance would be important then you could determine your best course of
action. Especially if you are nearing retirement to make certain that your
retirement plans are in place.
An
annuity is an insurance product that pays out income.
Initially,
you make an investment in the annuity, then it makes payments to you on a
future date or a series of dates. The income you receive from an annuity can be
paid out monthly, quarterly, annually or even in a lump sum payment. The size
of your payments are determined by a variety of factors, including the length
of your payment period.
You
may choose to receive payments for the rest of your life, or for a set number
of years. How much you receive depends on whether you choose a guaranteed
payout referred to as a fixed annuity, or a payout stream determined by
the performance of your annuity's underlying investments referred to as a
variable annuity.
There
are deferred annuities where your money is invested for a period of time
until you are ready to begin taking withdrawals, or with an immediate
annuity you begin to receive payments soon after you make your initial
investment. The deferred annuity accumulates money while the immediate annuity
pays out.
Annuities
are touted as useful retirement planning tools, although they incur high
expenses. Before investing in an annuity you should research it thoroughly, or
perhaps retain the services of a financial advisor to help determine if it is
an appropriate investment for your personal financial situation.
It
would be difficult to advise you on any tax implications of your account
without more knowledge on purchase price, appreciation, any offsetting losses,
holding period, etc. Also, a partial portfolio may need to be adjusted for
asset allocation.
The
proper way to have a portfolio analysis that uses statistical
measurements may require you to employ the services of a
investment advisory firm. Most independent financial advisors have access to
third party investment advisory firms that are not part of their own firm,
therefore there is no conflict of interest with recommendations. All of the
statistics you mentioned are a part of the process plus few more. I find the Up
and Down Capture Ratios to also be an important element. Up and Down Capture
Ratios reflect how a particular investment performed when a specific index has
either risen or fallen. And the Maximum Drawdown which represents the largest
peak to trough decline during a specific period of time. The Beta is another
beneficial measurement which is a measure of a fund's volatility relative to
market movements. You mentioned the Standard Deviation which is a statistical
measurement of volatility risk based on historical returns. All of these are
important but more importantly is to determine what your investment goals, risk
tolerance, and time horizon are for you after your divorce. Now that you are
divorced some of your financial resources may have changed.
It
is always prudent to get a second opinion on your investment account or perhaps
you are not getting the level of service you deserve from your current
investment firm. Unless you are working with a discount firm then you may not
be getting the advise you may need. Also, you may want to venture out and find
your own financial advisor if you are still using the same as your ex.
Can
an Index Fund be considered an equity?
An
equity is one or more shares in the ownership of a business or corporation that
are purchased by investors who are then entitled to shares of the firm's
assets in the case of liquation. These shares of stock may be bought
and sold among stockholders in response to changes in market
price. The primary difference between equity and stock is that equity is
a broader concept. Equity generally means ownership value in an asset or
business, whereas stocks are a specific form of ownership in a corporation.
That
said, in regard to your question an index fund could be considered an equity
fund that trades on an exchange in the form of an 1) ETF that could have
price fluctuations on their specific holdings or in the case of market
volatility where there are more buyers than sellors on a particular trading day
that would result in the price of the ETF appreciating. Or an 2) an index
fund that could be in the form of a mutual fund with daily liquidations.
Therefore, an ETF trades more like a stock and a mutual fund is required to
keep a percent of their fund in cash for redemptions. Although that may buffer
the volatility of shareholder selling but would not eliminate it.
So
yes, an index fund is considered to be an equity or an equity fund.
Which
mutual funds pay the highest dividends?
If
you are only interested in a high dividend paying mutual fund then I would
recommend going to a few of the mutual fund websites such as Morningstar or
even Zachs.com or Dividend.com then search for highest dividend fund. Although
there is a bit more to consider than just the yield since your principal is at
stake.
If
you are looking at whether or which fund to buy regardless of dividends, value,
or growth you usually look at its track record or performance history.
Although we all know at the bottom of every mutual fund brochure is the
disclaimer: "Past performance is not indicative of future
results." Since most investors are dazzled by yield or performance, I
beg to differThe first question should be: What are the costs? The annual cost
of owning a mutual fund is called the expense
ratio. There is also a separate charge
called the sales
load . The expense ratio is the
percentage of the fund’s assets that go toward running the fund. But there are
three additional components to be aware of:
If
you are looking for yield in the form of a fund, I would also recommend looking
at some of the higher yielding Closed End Funds that are trading at discounts
to their net asset value and have nice yields. Go to cefconnect.com to take a
look at some of the deep discounted funds that pay dividends. They are
generally less expensive and more liquid than a mutual fund which may be
important in a rising interest rate environment.
What's
the safest way to invest in high-yielding dividend stocks?
The
safest way to invest in high yield stocks would depend entirely on the amount
of funds in your total investment portfolio. If you have a significant amount
of funds to invest then you could employee a financial advisor to put together
a portfolio of higher yielding individual stocks, and alternatively to get more
safety add some other fixed income investment vehicles to gain more income as
well as diversification. Or if your portfolio is smaller, you may want to have
your advisor put together a portfolio of high yielding mutual funds, unit
investment trusts, closed end funds, and/or ETFs. And those funds may be
invested in high yielding stocks and/or fixed income. A blend would enhance the
safety.
Safe
means different things to different people so by employing a financial advisor
you would be able to identify what type of risks and exposure you are willing
to take in order to get the yield you want.
Then
there is also the element of reinvestment. Will you be reinvesting or taking
the distributions in the form of cash. If you use a disciplined reinvestment
strategy that could enhance the overal yield of your portfolio.
Is
a startup or private equity a better long-term investment?
Private
equity is private capital that is not traded on an exchange. Private equity
managers capitalize on the illiquidity premium as they are willing to give up
liquidity to achieve higher returns over a longer term holding period. They may
focus on different types of strategies such as buyout opportunities,
infrastructure, special situations, venture capital, mezzanine, distressed,
growth equity or real estate. Their investments will be less influenced by
public market factors like investor sentiment, volatility, quarterly reporting
and seasonality. Adding private equity to your portfolio may lower the volatility,
and more importantly may increase annualize returns. Start up or seed stage
usually involves a greater degree of risk.
Typically,
the stages of growth capital investing in varying stages of development:
Click
on this link for more detailed information on private equity:
http://rebeccajdawson.com/assets/privateequity.pdf
If
you are wanting to diversify your investment portfolio beyond the old
traditional asset allocation model of stocks, bonds and cash then you may want
to look at adding some alternative investments to your portfolio. It is
referred to as the Endowment Model Portfolio Strategy. College endowments such
as Yale, Harvard, and Stanford have had outstanding investment success in
contrast to traditional asset allocation. Alternative investments are typically
non-liquid and at times have financial suitability requirements for investors.
Private real estate programs and private equity are both good choices for
investing in non-correlated assets to stocks and bonds.
It
is an investment philosophy that was conventionalized by David Swensen, the
Chief Investment Officer of the Yale Endowment Office and Dean Takahashi, the
Senior Direct of the Yale Endowment Office. Under David Swensen's leadership,
the Yale Endowment has grown from $1 Billion in 1985 to $23.9 Billion in 2014.
Essentially, the system deviates from the traditional stock, bonds, and cash
investment model and leans on Modern Portfolio theory. It invests much more in
alternative and non-liquid assets and uses a heavily diversified model. .
What
is the difference between an LLC and an LLP?
Limited
liability companies (LLC and LLP) allow you to enjoy the liability protections
of a corporation with many of the structural and tax advantages of a
partnership. Most states offer both LLCs and LLPs formations. While the two
have some commonalities, they also have some differences, particularly with
regard to liability exposure. Your choice may depend largely on your business
type and your goals.
1)
Limited Liability Company: LLC owners, called "members," can manage
their businesses or hire professional managers. In addition, LLCs enjoy a lot
of flexibility. They can have as many members as they like, and corporations
are allowed to be members. LLCs enjoy freedom from the state-mandated membership
and management reporting requirements that corporations have. Most important,
LLCs do not have to pay taxes. Instead, their profits and losses are passed
through to their members' individual tax returns in the same way as a
partnership. As a result, members enjoy the advantages of avoiding the
"double taxation" of corporations as well as receiving tax relief
from the poor performance of their LLCs.
2)
Limited Liability Partnership: LLPs have the same tax advantages of LLCs.
Although they cannot have corporations as owners. Perhaps the most
significant difference between LLCs and LLPs is that LLPs must have at least
one managing partner who bears liability for the partnership's actions. With an
LLP, whoever is in charge is legally exposed in the same way owners of a simple
partnership are exposed. Silent partners and investors in an LLP receive
liability protection as long as they do not take on a managerial role. If they
do, a court could pierce the veil of liability protection.
Should
Traditional and Roth IRAs have different portfolios?
Traditional
IRAs and Roth IRAs do not require you to report earnings on your taxes each year.
With a Roth IRA, you do not have to report taxes on gains each year and the
funds also may be taken out tax-free.
Roth
IRA investments:
One
of the other advantages about a Roth IRA is that the initial investment (the
principal) has already been taxed so it will not be taxed again at withdrawal.
When you withdraw the earnings on the account, they are not taxed either (as
long as you are over 59˝ and you’ve held the account for 5 years). This
tax-exempt withdrawal is important because it’s the best possible tax treatment
for retirement account withdrawals. So wouldn’t you want this account to grow
the fastest and become as large as possible. You would want this account to
grow more than other accounts that are taxable in retirement, since it has the
best tax treatment at withdrawal. Additionally, unlike a traditional IRA there
is no annual required minimum distribution after the age of 70.5 so you may
take withdrawals at your own discretion not the governments.
In
other words, if you are going to invest in assets that are moderate or
aggressive, consider them for the Roth. Whatever your risk tolerance, consider
locating your investments on the more aggressive spectrum in the Roth.
Conversely, your traditional IRA may be invested in your more conservative
investments. There are also some relevant tax strategies you may be
able to take advantage of down the road converting your traditional IRA to
your Roth IRA. Please click on the link below for more details:
As
always, consulting with your CPA and financial advisor before making any tax
related retirement decisions is recommended.
How
has the average person's interest in the stock market grown in the last few
decades?
Most
historical data indicate that the average return on the stock market since
World War II is 7%.
More
specifically, here are the 30 year returns:
The
consistency of returns is fairly remarkable when you consider some of the
events that have transpired in each of those 30 year periods:
1926-1956: The
Great Depression, a stock market crash of more than 80%, World War II, The
Korean War and four recessions.
1956-1986: The
Civil Rights Movement, the Vietnam War, a president was assassinated and another
forced to resign, an oil price shock from the OPEC embargo, double digit
inflation and interest rates and six recessions.
1986-2016: Black
Monday in 1987, the Savings & Loan crisis, Desert Storm, 9/11, wars in Iraq
and Afghanistan, three recessions, and the dot-com bubble.
In
my 32 years of following the market, there was probably the greatest percent
gain of people's general 'interest' and attention to the stock market
during the dot-com bubble from 1997 to 2001.
Should
I begin to invest despite being in debt?
No,
the credit card and other debt is costing you more than what you would most
likely receive on any investments. You want to focus on getting all of your
debt paid off. Another reason besides the cost of debt is at 26 years of age
you need to be focused on improving your FICO score. Your credit score and
keeping a clean credit report will benefit you down the road when you may want
to 1) buy a home or 2) get a low interest rate on a car loan. Although at your
age and until you have paid down your debt and able to start investing, perhaps
setting up a Roth IRA, I would be careful taking on any more debt than necessary.
If
you are 26 years of age and make $35,000 a year salary, you will also need to
set aside 6 months’ salary in case of any unforeseen financial setback (medical
emergency not covered by insurance, if you lost your job, etc.) and keep that
in cash. Depending on what city you live in and whether you require your own
transportation, I would also save up for a used car, pay with cash, then only
buy the minimum amount of insurance required by law. Paying for car insurance
on an old car is not cost efficient. And once you have paid down your debt,
accumulated 6 months of living expenses, then you could look at investing.
Should
I wait for the market to go down before choosing to invest?
Without
knowing if you already have funds in the market or how much you have in your
savings or even what your investment goals and risk tolerance are that would be
difficult to address. Although investing for income in a unit investment trust
or a fund that has investment strategies designed for a potential rising
interest rate environment would be suitable. Senior loan, floating rate fixed
income that pays a good dividend and also would not have as much relative
volatility in the event of interest rates rising. Also, if you are looking at
an index fund or something similar start out small and, if and when we get
"the inevitable downturn" you will have some cash to add to your
current position.
Investing
for income in fixed income with short duration or floating rate could be a good
alternative until you are more comfortable with the stock market. I would
recommend to keep at least 6 months of living expenses in cash at the minimum.
Make certain you start small and keep diversified. Working with a financial
advisor could address your reservations and help identify your investment goals
and risk tolerance.
What
are the primary factors that affect the market price of stocks?
Very
simply, a stock goes up when there are more buyers than sellers, and a stock
goes down when there are more sellers than buyers.
Among
the many variables that are company-specific factors that can affect the share
price:
Often,
the stock price of the companies in the same industry will move in tandem with
each other. This is because market conditions generally affect the companies in
the same industry the same way.
Investor
sentiment or confidence can cause the market to go up or down, which can cause
stock prices to rise or fall. The general direction that the stock market takes
can affect the value of a stock.
Economic
factors like the consensus of where interest rates are headed, economic
outlook, inflation, etc.
What
should we do with two mature IRA CDs?
You
have many options investing in your IRA. If you opened up your IRA at a bank
then the choices of investments and level of advice/service is more limited. If
you were to transfer your IRA to a brokerage firm it would open up the
opportunity to invest in a myriad of investments, such as mutual funds, unit
investment trusts, ETFs, etc. You may transfer your IRA to another bank or
brokerage firm by contacting the receiving firm, opening up an IRA account,
then filling out the corresponding transfer forms. You may have as many IRAs as
you want at different financial institutions or consolidate with a firm that
would give you more options and also a higher level of service. You will not
get hit with a tax bill for a transfer of your IRA going from one financial
institution to another financial institution. If you were to rollover your IRA
and take possession of the funds (this is different from transferring from one
financial institution to another), then you would have 60 days to redeposit the
funds back into a financial institution in an IRA account and not be subjected
to taxes as long as you followed the rules. This rollover can only be done once
every 12 months.
An
Individual Retirement Account (IRA) is a tax deferred account available for
anyone of any age as long as you have earned income. Once you open your
account, you may invest the funds in your IRA in, but not limited to stocks,
bonds, mutual funds, and/or even CDs. An IRA is an account set up at a
financial institution that allows an individual to save for retirement with
tax-free growth or on a tax-deferred basis. A traditional IRA is tax deferred
which you make contributions with money you may be able to deduct on your
tax return, and any earnings can potentially grow tax-deferred until you
withdraw them in retirement.
Whereas,
a Certificate of Deposit (CD) is a type of fixed interest rate deposit
over a specified period of time. When that term ends, you can withdraw your
money or roll it into another CD. Withdrawing before maturity can result in a
penalty. It is low risk and low return. CDs are among the safest
investment a person can make. The interest rate is determined ahead of time,
and you’re guaranteed to get back what you put in, plus interest once the CD
matures. What’s more, if the bank fails or goes under, your deposit is most
probably insured by the FDIC for up to $250,000.
The
difference being that an IRA is a type of account in which you may leave in
cash or invest in differing securities or CDs. Whereas a CD is a time deposit
at a financial institution which may be bought in either a qualified (IRA)
account or a non-qualified (cash) account.
An
IRA is a type of an account. You have a choice of where you would like to
invest the funds within your IRA which may or may not be FDIC insured. If you
are looking for FDIC insurance in your IRA then CDs may be a good choice for
you.
The
difference being that an IRA is a type of account in which you may leave in
cash or invest in different securities or CDs. Whereas a CD is a time
deposit at a financial institution which may be bought in either a qualified
(IRA) account or a non-qualified (cash) account that has FDIC insurance.
If
your employer is matching your 401(k) contributions that would take priority.
Although I would not contribute any funds over and beyond their match.
Investing the difference perhaps in a Roth up to the maximum of $5500 per
year.
Another
assumption is what the tax rate will be after you retire. If the tax rate
goes up in the future, then it may be better to invest in the Roth IRA. Is
it better to pay tax now and invest in Roth IRA or wait to pay tax after you
retire. It may be better to max out the 401(k) first and then invest
in Roth IRA. Max out both 401(k) and Roth IRA so you can take advantage of both
programs if at all possible.
Please
see the attached article which pertains specifically to your dilemma:
Depending
on your view of where you believe taxes are headed, it might be a concern when
making your retirement investment decisions. We have all been advised to put
money away for retirement in tax deferred accounts like 401(k)s and IRAs. As
your 401(k) and IRAs grow, so does the government’s share since they are your
uninvited partner. Unlike most business partnerships, the IRS can increase
their percentage of your hard-earned tax deferred savings at their discretion.
Look
at where federal income tax rates have historically ranged:
History
of Tax Rates: 1913 – 2014
Tax
Rates Throughout History
In
1913, the United States endorsed the 16th Amendment and instituted the
federal income tax. That year the top tax bracket was 7% on income over
$500,000 (in today’s dollars that amount would equal approximately $11
million). Conversely, the lowest tax bracket in 1913 was 1%. Lawmakers use
taxes to stimulate a sector of the economy or to raise revenue. You have
heard the saying that the two things you can count on are death and taxes? Well
death does not get any worse (to my knowledge) every time Congress meets.
To
finance World War I, Congress passed the 1916 Revenue Act and thereafter the
War Revenue Act of 1917, which increased the highest federal income tax rate
from 15% in 1916 to 67% in 1917 and 77% in 1918. We all know war is very
expensive. After the war in the roaring 1920s, federal income tax rates
decreased to 25% from 1925 to 1931.
Then
came the Great
Depression, and Congress decided to raise
federal income tax rates again in 1932 from 25% to 63% for those in the top tax
brackets. Then came another war, WWII, and in 1944 the top rate was 94% on
income over $200,000 (in today’s dollars that amount would be approximately
$2.5 million). Top tax rates didn't decrease below 70% through the 1950s,
1960s or 1970s.
The
Economic Recovery Tax Act of 1981
In
1981, the Economic Recovery Tax Act of 1981 decreased the top bracket from 70% all the way
down to 50%, indexing the brackets for inflation. Then in 1986, lawmakers
enacted the Tax Reform Act of 1986, expanding the tax base and dropping the top
income tax rate to 28% beginning in 1988. The theory was that having a broader
base had fewer deductions and would bring in the same revenue. That 28% income
tax rate only lasted three years.
In
the 1990s, federal income tax rates went to 39.6%. Then the Economic Growth and
Tax Relief and Reconciliation Act of 2001 decreased the top income tax rate to
35% where it stayed from 2003 through 2012.
More
recently, the American Taxpayer Relief Act of 2012 raised the top federal income tax rate to 39.6%. Then
the Patient Protection and Affordable Care Act added another 3.8%, making the
total maximum income tax rate 43.4%.
In
summary, I find it imperative to look at history to predict the future since
these changes can affect your investments. Higher taxes mean less money for
your retirement years. Moving your tax deferred funds from accounts that are
forever being taxed to accounts that are never taxed is one solution.
Converting
to a Roth IRA
Converting
your traditional IRA or 401(k) (or at least a portion of these funds
depending on what taxes could easily be paid on those dollars that year or over
a series of years) into a Roth
IRA is a simple solution. By
converting your traditional IRA into a Roth IRA you will:
Converting
from a traditional IRA to a Roth could be a useful tool. By paying taxes today
you can take advantage of historically low rates. Also, if you are young enough
you may still have plenty of deductions that could potentially help offset the
taxes. Additionally, our new White House administration’s tax plan could
potentially make it an even more attractive time.
*In
1983, President Ronald Reagan and House Speaker Tip O’Neill passed a law that
would tax Social Security benefits in order to ensure the long-term viability
of the program. The IRS created income limits, or thresholds, that determine
whether or not your benefits will be taxed. Now we understand what actions the
IRS will take if you do not take your RMDs from your traditional IRA, if you
take out too much you will pay higher taxes on your Social Security benefits.
Can
I combine my 401k with my new 403b?
Yes,
when you leave one employer and go to another with a different retirement plan
you may roll it over to your new employer's plan. Although it is important to
look a bit deeper into each plan because all plans are not created equal.
As
you know, one of the ways to save for retirement is to participate in any
tax-advantaged plans offered by your employer, such as a 401(k) and/or 403(b).
You can grow your account through investing with the tax advantages. The key is
whether your plan offers you enough investing options. Again, not all plans are
created equal, such as the funds different investment options in the
company plan and also the plan fees so these are important features to
analyze. Although one benefit of rolling over an old 401(k) to an IRA is that
you typically get more investing options. The fees with an IRA are typically
lower than what your 401(k) plan will charge you after you leave your job.
When
you leave a company, you have the option of:
Here
are some considerations on whether to rollover your plans into a rollover
IRA:
One
of the main benefits of an IRA is that there are often more investing options.
If you contribute to your employer’s retirement plan, you might end up with
only a few options chosen by the plan administrator. You may have to be heavily
invested in your company’s stock or you may have a limited number of high cost
mutual funds to choose from. Instead of relying on these investment options,
(some of which you might not be comfortable with) you can roll your plan
over to an IRA and have nearly the entire universe of options available to you.
IRAs are individual accounts so you have access to a wider variety of investing
options. You are able to leave your funds in cash, or invest in funds, bonds,
stocks, and/or alternative investments to keep diversified by management and asset
class.
The
fees with an IRA can be lower than what is charged by your plan administrator.
You cannot control how your investments perform but you can control how much
you pay in fees, which has an impact on your returns.
When
you roll over to an IRA, you do not pay taxes. As long as you are careful to
designate your withdrawal as a rollover, and as long as the money is invested
in a Traditional IRA, you don’t have to worry about taxes. The only exception
is if you are rolling your money over from a tax-deferred account into a Roth
IRA, which is known as a Roth conversion.
With
a tax-deferred account, such as a traditional 401(k) or 403(b), you receive a
tax deduction and you are expected to pay taxes later, when you withdraw from
your account. If you roll over the money from a traditional plan to a Roth IRA,
you will have to pay income taxes on the money (although you will escape the
10% penalty for an early withdrawal if you are under 59 ˝ years of age).
Consulting
with a financial advisor and your CPA in order to identify your financial
situation prior to would be advisable. It may make sense for you to roll
your 401(k) or 403(b) into an IRA to improve your investment options, or
to better handle your tax planning for the long run.
Is
it wise to avoid consolidating retirement accounts so I don't have to pay a
sales charge?
It
can be cost efficient to merge your retirement accounts although just to
clarify:
A
401(k) is one of the ways to save for retirement in a tax-advantaged
plan offered by your employer. You can grow your account through investing
with the tax advantages. The key is whether your plan offers you enough
investing options. Again, not all plans are created equal, such as the
funds different investment options in the company plan and also the plan
fees so these are important features to analyze. Although one benefit of
rolling over your 401(k) to an IRA is that you typically get more
investing options. The fees with an IRA are typically lower than what your
401(k) plan will charge.
Here
are some considerations on whether to rollover your 401(k) into a rollover
IRA:
One
of the main benefits of an IRA is that there are often more investing options.
If you contribute to your employer’s retirement plan, you might end up with
only a few options chosen by the plan administrator. You may have to be heavily
invested in your company’s stock or you may have a limited number of high cost
mutual funds to choose from. Instead of relying on these investment options,
(some of which you might not be comfortable with) you can roll your plan
over to an IRA and have nearly the entire universe of options available to you.
IRAs are individual accounts so you have access to a wider variety of investing
options. You are able to leave your funds in cash, or invest in funds, bonds,
stocks, and/or alternative investments to keep diversified by management and
asset class.
The
fees with an IRA can be lower than what is charged by your plan administrator.
You cannot control how your investments perform but you can control how much
you pay in fees, which has an impact on your returns.
When
you roll over to an IRA, you do not pay taxes. As long as you are careful to
designate your withdrawal as a rollover, and as long as the money is invested
in a Traditional IRA, you don’t have to worry about taxes. The only exception
is if you are rolling your money over from a tax-deferred account into a Roth
IRA, which is known as a Roth conversion.
With
a tax-deferred account, such as a traditional IRA, you receive a tax deduction
and you are expected to pay taxes later, when you withdraw from your account.
If you roll over the money from a traditional plan to a Roth IRA, you will have
to pay income taxes on the money (although you will escape the 10% penalty for
an early withdrawal if you are under 59 ˝ years of age).
Consulting
with a financial advisor and your CPA in order to identify your financial
situation prior to would be advisable. It may make sense for you to roll
your 401(k) into an IRA to improve your investment options, or to
better handle your tax planning for the long run. Your advisor would be able to
identify what fees you could potentially save on or what your other options are
only with more detailed information on each account and their holdings.
How
should I invest a lump-sum inheritance to add value to my savings?
If
you are buying California municipal bond funds then you must be a resident of
California. So initially I would consult with your CPA regarding the
inheritance tax for California.
Then
I would consult with a financial advisor in order to properly analyze your
current portfolios for diversification within all of your accounts. If you do
not take your entire investments into consideration it would be like getting
conflicting medical prescriptions from different doctors.
There
are many options available to you once you identify how your assets are allocated.
One area that I like for a properly diversified portfolio is to implement
alternative investments which are non-correlated to the stock and bond
markets. If you are wanting something passive and stable there are some non-traded
preferred REITs:
Or
other alternative investments in real estate that have excellent track
records and management. The old stock, bond and cash asset allocation is
outdated.
If
you are wanting to diversify your investment portfolio beyond the old
traditional asset allocation model of stocks, bonds and cash then you may want
to look at adding some alternative investments to your portfolio. It is
referred to as the Endowment Model Portfolio Strategy. College endowments such
as Yale, Harvard, and Stanford have had outstanding investment success in
contrast to traditional asset allocation. Alternative investments are typically
non-liquid and at times have financial suitability requirements for investors.
Private real estate programs and private equity are both good choices for
investing in non-correlated assets to stocks and bonds.
It
is an investment philosophy that was conceptualized by David Swensen, the Chief
Investment Officer of the Yale Endowment Office and Dean Takahashi, the Senior
Direct of the Yale Endowment Office. Under David Swensen's leadership, the Yale
Endowment has grown from $1 Billion in 1985 to $23.9 Billion in 2014.
Essentially, the system deviates from the traditional stock, bonds, and cash
investment model and leans on Modern Portfolio theory. It invests much more in
alternative and non-liquid assets and uses a heavily diversified model. .
What
is the most tax efficient way to store funds from the sale of a home in an IRA?
There
are different types of IRAs. Congress wanted them to have limitations
(to limit the super wealthy from tax advantages) and in order to
achieve this, they set IRA contribution limits that restrict the amount of
funds you may add to the account each year. So you may not be able to
contribute the entire $50,000 in your traditional or Roth IRA this year. I
have listed the different types of IRAs below:
You
may have more than one IRA. The traditional IRA and Roth IRA contribution
limits are consolidated. You may contribute up to $5,500 in total in
the tax year 2016 to any combination of a traditional IRA and Roth IRA but
you could not put $5,500 in each.
It
may be better to fund a Roth IRA than a traditional IRA if you qualify.
You can, however, have a SEP-IRA or a Simple IRA on top of your
traditional IRA or Roth IRA. You would need to speak with your CPA in
order to calculate your contribution limits and discover the maximum amount of
tax advantaged accounts for which you qualify.
What
effect if any will a proposed rate increase have on the municipal bond market?
Municipals
offer more yield with less interest rate sensitivity versus corporate or
government paper. In both the current and proposed environment, municipal
credit remains one of the few attractive fixed income sectors. Top performing
municipals can vary across the credit spectrum and yield curve. The municipal
market has experienced a structural shift calling for more research and
expertise. Access to individual bonds is low relative to history. And there is
less insurance on new issuance. Municipal inventory is low with less liquidity
pre 2008. There has been a record of new issuance but net issuance is actually
shrinking versus bond calls and maturities. In 2007 AAA municipals had 69.5% of
the muni market and in 2016 AAA paper had 13.9% of the muni market. From CA
paper to National munis with credit quality you can add some yield even with
possible tax breaks coming. There may be some significant pension fund reform
so it is important to look at the pension fund exposure before buying. The
power of tax free has gone up in our current environment.
I
would recommend consulting with your CPA and financial advisor to evaluate the
impact municipals would have on your current portfolio.
Is
there a mutual fund that specifically includes blue chip stocks?
Yes,
there are several choices of blue chip mutual funds. Most have had successful
runs as of late so timing is something to consider. And with only $5000 it
would be hard to buy a portfolio of individual blue chip stocks with any kind
of diversification.
The
purpose of having a diversified portfolio is
not necessary to increase the total return, but to reduce the
volatility and potential downside. Initially, you should clarify your
level of risk based on your investment goals, time horizon, and risk tolerance.
In
order to build a diversified portfolio, you should look for assets:
stocks, bonds, cash, and/or alternative investments. Assets that are
non-correlated and whose returns have not historically moved in the
same direction. Also, to be diversified within each asset class.
Not
only do you need to be diversified within stock sectors, but also by small,
mid, or large cap stocks. Caps, sectors, and geography. The standard rule
of thumb is not to be exposed to any more than 5% of any one stock. This can
better be achieved through a managed portfolio for asset allocation. Then there
is the diversification within growth, value, or income style of investing.
When
and if you decide to invest in bonds, consider laddering or varying
maturities, credit qualities, and durations, which measure sensitivity to
interest-rate changes. There are many differing fixed income funds that would
be an attractive diversification for your stock exposure.
For
the cash exposure, it is advisable to keep at least six months’ worth of
living expenses in cash in the event of any unforeseen financial setback.
Obviously, this would be outside of your retirement account, but also an
important component to a diversified portfolio.
If
investing in individual stocks you would need to have enough funds to buy a
diversified portfolio of different stocks. There are large cap, small cap, mid
cap then you would want to look at diversifying by industry and sector. The
most successful way to do this is by buying funds or hiring a professional
money manager. The best way to determine this is to consult with a financial
advisor in order to identify your investment goals and risk tolerance. Picking
the right stocks requires in depth analysis and requires daily monitoring. The
stock market can be volatile and unpredictable so having your risk spread over
a basket of individual stocks and other investments would be the best way to
potentially increase the growth of your portfolio along with taking some
additional exposure.
If just starting out with $5000 perhaps consulting with a mutual fund advisor to
determine your investment goals, time horizon and risk tolerance.
What
does it mean when people say they "beat the market"? How do they know
they have done so?
The
phrase beat the market usually refers to outperforming one of the
stock indices like the S&P 500 index. There are other U.S. indices
such as, DJIA, NASDAQ 100, NASDAQ Composite, Russell 2000, Wilshire 5000, and
many other domestic and international ones. However, the S&P 500 is by far
the most used benchmark for investment performance. It is a good benchmark
because it represents a well-diversified portfolio of large and medium, as well
as value and growth, stocks in many industries. By beating the market it is a
way of comparing your investment performance against one of these indices.
By
comparing your return against the S&P 500, you get a more accurate
measurement of your investments true performance. A 13% return may sound good
but not relatively as good if your comparable index returned 26%. It is better
to compare against an index in order to get a more accurate barometer of your
investment performance versus using a standard 7 or 10% performance.
It
is not always easy to beat the market. Beating the S&P 500 is actually
quite an accomplishment for any stock investor and not always realistic
consistently.
What
is the "stretch IRA" concept?
A Stretch
IRA is not a type of Individual Retirement Account. It is an
approach to estate planning, which goal is to maximize the tax-deferred growth
potential of the IRA assets by leaving them in the account for as long as the
account holder and beneficiaries want and as long as the law permits. The
approach being used for the stretch IRA does not allow large or lump-sum
distributions to the IRA owner and his beneficiaries. Usually, these
distributions of IRA assets are spread out to one or two later generations of
beneficiaries.
Thus,
a stretch IRA, or also known as “inherited IRA”, is simply a wealth transfer
method that provides potential to the IRA holder to “stretch” his IRA over
several future generations, so the obvious advantage of this is that taxes may
also be spread out. Of course, just as the Individual Retirement Account is
governed by several IRA rules and regulations, there are some Stretch
IRA rules that must also be considered and followed for this type of approach.
When
you inherit an IRA, the first rule is, touch nothing. If you roll the inherited
IRA into your own IRA or even move it to another institution, the money
instantly becomes taxable.
As
the beneficiary, you must retitle the IRA with your name and the deceased's
name.
You
must begin withdrawals of the required minimum distribution (RMD) starting on
Dec. 31 of the year after you inherit. They will be taxable. Their amount is
calculated by dividing the IRA's balance by the number of years of your life
expectancy as determined by the IRS. The younger you are, the smaller the
RMD.
If
you want to stretch the IRA to a third generation and potentially make the
account bigger, take out only the minimums RMDs
The
differences between a Roth IRA distribution and a traditional IRA is the
Roth IRA funds have already been taxed so when you take your distributions they
are tax free. Wherea,s the traditional IRA is tax deferred funds and your
distributions will be taxed at your current tax rate. And you are required to
take out your distributions from a traditional IRA, there are no required
minimum distributions from a Roth IRA. So you can manage your distributions in
a Roth IRA. Additionally, your traditional IRA distributions count as
provisional income which could put you in a higher threshold and have your
Social Security benefits taxed. Roth IRAs distributions do not count as
provisional income.
I
have listed below the other benefits of having a Roth IRA:
Can
mutual funds invest in IPOs?
Technically
yes, they are able to invest in IPOs. Mutual funds with this investment
strategy have portfolios managers who buy shares of newly public companies they
believe will outperform, getting in on the IPO whenever possible, as well as
snapping up shares on the secondary market. Although what is referred to
as a "hot" IPO has limited shares and they are generally only offered
on a limited basis to the IPO underwriting firms or investment firms who have
been invited to be a part of the selling group. Hot IPOs are often
oversubscribed, meaning market demand far exceeds the supply of shares.
The
underwriter is usually an investment bank that employs IPO specialists. These
bankers ensure that the firm satisfies all regulatory requirements, such as
filing with the appropriate bodies and depositing all fees, and makes all
mandatory financial data available to the public. Next, and perhaps most
importantly, the underwriter contacts large prospective buyers of stock, such
as institutional investors who have large sums of money to invest. The
underwriter takes the pulse of prospective buyers and then recommends an IPO
price to the firm. This is the price at which the shares will be sold. An
excessive price may leave the firm with unsold stock, while a price that is too
low will mean forgone revenue from the stock sale.
What
is an equity-indexed annuity?
Equity
indexed annuities are complicated insurance contracts whose returns are
linked to the stock market.
Like fixed
annuities, Equity Indexed Annuities are contracts with an insurance company. They
pay interest until you begin withdrawing regular payments. Those payments are
based on the value of your account, current rates and the payout period.
Equity-indexed
annuities have a minimum fixed interest rate, but they offer the potential to
earn more with a variable rate that is based on the performance of a stock
index, such as the Standard & Poor's 500. The insurance company determines
how much of the index's gain goes to your account. While others apply a spread,
or margin. There also may be caps on an Equity Indexed Annuities.
This cap could change every year. And companies might credit your account at
different times.
If
you withdraw money in the first years of the contract, you might have to
pay penalties, called surrender fees. You can lose money if you take early
withdrawals. Surrender charges can apply for more than a decade as
well. If you make a withdrawal before you reach the age of 591/2, you will
pay a 10% tax penalty as well as owing income taxes on your gains.
Can
I own Master Limited Partnerships (MLP) on my Roth IRA?
Yes,
you may own MLPs in your Roth IRA, although one of the most
important rules that MLP investors need to
understand deals with the consequences of holding individual MLPs
inside of a retirement account.
There
are some potentially unfavorable tax consequences in doing so. The
principal advantage that IRAs have over traditional investment accounts is
that IRAs have favorable tax treatment. In the case of traditional
IRAs, the contributions to such accounts are tax-free and you need not pay
taxes until you actually withdraw the money, in the case of Roth IRAs,
contributions are taxed but withdrawals are tax-free.
But
this tax advantage may disappear if your retirement account
has individual MLPs. IRAs are subject to taxes on a special type
of income called unrelated business taxable income, or "UBTI."
The distributions paid by MLPs are likely to be considered
UBTI. If an IRA earns more than $1,000 of UBTI annually, the
UBTI income above $1,000 is subject to tax even if the securities are held
in a retirement account.
If
your retirement account earns more than $1,000 per year in UBTI, you
have just eliminated the tax advantage of your retirement
account. It is usually a good idea to hold individual MLPs in a
taxable account versus a retirement account.
Will
impact investing hinder potential profits?
Impact
investing refers to the idea of investing in businesses that will cause a
social benefit. Sort of like philanthropy but with the added benefit of a
financial return.
It
is important to note that most impact investments are open only to
institutional investors or high net worth investors. The Securities and
Exchange Commission requires that investors in certain investments be
“accredited.” Investors with consistent personal income above $200,000 per year
or a net worth, excluding a primary residence, of $1 million are considered
accredited.
Although
the number of securities offerings under all securities exemptions from
registration should be increasing, due to the recent implementation of new
rules from the SEC that changed intra-state crowdfunding restrictions and
increased the amount issuers can raise under certain circumstances. The result
will be a rapidly growing set of investment opportunities for non-accredited investors.
There
is also more data to support the idea that doing well and doing good are
not mutually exclusive. Recent data show that private equity and
venture capital funds with impact investing strategy produce
approximately the same returns as nonimpact funds.
Analyzing
some 51 impact funds, launched between 1998 and 2010 returned an average of 6.9
percent per year to investors through June 2014 versus 8.1 percent for 705
nonimpact funds.
There
is a stereotype among some investors that impact investing causes a
sacrifice in financial return. The sample set of 51 impact funds is relatively
small, and 35 of 51 were launched from 2005 to 2010, meaning their full returns
are not yet available, which makes it is difficult to draw definitive
conclusions on the performance of impact investing funds.
Can
I roll my SEP IRA into a Traditional IRA or should I convert to a Roth?
Yes,
you can roll your SEP IRA into a traditional IRA or convert it to a Roth IRA.
Due to the Tax Increase Prevention and Reconciliation Act of 2005, all holders
of IRAs (SEP,
SIMPLE and traditional) can convert to a Roth IRA regardless of their income.
Previously, in order to be able to convert from an IRA to a Roth IRA your
income needed to be under $100,000.
If
you choose a Roth conversion, you simply elect to be taxed at current
individual tax rates for the total amount that you convert to a Roth IRA. You
may do a full or a partial conversion. Once it is converted, any withdrawals
from the Roth account after five years and achieving the age of 59.5 will be
tax-free. Whereas if you roll your SEP IRA into a traditional IRA, you will pay
taxes on distributions when they are withdrawn from your traditional IRA.
Additionally, after age 70.5 you will be required to take distributions every
year from your traditional IRA, they are referred to as Required Minimum
Distributions (RMDs).
Keep
in mind that you may recharacterize your Roth conversion which allows you
to “undo” or “reverse” a rollover or conversion to a Roth IRA. You generally
tell the trustee of the financial institution holding your Roth IRA to transfer
the amount to a traditional IRA (in a trustee-to-trustee or within the same
trustee). If you do this by the due date for your tax return (including
extensions), you can treat the contribution as made to the traditional IRA for
that year (effectively ignoring the Roth IRA contribution).
You
can only recharacterize amounts rolled into a Roth IRA from a SEP IRA by
transferring them to a new or existing traditional IRA, and not back into the
plan from which they were distributed.
Below
are some advantages you may want to consider before converting, as Roth IRAs
would:
What
is the difference between a Keogh and an IRA?
An
Individual Retirement Account (IRA) is a type of personal retirement savings
account that allows you to save for your retirement with tax
advantages. Whereas a Keogh is a more complex type of retirement
account for self-employed business owners, partners in a company and their
employees.
Keogh
plans get their name from the man who created them, Eugene Keogh, who
established the Self-Employed Individuals Tax Retirement Act of 1962 or the Keogh
Act. The plans have changed over the years and the Internal Revenue
Code no longer refers to them as Keoghs. They are now known
as HR 10 or qualified plans.
The
Keogh structures still exist, but they have lost popularity compared to
plans like SEP-IRAs or individual or solo 401(k)s. A Keogh may be right
for a highly paid professional, such as a self-employed dentist or a lawyer.
What
are the differences between a Simple IRA and a Traditional IRA?
Small
business owners and self-employed individuals who do not have access
to a 401(k), may consider opening an individual retirement plan
(IRA). While there are several different versions, including the Roth and SEP
IRA, you may receive some of the best tax benefits from a traditional or SIMPLE
IRA, which is an IRA designed for small businesses.
A
traditional IRA lets you put pre-tax money into an account for retirement.
While you will pay taxes on your withdrawals in retirement, you' will get an
up-front tax break when you contribute money to your account.
There
are limits as to how much money you may contribute to a traditional IRA per
year. For 2016, the annual limit is $5,500 if you're under 50. If you're 50 or
older, you can make a $1,000 catch-up contribution for a total of $6,500 per
year.
Once
that money is in your IRA, you cannot withdraw it until you reach age
59.5. Otherwise, you will incur a 10% early withdrawal penalty. Although there
are some exceptions, though. Such as but not limited to, you can take money out
of an IRA early to pay for qualified higher education expenses for yourself, a spouse,
or a child. You can also withdraw up to $10,000 penalty-free for the purpose of
buying a first-time home.
With
a traditional IRA, you're required to start taking required minimum
distributions (RMDs) from your account once you reach age 70.5. If you
fail to do so, you could receive a 50% penalty on the amount you
should have withdrawn.
SIMPLE
(Savings Incentive Match Plan for Employees) IRAs are similar to traditional
IRAs in many regards, but while traditional IRAs are geared toward anyone
looking to save for retirement, SIMPLE IRAs are for small business
owners and those who are self-employed.
Like
a traditional IRA, SIMPLE IRA contributions go in tax-free, which means you get
a tax break when you put money in but pay taxes on withdrawals in retirement. If
you take withdrawals from your SIMPLE IRA before you reach age 59.5, you
will incur a penalty unless you qualify for an exception. Also, you are
required to take required minimum distributions starting at age 70.5.
One
key difference between a traditional IRA and a SIMPLE IRA is the annual
contribution limit. Currently, the limit for SIMPLE IRAs is much higher. For
2016, you can contribute up to $12,500 per year to a SIMPLE IRA. If you're 50
or older, you're allowed a $3,000 catch-up contribution for a total of $15,500
per year.
Another
difference between a traditional IRA and SIMPLE IRA is that with a SIMPLE IRA,
employers are obligated to match part of their employees' contributions. Also
early withdrawals from a SIMPLE IRA could come with higher penalties than
those taken from a traditional IRA. If you take money out of a SIMPLE IRA
within the first two years of participation in the plan, you will incur a 25%
early withdrawal penalty unless you qualify for an exception. Only
companies with fewer than 100 employees can create SIMPLE IRAs.
You
must wait two years after opening a SIMPLE IRA to roll the money over into a
non-SIMPLE account, including a traditional IRA. As soon as this waiting period
is over you can transfer the funds to a traditional IRA without any
tax consequences. SIMPLE IRAs cannot accept rollovers from any type of
account other than another SIMPLE IRA. You may not move money from a
traditional IRA to your SIMPLE IRA.
How
can I earn interest on my unneeded RMDs?
Proper
financial planning can help you make the most of your RMDs (required minimum
distributions). And yes, this includes reinvesting RMDs that you do not need for
living expenses. There are many variables with taking your RMDs, such as
complex rules, personal goals, and tax implications. We are living in a time
where getting the most of your RMDs is higher than ever with baby boomers
retiring every day.
Keep
in mind, that you must take separate RMDs on your 401(k) and your traditional
IRA (if you own one). RMDs must be calculated separately and distributed separately
from each employer sponsored account. Although RMDs for IRAs can be aggregated.
The total may then be withdrawn from one or multiple IRAs. If this is the case,
then you may want to consider consolidating to an IRA.
Additionally,
if you are over the age of 70 and still working and you own less than 5%
of the business, then you are not required to take a distribution from
your 401(k).
In
order to recommend a proper asset allocation for your RMDs would be dependent
on your individual financial goals such as legacy planning or to create a
reserve for retirement. You could also benefit from tax planning, such as Roth
conversions although the tax for the distribution in the year of the conversion
must be paid.
If
your RMDs are unneeded, you may consider taking in-kind distributions. Taking
the distributions in the form of the securities held in your retirement
account.
Also,
if you roll your 401(k) into an IRA, you can have your distributions pulled
monthly or quarterly. Although waiting till year end would give more tax
deferred growth. And you may reinvest your RMD proceeds to a taxable
account or a revocable trust if you have one.
As
far as the proper asset allocation, I would recommend a portfolio of
conservative fixed income. Perhaps some funds that have attractive yields with
a stable price history. It would be hard to make a precise recommendation
without knowing more about your personal financial situation investment goals
and risk tolerance. Meeting with a financial advisor in order to take your
entire personal financial situation into consideration would be prudent.
Is
it too late for me to invest my inheritance?
No,
it is not too late to invest. There are many options for you at this age. It
would be difficult to make a recommendation of where to invest those funds
without knowing your personal financial situation, such as whether you own any
other investments, what type of investments you are invested in currently
or in the past, your investment goals, your risk tolerance, your tax bracket or
current income, any dependents, your net worth, etc.
The
advice I would give you is to meet with a financial advisor in order to
determine what would best be suited for you. You would most probably benefit
from a portfolio of conservative income investments that may
have capital appreciation potential. And keep in mind the importance of
diversification, having a mix of investments to reduce risk or
volatility by investing in a variety of assets that allocate capital
in a way that reduces the exposure to any one particular asset or risk. You
certainly would not want to invest those funds into any type of potential
investments with volatility. Perhaps some funds that would give you some
additional monthly income with some capital appreciation potential. You
may be able to take the income, let it accumulate for reinvesting later on or
have your current portfolio reinvest in the same assets. The power of reinvestment
can be very profitable.
My
Mother went through a divorce after 25 years of marriage so I can
understand how vulnerable a time this can be and the consequences involved. I
have also had similar situations with my clients in and out of state. I amend
you for seeking out your own financial advisor versus using your soon to be ex-husband’s
advisor. It is usually better to branch out on your own if your husband was the
one who had the relationship with financial advisor, attorney, CPA, etc.
On
the first meeting, I always recommend to bring your personal financial
statement if you have one. If not, we will work with you to put one together
so make certain to bring all brokerage statements, bank statements,
retirement plans, last 2 to 3 years tax returns, real estate holdings,
liabilities and/or insurance policies.
It
is good to be planning ahead so that we can work together with your attorney
advising you on what you can expect pertaining to all your coupled assets and
their corresponding valuations.
What
you can expect is to be better prepared going forward financially as well as
emotionally. Knowledge is key to a healthy settlement for your future years.
How
hard is it for advisors to comply with the new 'Fiduciary Rule'?
You
want an advisor that has always operated with their client’s best interest first
regardless of the new Fiduciary Rule. An advisor that has difficulty complying
with new securities rules may have other difficulties as well. There needs to
be full disclosure of all fees and commissions prior to hiring a financial
advisor. Look for an advisor who is transparent and forthcoming.
If
your potential financial advisor is not forthright about how they are
compensated and the exact cost of their advice, you may want
to look for another advisor. All the compensation an investment
advisor receives should come directly from his clients. Any other sources of
income should be insignificant and fully disclosed. Brokers can earn
commissions on trades, trailer fees for mutual funds and annuities, and bonuses
tied to their firm’s proprietary investment products or trading. These other
sources of income create lots of conflicts. There is nothing wrong with
paying your financial advisor. They work hard to ensure your money works for
you. But you deserve to know how your advisor gets paid and which
option benefits you in the long run.
The
following are differing structures most financial advisor use:
There
are times that the percentage of assets is appropriate then there are other
times that a commission is to your advantage. Personally, I use both. It
depends on the client and the client's assets. This is a subject that should be
discussed prior to investing or entering into a relationship with an
advisor.
It
is important to always ask a financial advisor for a clear explanation of how
they will be compensated before you hire them. This is one question
you would want to ask any potential financial advisor. Look for an honest,
straight-forward answer and avoid "advisors" who try to avoid
the question.
Should
I open an IRA or a Roth IRA?
If
you are trying to reduce taxes this year and have earned income then a
traditional IRA would be suitable. A traditional IRA is tax deferred and with a
Roth IRA taxes are paid upfront and grow tax free.
Later
down the road you may consider converting your traditional IRA (or at least a
portion of these funds depending on what taxes could easily be paid on those
dollars that year or over a series of years) into a Roth IRA. By
converting your traditional IRA into a Roth IRA you will:
Is
a fiduciary or a broker better for planning and investing assets?
Over my
30 years of following markets, managing client portfolios, and working in
offices with brokers and fiduciaries, I would say the better indicator of who
would be working in your best interest would be the individual investment
professional. It is unfortunate that someone needs to be classified
with a label in order to be "perceived" as a better advisor.
Anyone who has the privilege to be trusted with managing your
personal investments should be working in your best interests regardless.
The
best way to determine this would be upon meeting and interviewing a broker who
has had significant experience managing money over a longer period of time
under different market environments. Education is important but a seasoned
investment professional with years of experience will trump a younger advisor
that has limited experience and is only relying on the creditials of his
or her firm. A Financial Advisor who enjoys helping clients and who has
enthusiasm, as well as having been exposed to differing markets and has
experience with differing types of clients with different investment strategies
and with a wider range of investment products. The last broker or fiduciary you
would want to work with is one who is limited to offering only products their
firm represents, proprietary products or insurance products.
I
always recommend to any new client to know your money manager, ask questions,
and to be provided with full disclosure of all fees and commissions. Getting a
second opinion can also be advantageous. If a broker or fiduciary is not
comfortable discussing this or does not give you the time and attention you
require would also be a good indicator of who is the better advisor. A
Financial Advisor that takes the time to take your call and does not delegate
you to his junior broker. You want this to be a long term relationship and
trust is paramount.
Where
should I go for advice regarding my 401(k), IRA, brokerage, and cash flow?
I
would recommend meeting with different financial advisors until you find an
advisor that you have the most confidence in. This should be a long term
relationship and you do not want to work with an advisor who just happens
to office nearby, or one who happens to be fee-only, hourly or commission
based. There are times when working on a fee basis is appropriate and other
times when a commission basis is more to your advantage. You want to work
with an advisor who explains this in detail and shows you the comparable
numbers before you invest. Make certain that the funds that are managed with
fees are not co-mingled with the commissioned funds. For example, if your
advisor recommends a mutual fund, make certain that you are not paying an
annual fee on top of the mutual fund fees/expense ratio.
Over my
30 years of following markets and managing client portfolios, I would
say the better indicator of who would be working in your best interest
would be the individual investment professional. It is unfortunate that someone
needs to be classified with a label in order to be
"perceived" as a better advisor. Anyone who has the privilege to
be trusted with managing your personal investments should be working
in your best interests regardless.
The
best way to determine this would be upon meeting and interviewing a broker who
has had significant experience managing money over a longer period of time
under different market environments. Education is important but a seasoned
investment professional with years of experience will trump a younger advisor
that has limited experience and is only relying on the creditials of his
or her firm. A financial advisor who enjoys helping clients and who has enthusiasm,
as well as having been exposed to differing markets and has experience with
differing types of clients with different investment strategies and with a
wider range of investment products. The last broker or fiduciary you would want
to work with is one who is limited to offering only products their firm
represents, proprietary products or insurance products.
I
always recommend to any new client to know your money manager, ask questions,
and to be provided with full disclosure of all fees and commissions. Getting a
second opinion can also be advantageous. If a broker or fiduciary is not
comfortable discussing this or does not give you the time and attention you
require would also be a good indicator of who is the better advisor. A
financial advisor that takes the time to take your call and does not delegate
you to his junior broker. You want this to be a long term relationship and
trust is paramount.
Are
there funds that have performed better than those that follow the total stock
market?
There
always will be funds that outperform each other, regardless of whether they are
indexed funds or actively managed funds. You need to find a strategy or
discipline that works for you and your individual goals and risk tolerance.
Every mutual fund disclaimer states that past performance is not indicative of
future results.
The
attraction with passive or index funds is that they are more simple
thus easier to comprehend for most investors; and they are
also less expensive with lower fees. Most studies have
determined the same conclusion; while a handful of active managers beat
their benchmarks due to skill, most did not sustain that benchmark beating
performance for long.
For
relating mutual fund reading please see the following article:
There
is a common belief that investing in mutual
funds is a conservative way to
accumulate wealth in the stock market. We have all seen the cover of financial
magazines that read: “Our 100 Best Mutual Funds for 2017.” Yes, magazine
companies are in the business of selling their magazines.
If
you are looking at whether or which fund to buy you usually look at its track
record or performance history. Although we all know at the bottom of every
mutual fund brochure is the disclaimer: "Past performance is not
indicative of future results." Since most investors are dazzled by performance,
I beg to differ.
The
Costs
The
first question should be: What are the costs? The annual cost of owning a
mutual fund is called the expense
ratio. There is also a separate charge
called the sales
load which I will cover later. The
expense ratio is the percentage of the fund’s assets that go toward running the
fund. But there are three additional components to be aware of:
Management
fees or investment advisory fees go to pay the portfolio manager. You know it
keeps up his Hampton beach house. Seriously, that is how he gets paid as well
as from firm bonuses.
Administrative
costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the
fund.
Lastly,
there is the 12b-1 fee. This fee is for marketing and advertising. Think about
this fee when you see your fund advertised during Super Bowl half time. It also
includes trailer commissions paid to the broker of record as an incentive to sell
the fund. It works like an annuity for the sales person over the life of the fund. It is
usually paid to the broker quarterly as it is taken out of the net
asset value of the fund fractionally. I
have even seen some funds that are closed to new investors and are still
charging 12b-1 fees.
Regarding
the sales load, mutual funds come in different share classes and this will
determine whether you pay an up-front, back-end, contingent
deferred sales load or no-load. The expense ratio usually differs with which share class
you buy. Sounds confusing, doesn’t it? That is the way the mutual fund industry
prefers it.
The
bottom line is that these fees are rising as funds shift away from the up-front
loads that are driving away sales and into the annual expense ratios where they
are not as detectable. And these fees are charged every year whether or not the
fund has performed. I have seen mutual fund holdings that have been held for
years and the only one who has profited is the mutual fund company.
Other
Issues
The
other issue with mutual funds is the high turnover of assets in the fund.
Buying and selling stocks have transactional costs which cut into the net
return. A fund with a high turnover will end up distributing yearly capital
gains to their shareholders and that
will generate a tax bill for the investor thereby reducing net returns.
Additionally,
mutual funds are required to maintain liquidity and the capacity to accommodate withdrawals. Funds
typically have to keep a portion of their portfolio as cash. The funds are
keeping cash balances of usually around 8% of the fund, which is not generating
any returns. The average fund is charging around a 1.5% expense a year on the
8% that it is keeping in cash.
Mutual
fund companies aggressively market funds awarded 4 or 5 stars by rating
agencies. But the rating agencies merely identify funds that have performed
well in the past. It provides no help in finding future winners. Historically,
mutual funds have not outperformed the market. Research indicates that around
72% of actively-managed large
cap funds failed to outperform the
market over the last 5 years.
Mutual
Fund Alternatives
There
are alternatives to mutual funds that are structured differently and will also
give you diversification. Unit
investment trusts (UITs) are a fixed portfolio
of securities usually with a 12 to 24 month term, therefore, no annual expenses
only an upfront commission. Additionally, exchange-traded
funds (ETFs) offer diversification
and liquidity with lesser fees relative to mutual funds.
The
bottom line is that mutual funds are not always the safe haven that they have
been touted. The companies that manage mutual funds face a fundamental conflict
between producing profits for their owners and generating superior returns for
their investors. The best way to evaluate a fund is by digging a bit deeper
into the fees and also looking at the turnover ratio prior to investing. It is
important to understand the good and bad points. The probability of a
successful portfolio increases dramatically when you do your homework
What
are good long term investing strategies for dividend income?
It
sounds like you are looking for both income and growth in
your portfolio since you are young and just starting out. This can be
achieved by honing in on stocks that not only pay dividends but also
consistently increase their payout.
Stocks that have a strong history of dividend growth as opposed to those that
pay high yields form a healthy portfolio with more scope for capital
appreciation. This is because these stocks act as a hedge against economic or
political uncertainty as well as stock market volatility. Simultaneously, these
offer outsized payouts or sizable yields on a regular basis irrespective of the
market direction.
Additionally, these stocks have superior fundamentals compared to other
dividend paying stocks as dividend growth reflects a sustainable business
model, a long track of profitability, rising cash flows, good liquidity, a
strong balance sheet and some value characteristics. All these make dividend
growth a quality and promising investment for the long term.
Consequently, the long history of outperformance by dividend growth stocks
compared with the broader stock market or any other dividend paying stocks does
not necessarily mean that they will have the highest yields.
Do
mutual funds pay dividends or interest?
Mutual
funds pay, or pass through, to its shareholders both dividends and
interest. A mutual fund may generate capital gains and income for
shareholders in two ways, by selling investments that have increased in
value and by earning dividends and interest on its investments.
Mutual
funds technically do not pay anything. They pass these through. So,
to the extent that a fund earns interest, it will pass it through as an income
distribution. Stock funds will also have income distributions for dividends.
These are generally combined. Even some stock funds may have some interest
income because they generally have some cash and hold it in
T-bills or commercial paper. For bond funds and money market funds, the income
distribution is all interest.
So
it all depends on what type of investment instrument the income is coming from,
or what type of mutual fund you own.
What
will happen to my shares when the stock I bought gets a new ticker symbol?
Whenever
a stock gets graduated to a listing on one of the major exchanges that is very
good news. You will be notified of the new stock symbol either by looking at
your updated account online or on your next statement, regardless you will know
this from your brokerage firm, your stock will automatically transition to the
major exchange. If any change in the ticker symbol takes place, your brokerage
firm will contact you via your trading console and/or by regular mail.
There
is also the possibility that your stock shares will gain in value because
it opens your stock up to a whole new set of investors who only trade on major
exchanges.
Better
to hear of a stock being listed on a major exchange versus a reverse split.
What you can most likely expect also is more volume or interest in your stock.
Can
I buy ETFs for my Roth IRA?
Yes,
you may invest in ETFs within your Roth IRA. Reading the IRS Tax Code can be
confusing, the Code was written to give investors a wide range of
alternatives when deciding what to invest in their IRA. Most any
investment that a bank, mutual fund company, or brokerage firm would
offer is acceptable as an IRA investment. This applies to your Roth
IRA as well as a traditional IRA.
Generally
you can purchase any of the following assets within your IRA:
As
a general rule, you may not invest your IRA in either of the
following categories:
What is a wrap
account and what are the advantages of using one?
A
wrap account is a type of investment account where all of the account's assets
are managed by a professional money manager. All expenses relating to the
account, including the professional advice, money management, and commissions, are
wrapped into a single annual fee that could range from 1 to 3% of the total
market value of the assets in the account. Fixed income accounts would have
lower annual fees versus an equity portfolio. These accounts are designed for
individual investors who choose to have a professional money manager handle all
or a portion of their investments. They usually require a minimum initial
investment of at least $100,000.
Wrap
accounts came out in the late 1980s. I started my career in 1985 with
PaineWebber Inc.(now UBS) when wrap accounts were offered to our clients.
They had the investment representatives bring in their clients to sit down and
meet with several different money managers then pick the one they felt best to
match their investment strategy. At the time, they were one of the first fee
based platforms.
The
advantage is having professional money management along with a financial
advisor who consults with you on all of the different types of investment
strategies offered. A blend of more than one money manager would also be an
advantage.
How
can I buy oil as an investment?
As
an investment, there are many ways that you can buy oil commodities. You can
also buy various securities that give an indirect exposure to oil. You can
even buy actual oil by the barrel.
Crude
oil is the world's most actively traded commodity. It trades on the New York
Mercantile Exchange (NYMEX) as light sweet crude oil futures contracts, as well
as other commodities exchanges around the world. Since oil is a commodity that
is produced and in large quantities that are costly to transport, it trades in
futures contracts. Futures contracts are agreements to deliver a quantity of a
commodity at a fixed price on a fixed date in the future.
Oil
options are another way to buy oil. Options are contracts which give the buyer
or seller the option to trade the oil on a future date. Options often have cash
settlement, meaning that on the exercise date of the option, the buyer and
seller just pay each other off based on the current price of oil rather than
delivering the real physical oil to each other. If you choose to buy futures or
options directly in oil, you will need to trade them on a commodities exchange.
You can open a managed account at a brokerage firm. With a managed
account you can ask your broker to make the trades for you and advise you in
the various risks associated with trading commodities.
The
more common way to invest in oil for the average investor is to buy
an oil Exchange Traded Fund (ETF). An oil ETF is a fund that trades in real
time price changes on major stock exchanges. It is designed to closely track
the movements of the price of crude oil. What the fund does is maintain various
investments in the above mentioned oil futures and options markets, and then
sells shares of its fund to smaller investors. Some common oil ETF stock
ticker symbols are OIL, USO, UCO, and DBO. You can buy into or out of these
funds any time during normal market hours, and you can buy shares in small
quantities as opposed to the hundreds of thousands of dollars you need to
invest in futures and options.
Finally,
you can invest in oil through indirect exposure by owning various oil
companies. These companies tend to own large amounts of oil and therefore their
stock prices move in approximate correlation to oil's price.
The
price of a bond and interest rates have an inverse relationship. If rates go up
the price of the bond goes down and vice versa. There are two risks associated
with individual bonds: interest rate risk and default risk.
So
the best time to sell a bond versus letting it mature, would be if rates have
gone down from the time it was purchased and this will be enhanced if it is a
long term bond.
Perhaps
the company is having a secondary offering and not the initial public
offering of stock. A secondary offering refers to a large-scale
sale of a company's shares by a major shareholder(s).
A
secondary offering is distinguished from an initial public offering
(IPO) in that the proceeds generated by the sale of the
shares goes to shareholder(s) rather than the issuing company. In the
case of a secondary offering, that shareholder is simply reselling the shares
in the market.
The
purpose of ownership transfer in an IPO is to raise capital funding for
this issuing company. A secondary offering simply transfers ownership between
investors in the market place.
Market
cap or market capitalization is the total market value of a company's
outstanding shares of stock.
To
calculate market capitalization, take the total number of a company's
stock shares outstanding and multiply that figure by the stock's market price.
A
company can issue new shares of stock to increase its market capitalization,
however a stock split will not affect a company's market capitalization,
even though it will increase the total shares outstanding.
Market
caps by size:
Large-cap
companies generally have more assets and capital than small-cap companies, so
they are often considered to be a lower-risk investment than small-cap
companies. Whereas, small-cap companies may have the potential for greater
grow than large-cap companies.
The
price of an individual share of stock does not tell us how much its issuing
company is worth. It tells us the current price to buy a piece of
that company. It is possible for a company with a lower stock price
to have a larger market cap than one with a higher stock price.
What
options will minimize penalties and taxes when taking out my 401(k) from my
previous employer?
First
off, I would roll those funds into a Rollover IRA with a financial firm. Then
you have the option of "borrowing" those funds for 60 days as long as
you redeposit those same funds back into your Rollover IRA. Otherwise, you will
have a 10% penalty for early withdrawal since you are under 59.5 years of age.
You will also pay taxes on any funds that are not redeposited.
I
have attached an article that goes into detail regarding exceptions to the 10%
early withdrawal penalty:
How
to Avoid the 10% IRA Early Withdrawal Penalty by Rebecca Dawson May 30, 2017
Have
you ever wondered how you could get money out of your traditional IRA pre-59.5
years of age without paying the 10% early withdrawal penalty? There is a little
known section of the IRS tax code: Section 72t that allows you to take substantially
equal periodic payments (SEPP) on
an annual basis before the age of 59.5 without paying the 10% early withdrawal
penalty. The IRS stipulates you take money out of your IRA for five years or
until the age of 59.5, whichever is longer.
According
to the IRS, funds contributed to investment vehicles such as IRAs or non-qualified annuities are locked into the
investment until the money matures. Money in these accounts mature when the
investor turns 59.5 years of age. Any and all funds taken out of these accounts
prior to 59.5 are subject to a 10% early withdrawal penalty fee in addition to
any income tax incurred by the withdrawal. Section 72t essentially allows investors
to forgo the 10% fee by making SEPPs.
This
allows investors access to those dollars for many differing personal financial
reasons and mitigates the size of their traditional IRA, thereby decreasing
their RMD (required minimum distribution) after age 70.5.
Keep
in mind that any distributions coming out of your traditional IRA will count as
provisional income, possibly increasing the likelihood your Social Security may
be taxed, contrary to Roth IRAs, which have no taxation from distributions and
are free from federal, state and capital gains tax as long as you are over 59.5
years of age. Roth IRAs also have no Social Security tax. Roth IRA
distributions do not count against income thresholds that may cause Social
Security benefits to be taxed.
Set
up SEPPs Before Retirement
In
order to calculate the proper balance when taking advantage of the 72t you may
need to act before retirement. By postponing until retirement you may risk tax
rates being higher than they are today. And you may find you have to shift
larger amounts of money because your assets by that time will have grown
and compounded.
When
you shift assets during retirement, the additional provisional income causes
your Social Security to be taxed.
The
amount you can withdraw by way of a 72t fluctuates based on a number of criteria, including
the age of the account holder and interest rates. All of your future payments
will be exactly the same until the SEPP is no longer in effect. It is important
to know the amounts you have calculated will be the exact figures for your
payments from the account. You cannot name your own amount to take each year.
How
to Raise or Lower SEPP Amount
The
way to impact the amount of the payment is to adjust the balance in the IRA. If
you have more than one IRA available, you can transfer funds into one account
to increase or decrease your payment. This must be done before
establishing the SEPP. You cannot deposit money into or remove funds from
your IRA while the SEPP is in place other than the required payments from the
account each year. Any deviation from the prescribed payments will cause the
SEPP to be canceled which can result in negative consequences.
Exceptions
to the 10% Early Withdrawal Penalty
The
following are specific circumstances that will allow exceptions to the 10%
penalty under IRS Section 72t:
Typically,
the Roth IRA is the better choice at your age since your investments will be
ablet to grow tax free. Unless you can take advantage of the deduction with the
traditional IRA. That would be a question for your CPA.
Here
is a list of some of the positives of a Roth IRA:
Should
I use my 401(k) to pay off high interest credit card debt?
It
sounds like you have thought out some good alternatives. My priority would be
to get the debt paid off. Additionally, depending on your credit score you may
be able to take advantage of some 0% balance transfer credit card for up to 21
months.
Perhaps
you could use a combination of your current resources along with consolidating
with a 0% balance transfer option. Cutting back on other expenses to get your
debt paid off in a reasonable time would be beneficial.
What
are the risks associated with a Roth IRA?
There
are no real risks associated with Roth IRA. A Roth IRA is a type of retirement
account. It does not allow the deduction that a traditional IRA would but
your money will grow tax free in the account. You pay taxes on traditional IRA
funds when they are withdrawn contrary to a Roth where the money is taxed prior
to depositing into the Roth IRA. So depending on where your tax bracket
is could have consequences.
There
could be potential risks with the type of investments you choose to buy within
your self-directed Roth IRA. Typically, an IRA whether it is a traditional
or Roth and the age you set up your account will be a long term investment. So
this would allow your investments to grow over time taking out some of the
element of risk.
Can
IRAs be held jointly by spouses?
No,
an IRA cannot be held jointly by spouses. Although if you are married to
nonworking spouse you may open up a separate IRA for your spouse. Married
couples can boost or improve their retirement savings while offering the stay
at home partner to build the nest egg. This kind of arrangement is known
as Spousal IRA. Many households do have at least one spouse looking after
the children while staying at home. In fact, the stay at home parent or spouse
may open an IRA in the name of the working spouse. It is the kind of regular
IRA where the working spouse may definitely make a contribution towards the IRA
of the nonworking spouse. You need to know eligibility requirements as well.
•
The foremost criterion is that the person must be married
•
When it comes to tax filing, both spouses need to file jointly
•
The spouse who is contributing towards the IRA must have earned income or
compensation amounting to the amount which is to be contributed annually
towards the IRA. In case, the contributing spouse is also having IRA, then the
income must exceed combined contributions to the IRA.
•
It is important for the noncontributing spouse to have an age below 70
years. But then, if you consider Roth IRA, there is no age limit.
So,
if you are eligible for IRA, you can open the retirement account and take
contributions from the working spouse. IRA can be held separately and never can
it be jointly held. In the IRA, the nonworking spouse just owns the assets. The
money also becomes yours when the working spouse starts contributing towards
the IRA. However, the IRA can be opened with the social security number and
belongs to the nonworking spouse even if there is a divorce.
This
is the foremost reason for considering IRA. The IRA account of nonworking
spouse offers the same kind of tax benefit as the IRA account of the working
spouse. However, the advantage is dependent on the income, age and the kind of
IRA.
How
do I set up a self-directed IRA to invest in real estate?
Yes,
an IRA can legally own real estate and a lot of other alternative investments
as well, ranging from private equity and promissory notes to gold, oil and gas
and cattle. (It can’t own insurance, collectibles or stock in S corporations.)
Most
financial institutions that act as custodians for IRAs generally limit
investments to publicly traded stock, bonds, mutual funds and bank CDs. So you
will first need to move your IRA to one of the smaller custodians offering
self-directed IRAs. I have used NuView IRA which is a privately held company.
It operates as a retirement plan administration company that also specializes
in maintaining records for clients who would like to self-direct their
retirement plans for alternative investment. NuView IRA help clients invest in
various assets such as real estate, private lending, private placements,
precious metals, and joint ventures. I have found their fees to be very
competitive relative to other similar alternative retirement custodians.
Satisfying
the requirements for IRA payouts can get more complicated with illiquid assets
in your IRA. An IRA owner must take an annual required minimum distribution
(RMD) starting at age 70˝ unless the account is a Roth. Nonspouse heirs,
regardless of age, must begin withdrawals from both regular and Roth IRAs by
Dec. 31 of the year following the IRA owner’s death. I you miss an
RMD, the IRS will hit you with a penalty equal to 50% of the required
payout.
The
RMD is based on the account balance on Dec. 31 of the previous year divided by
life expectancy, as listed in IRS tables. If there are plenty of
liquid assets in the traditional IRA to make the payout. But if there is
no liquid cash, the IRA would have to distribute an interest in the LLC
instead.
Whereas
distributions from a traditional IRA are taxed at ordinary federal income rates.
That includes long term gains. In other words, you might undercut the benefits
of tax deferral by paying a much higher rate than needed on your gains. With a
Roth, all withdrawals by you or your heirs are tax free. That is why an
investment that has the potential to appreciate greatly (like real estate)
is more appropriate in a Roth IRA.
For
IRA owners a Roth also avoids the requirement to take yearly distributions
after 70˝. Not only can that leave more for beneficiaries if you do not use the
money yourself, but with assets that are partly or totally illiquid it also
avoids the cumbersome calculation of RMDs.
If
you earn too much to make annual contributions to a Roth IRA (there are income
limits), consider converting a traditional IRA to a Roth. To do this you pay
tax on a traditional IRA, then shift the money to a Roth where all future
growth is tax free. Inherited traditional IRAs aren’t eligible.
Are
all bank accounts insured by the FDIC?
The Federal
Deposit Insurance Corporation (FDIC) provides insurance to
depositors in U.S. banks. The FDIC was created during the Great
Depression to restore trust in the American banking system. Currently,
FDIC insures deposits in member banks up to $250,000 per account.
The
FDIC and its reserves are funded by member banks' insurance dues. Only
banks are insured by the FDIC, credit unions are insured up to the same
insurance limit by the National Credit Union Administration, which is also
a government agency.
Conversely,
the Securities Investor Protection
Corporation (SIPC) protects membership of most U.S. registered
investment firms/broker dealers, it is designed to protect the customers of
brokers or dealers subject to the SIPA from loss in case of financial
failure. SIPC is required to report to, and be overseen by, the Securities
Exchange Commission (SEC) in the amount of $500,000 per account.
The information is not meant to be, and should
not be construed as advice or used for investment purposes. User is solely
responsible for verifying the information as being appropriate for user’s
personal use, including without limitation, seeking the advice of a qualified
professional regarding any specific financial questions a user may have.
·
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