If investments in a 401(k) have lost money, can you use the current value to convert to a Roth?

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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:

You must be separated from your employer to roll your 401(k) into a Roth IRA. You may not do this if you are still working for the same company and/or employer, unless you’re already older than 59.5.
Prior to January 2008, you weren’t able to roll your 401(k) into a Roth IRA. If you wanted to do so you had to open a traditional IRA then convert the traditional IRA to a Roth IRA. It all depends on your plan administrator.

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:

Do you expect to pay higher taxes in the future.
Roth IRAs use after-tax dollars, so you will have to pay taxes upfront on any funds you rollover. With a Roth IRA, your withdrawals will be tax-free.
You want to take withdrawals at your own discretion. Traditional IRAs force you to begin taking withdrawals at age 70.5, Roth IRAs do not have the required minimum distribution (RMD).
Keep in mind that if you do a Roth IRA conversion from a traditional IRA you may re-characterize your conversion if you decide to undo the conversion due to your investments going down even lower or if you do not have the funds to pay the taxes that year. When converting directly from a 401(k) to a Roth IRA the re-characterization is not an option.

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?

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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?

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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?

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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.

Direct rollover: You can request your plan administrator to make the payment directly to another retirement plan or to your IRA. In this case, contact your plan administrator for their forms or instructions. The plan administrator will issue your distribution in the form of a check payable to your new account. No taxes are withheld.
Trustee to trustee transfer: In this case, when receiving a distribution from an IRA, you can instruct the financial institutional holding your IRA to transfer your IRA to another IRA or to a retirement plan. No taxes are withheld.
60 day rollover: If your distribution from an IRA or a retirement plan is paid directly to you, then you have 60 days to redeposit those funds into your IRA or a retirement plan. I would not advise waiting the full 60 days due to unexpected delays. You may only make one rollover from your IRA to another in any 12 month period.

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?

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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:

If you buy a put or a call, you may not deduct its cost. It is a capital expenditure.
If you sell the put or the call before you exercise it, the difference between its cost and the amount you receive for it is either a long-term or short-term capital gain or loss, depending on how long you held it.
If the option expires, its cost is either a long-term or short-term capital loss, depending on your holding period, which ends on the expiration date.
If you exercise a call, add it's cost to the basis of the stock you bought.
If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss.
Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.

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?

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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?

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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?

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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.

What's the difference between an individual retirement account (IRA) and a certificate of deposit (CD)?

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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?

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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?

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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:

Marital Status: Married
Tax Filing Status: Married, filing jointly
Earnings: Contributing spouse must have compensation/earned income that amounts to at least the amount annually contributed to the non-working spouse’s IRA. If the contributing spouse also has an IRA, annual compensation/earned income must exceed the combined contributions the IRAs.
Age: The non-working spouse must be under 70 1/2 in the year of the contribution for a traditional IRA. There are no age restrictions on a Roth IRA for a non-working spouse.

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?

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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?

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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:

An investor decides to sell investment property and do a 1031 exchange. He contacts a qualified intermediary (QI) and they enter into an agreement.
The investment property is placed on the market.
An offer to purchase the investment property is accepted and signed by the QI.
Escrow for the sale is opened, and a preliminary title report is produced.
The QI sends required exchange documents to the escrow closer for signing at property closing.
Escrow closes.
Within the first 45 days after the close of escrow on the sale of the relinquished property, the investor identifies replacement properties as required by law. This is known as the "Identification Period".
Within 180 days after the close of escrow on the sale of the relinquished property, the investor closes on one of the replacement properties which he has identified. This is called the "Exchange Period". This completes the exchange. No cash – or ‘’boot’’, as it is known – is taken by the exchanger.

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)?

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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.

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.
The 12b-1 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.I have seen some funds that are closed to new investors and are still charging 12b-1 fees so be sure to get all of your questions answered prior to buying.

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?

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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?

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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?

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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.

Is investing in individual stocks a good method to increase the risk and potential growth of my portfolio?

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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?

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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:

Traditional IRA - 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. Many retirees also find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
Roth IRA - You make contributions with money you’ve already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
Rollover IRA - A Traditional IRA intended for money "rolled over" from a qualified retirement plan. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.

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:

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free. (For related reading, see: How a Roth IRA Works After Retirement.)
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose an excise tax. It is a 50% penalty. The IRS is a greedy partner.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.*
Your heirs will receive your Roth funds tax-free. (For related reading, see: 4 Mistakes Clients Make With Roth IRAs and Their Estate.)
Roth IRA conversions may be re-characterized if your financial situation changes that year.

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?

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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:

Take out a business loan
Sell ownership in the company

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?

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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:

Class A mutual fund shares generally have front-end load or sales charge. Class A shares are best for investors who plan to invest larger dollar amounts and will buy shares infrequently. If the purchase amount is high enough, you may qualify for breakpoint discounts. And may also have exchange privileges within a mutual company's family of funds.
Class B shares are a share class of mutual funds that do not have up front sales charges, but instead charge a contingent deferred sales charge or back end load. Class B shares also tend to have higher 12b-1 fees than other mutual fund share classes. If an investor purchases mutual fund Class B shares, they will not be charged a front-end load but will instead pay a back-end load if the investor sells shares prior to a stated period, such as 7 years. Class B shares can eventually exchange into Class A shares after seven or eight years. This class may be best for investors who do not have enough to invest to qualify for a break point on the A share, but intend to hold the B shares for several years or more.
Class C Share mutual funds charge a level load annually, which is usually 1.00%, and this expense never goes away, making C share mutual funds the most expensive for investors who are investing for long periods of time. There may also be 12b-1 fees. A shares or B shares are better for investment time horizons of more than a few years. C shares are best for short-term (less than 3 years) and use A shares for long-term (more than 8 years), especially if you can get a break on the the front load for making a large purchase. Class B shares can eventually exchange into Class A shares after seven or eight years.
Class D mutual funds are often similar to no load funds in that they are a mutual fund share class that was created as an alternative to the traditional and more common A, B or C share funds that are either front load, back load or level load.
Adv share class mutual funds are only available through an investment advisor, hence the abbreviation "Adv." These funds are typically no-load but can have 12b-1 fees up to 0.50%. If you are working with an investment advisor or other financial professional, the Adv shares can be your best option because the expenses are often lower.
Inst funds (Class I, Class X, Class Y or Class Y) are generally only available to institutional investors.
Load waived funds are mutual fund share class alternatives to loaded funds, such as A shares. The load is waived, these funds are offered in 401(k) plans where loaded funds are not an option. Load waived mutual funds are identified by an "LW" at the end of the fund name and at the end of the ticker symbol.
R share mutual funds do not have a load (ifront end, back end, or level load) but they do have 12b-1 fees that typically range from 0.25% to 0.50%. If your 401(k) only provides R share class funds, your expenses may be higher than if the investment choices included the no load or load waived version of the same fund.

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
Administrative costs
12b-1 fees

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?

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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:

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.
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.
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.

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?

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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)?

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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?

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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?

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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."

Class A mutual fund shares generally have front-end sales charges (also known as a "load"). A shares are best for investors who plan to invest larger dollar amounts and will buy shares infrequently. If the purchase amount is high enough, you may qualify for "breakpoint discounts." Be sure to inquire about these discounts on the load if you plan to purchase additional shares of the fund (or mutual funds within the same fund family).
Class B shares are a share class of mutual funds that do not carry front-end sales charges, but instead charge a contingent deferred sales charge (CDSC) or "back-end load." Class B shares also tend to have higher 12b-1 fees than other mutual fund share classes. Class B shares can eventually exchange into Class A shares after seven or eight years. They may be best for investors who do not have enough to invest to qualify for a break level on the A share, but intend to hold the B shares for several years or more.
Class C Share mutual funds charge a "level load" annually, which is usually 1.00%, and this expense never goes away, making C share mutual funds the most expensive for investors who are investing for long periods of time. There may also be 12b-1 fees.
Class D mutual funds are often similar to no-load funds in that they are a mutual fund share class that was created as an alternative to the traditional and more common A share, B share and C share funds that are either front-load, back-load or level-load, respectively.
Load-waived funds are mutual fund share class alternatives to loaded funds, such as A share class funds. As the name suggests, the mutual fund load is waived (not charged).

Four of the best no-load fund families include Vanguard Investments,Fidelity Investments, T. Rowe Price, and PIMCO.

Which is the more tax-friendly account to distribute from?

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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.

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.*
Your heirs will receive your Roth funds tax-free.
Roth IRA conversions may be re-characterized if your financial situation changes that year.

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?

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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?

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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.

What does it mean when you are waiting for a bond to settle?

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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?

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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?

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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:

Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
Commissions paid to them from financial products you buy through them.
Combination of fees and commissions.
Hourly rate.
Flat fee to complete a specified project.

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?

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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).

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.
Your heirs will receive your Roth funds tax-free.
Roth IRA conversions may be re-characterized if your financial situation changes that year.

Is it better to hold a REIT in a taxable account or a Roth IRA?

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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:

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.
Your heirs will receive your Roth funds tax-free.
Roth IRA conversions may be re-characterized if your financial situation changes that year.

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

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?

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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.

Consumer sentiment is high.
The unemployment rate is heading towards the pre-2008 crash level.
New housing construction starts in the U.S. continues to rise.

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.

How can I avoid the 10% early retirement withdrawal as a public safety employee retiring before age 50?

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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:

Age 59.5
Upon death paid to the beneficiaries
Disability
Series of substantially equal periodic payments (SEPP)
Certain qualified medical expenses
Health insurance premiums
Qualified higher education expenses
First-time home purchase
Seperation from service exception only for 401(k)s not IRAs.

If an IRA beneficiary is a minor at the time of my death, what is the most tax efficient way for them to receive the funds?

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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

Look at where federal income tax rates have historically ranged:

History of Tax Rates: 1913 – 2014

Tax Rates Throughout History

The Economic Recovery Tax Act of 1981

Converting to a Roth IRA

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose an excise tax. It is a 50% penalty. The IRS is a greedy partner.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.*
Your heirs will receive your Roth funds tax-free.
Roth IRA conversions may be re-characterized if your financial situation changes that year.

(For more from this author, see: Tax Savings with a Roth IRA and Real Estate.)

Real Estate Limited Partnerships

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:

Fees: Fees for mutual funds are higher than ETFs because mutual funds have more operational and management costs. The expense ratio for mutual funds can typically cost anywhere from 1% to 2% and includes management fees, transaction fees, distribution fees, marketing costs and other expenses. You will pay even more if you are investing in a mutual fund that comes with a upfront sales load. Conversely, the expense ratio for an ETF is typically around 0.5%. ETFs do not have any 12b-1 or load fees, but you will pay a commission to buy or sell them.
Taxes: Due to the different structures of ETFs and mutual funds, the tax consequences will also be different. With an ETF, you can decide when to take a capital gain or loss by selling it whenever you want. Because ETFs are traded on an exchange, no underlying stocks need to be sold to raise cash for investors who want to redeem shares. Although with mutual funds, the fund manager can sell securities at any time to rebalance the fund or accommodate other investors who want to redeem their shares. Even if the fund is losing money overall, shareholders will own tax on any gains from these sales.
Accessibility: ETFs do not require an initial minimum investment like most mutual funds do.
Trading Flexibility: In regards to trading, ETFs behave much like stocks. With mutual funds, you do not know what price you bought or sold them at until the end of day when the net asset value is calculated. Mutual funds trades only take one day to settle, in contrast to ETFs which take three days after the trade date to settle.

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.

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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:

Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
Commissions paid to them from financial products you buy through them.
Combination of fees and commissions.
Hourly rate.
Flat fee to complete a specified project.

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.

Should I leave my $400,000 IRA in a managed account, or should I place it in a low cost dividend stock?

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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:

Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
Commissions paid to them from financial products you buy through them.
Combination of fees and commissions.
Hourly rate.
Flat fee to complete a specified project.

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 70½, 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:

Traditional IRAs
Rollover IRAs
Inherited IRAs
SEP IRAs
SIMPLE IRAs
401(k), 403(b) and 457(b)s
Keogh Plans

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 70½. 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 70½, 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?

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Mutual funds are either closed-end or open-ended funds.

Closed-End Funds
This[rj1] type of fund has a set number of shares issued to the public through an initial public offering (IPO). These shares trade on the open market, also the fact that a closed-end fund does not redeem or buy new shares like an open ended mutual fund, subjects the fund shares to the laws of supply and demand. As a result, shares of closed-end funds may trade at a discount or a premium to net asset value.

Open-End Funds
An open-ended mutual fund means that the fund does not have a set number of shares. Instead, the fund will issue new shares to an investor based upon the current net asset value and redeem the shares when the investor decides to sell. Open-end funds always reflect the net asset value of the fund's underlying investments because shares are created and destroyed as necessary.

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?

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The following are differing structures most financial advisor use:

Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
Commissions paid to them from financial products you buy through them.
Combination of fees and commissions.
Hourly rate.
Flat fee to complete a specified project.

What's the difference between a savings account and a Roth IRA?

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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?"

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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?

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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?

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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?

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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?

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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?

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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?

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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:

Vanguard Value Index 5.6%
Vanguard Small-Cap Index 8.3%
Vanguard Small-Cap Value Index 10.5%
Vanguard REIT Index 12.5%
Vanguard International Value 4.5%
Vanguard Emerging Markets Stock Index 7.1%.

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:

The Costs

Management fees
Administrative costs
12b-1 fees

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.

Other Issues

Mutual Fund Alternatives

Why would a person choose a mutual fund over an individual stock?

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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
Administrative costs
12b-1 fees

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.

Does parental income affect a dependent child's Roth IRA contributions?

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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?

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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:

The Costs

Management fees
Administrative costs
12b-1 fees

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.

Other Issues

Mutual Fund Alternatives

What does it mean to "liquidate and move to cash"?

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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?

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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?

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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?

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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?

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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.

Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
Commissions paid to them from financial products you buy through them.
Combination of fees and commissions sometimes called "fee-based." *
Hourly rate.
Flat fee to complete a specified project.
Quarterly or annual retainer fee.

*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?

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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.

Should I buy or rent a condo?

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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?

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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.

Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
Trustee-to-trustee transfer – If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount.
60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you’ll have to use other funds to roll over the full amount of the distribution.

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:

rollovers from traditional IRAs to Roth IRAs (conversions)
trustee-to-trustee transfers to another IRA
IRA-to-plan rollovers
plan-to-IRA rollovers
plan-to-plan rollovers

Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:

Required minimum distributions,
Loans treated as a distribution,
Hardship withdrawals,
Distributions of excess contributions and related earnings,
A distribution that is one of a series of substantially equal payments,
Withdrawals electing out of automatic contribution arrangements,
Distributions to pay for accident, health or life insurance,
Dividends on employer securities, or
S corporation allocations treated as deemed distributions.

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.

IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.
Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

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:

Direct rollover: You can request your plan administrator to make the payment directly to another retirement plan or to your IRA. In this case, contact your plan administrator for their forms or instructions. The plan administrator will issue your distribution in the form of a check payable to your new account. No taxes are withheld.
Trustee to trustee transfer: In this case, when receiving a distribution from an IRA, you can instruct the financial institutional holding your IRA to transfer your IRA to another IRA or to a retirement plan. No taxes are withheld.
60 day rollover: If your distribution from an IRA or a retirement plan is paid directly to you, then you have 60 days to redeposit those funds into your IRA or a retirement plan. I would not advise waiting the full 60 days due to unexpected delays. You may only make one rollover from your IRA to another in any 12 month period.

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
Administrative costs
12b-1 fees

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.

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.

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

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:

The interest deduction- Mortgage interest has a benefit. If you are in a high tax bracket, losing this deduction could potentially push you into a higher tax bracket.
Limited liquidity- If your home is your only real asset and you or your family encounter any potential setbacks, like losing your job, a major medical issue, or perhaps sending your children to college, you will not have liquid assets to handle any of these problems if they arise. Make certain you have adequate emergency reserves if you do decide to pay off your mortgage. On the contrary, investing your funds in a portfolio of stocks, bonds, etc., would give you liquidity in the event of an unforeseen financial event or even a big purchase item.
No income generated- Unless you have a guesthouse or plan on building one, there will not be any income made off of your home. Whereas, investing your funds could secure an income stream.
Interest Rate- This is a function of your credit. The higher the rate, the more attractive paying your mortgage down or even a portion of it would be. If you have a low rate, then it can pay to hold on to that mortgage. Reap the tax benefits and invest the cash.

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:

Growth funds focus on stocks that may not pay a regular dividend but have potential for above-average capital appreciation. They may have capital appreciation as the primary investment objective with some income. Or 100% capital appreciation investment objective.
Income funds invest in stocks that pay regular dividends. And also may have income as the primary investment objective with some possible growth/capital appreciation. Or 100% income investment objective.
Index funds track a particular market index such as the Standard & Poor’s 500 Index.
Sector funds specialize in a particular industry segment.

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.

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.

Illiquid credits may not be able to be sold.
A slowdown in issuance could impact growth.
With credit conditions tightening issuance may slow.

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.

Will I gain anything from transferring my brokerage account currently with a bank to a different brokerage firm?

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.

What is an annuity?

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.

How do I determine which stocks I should cash out from a retail account and which I should place in a managed account?

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:

Management fees
Administrative costs
12b-1 fees

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:

Seed stage: Friends and family/angel investors
Early stage: Venture Capital
Expansion stage: Private Equity
Public company: Public equity/shareholders

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:

Investments that pay high dividends and interest such as REITs or corporate bonds could be a fit for your Roth IRA.
Investments that you trade frequently that result in short-term capital gains since short-term capital gains are taxed at the ordinary income tax rate (the highest rate) would be a good fit for a Roth IRA.
Investing the portion of your assets that are earmarked to be on the more growth oriented end of your personal risk tolerance scale in the Roth IRA. Small or mid-cap stocks or stock mutual funds. Any growth oriented investments that have a stronger probability of growing faster and eventually larger in your Roth instead of in your traditional IRA.

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 59½ 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:

1926-1956: +10.77%
1956-1986: +9.63%
1986-2016: +9.99%

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:

news releases on earnings and profits, and future estimated earnings
announcement of dividends or going ex-dividend
introduction of a new product or a product recall or if a bio tech company getting positive or negative results on their drug trials
securing a new large contract
employee layoffs
anticipated takeover or merger
a change of management
accounting errors or scandals

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.

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.

Are most IRAs FDIC insured?

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.

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 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.

What percentage allocation is recommended for my retirement investments between a Roth and Traditional 401(k)?

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:

Look at where federal income tax rates have historically ranged:

History of Tax Rates: 1913 – 2014

Tax Rates Throughout History

The Economic Recovery Tax Act of 1981

Converting to a Roth IRA

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose an excise tax. It is a 50% penalty. The IRS is a greedy partner.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.*
Your heirs will receive your Roth funds tax-free.
Roth IRA conversions may be re-characterized if your financial situation changes that year.

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:

rolling over your account into an IRA
keeping it with your provider, or
rolling it over to your new employer’s plan

Here are some considerations on whether to rollover your plans into a rollover IRA:

More investing options:

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.

Fees:

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.

Taxes:

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 ½ 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 a company sponsored retirement plan offered by your employer.
An IRA is a self-directed retirement plan you may open on your own.
A mutual fund is a type of investment appropriate for investing within a qualified or non-qualified account. It is a basket of securities managed by the fund company which is usually offered in either of your two tax deferred retirement plans (401(k) and IRA) for investing.

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:

More investing options:

Fees:

Taxes:

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 ½ 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:

Lower fees
Typically a 5 to 7 year redemption period
Stable preferred dividends
Equity participation with warrants attached
Non listed so no volatility

Or other alternative investments in real estate that have excellent track records and management. The old stock, bond and cash asset allocation is outdated.

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:

Traditional IRA: You contribute cash and receive a tax deduction. The money in the account is sheltered from taxes until you withdraw it. That allows you to retain your dividends, capital gains, and/or interest income without having to send money to the IRS, resulting in more money working for you. When you take money out of the account, you pay taxes on it. These withdrawals are known as IRA distributions. If you withdraw funds before you are 59.5 years old, you will have to pay a penalty tax of 10% for early withdrawal on top of the other taxes due. You must begin taking out distribution (required minimum distributions RMDs) when you are 70.5 years of age. The traditional IRA contribution limit is set at $5,500 for the tax year 2016 and 2017. Whether you can take advantage of the tax deduction depends on your adjusted gross income. If you are 50 years or older, you can make additional $1000 contributions to an IRA of $6500.

Roth IRAs: Introduced in the Taxpayer Relief Act of 1997. It allows you to contribute cash but you will not receive a tax deduction at the time of the contribution therefore the money grows in the account tax-free. When you reach 59.5 years or older, you can begin taking withdrawals. The limits on the Roth IRA are identical to those on the traditional IRA; it is $5,500 in the tax year 2016 and 2017. As with the traditional IRA, investors 50 years and older can deposit $6500. There are income limits to the Roth IRA.

SEP-IRA: A SEP-IRA stands for Simplified Employee Pension Individual Retirement Account. The rules are much more complex and they are often used by self-employed business owners who have few or no employees. A SEP-IRA has the same general features as a traditional IRA only with much higher contribution limits. Under the right circumstances, and with a high enough income ($250,000 to $500,000), a married couple who owned a successful business could make combined contributions of $100,000 or more in a single tax year. Money cannot be withdrawn early and you must start taking cash by the time you are 70.5 years old.
Simple IRA: A Simple IRA is a type of retirement plan used by a lot of small business owners. As of 2015, the IRA contribution limit is $12,500 and those 50 or older can contribute an extra $3,000, bringing their contribution limit to $15,500.

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.

10 year AAA muni Taxable Equivalent Yield (TEY) 4.45%
10 year Treasury TEY 2.37%
10 year AAA Corporate TEY 2.99
10 year A Corporate TEY 3.21%

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.

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.

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

What are the differences between a Roth IRA distribution and a distribution from a traditional IRA or other qualified plans?

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:

Reduce your tax rate risk: Any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age you are required to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.*
Your heirs will receive your Roth funds tax-free.

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:

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government requires you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.*
Your heirs will receive your Roth funds tax-free
Roth IRA conversions may be re-characterized if your financial situation changes that year

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.

An IRA is set up by an individual and has nothing to do with your employer.
A Keogh is set up by a business for its employees including the business owners.
With a Keogh account, the contributions are made by the business into employees’ accounts.
IRA contributions are made by individuals into their own accounts.
Limits are placed on both types of accounts, but more funds can be placed in a Keogh than in an IRA.
In both IRA and Keogh accounts, the individual decides where the funds are invested, such as mutual funds, stocks and bonds or a combination.
Funds contributed to an IRA directly reduce the amount of money you owe taxes on. When you withdraw funds from the IRA, after you are at least 59 1/2 years old, you pay income taxes at whatever your tax rate is at that time.
Keogh contributions do not impact individuals' personal tax situation directly. Instead, contributions are deductible for the business. Upon retirement, withdrawals are taxed as income to the individuals.

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.

What documents do I need to bring to a consultation meeting with a financial advisor if I am in the process of getting divorced and what should I expect to get out of a consultation?

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:

Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
Commissions paid to them from financial products you buy through them.
Combination of fees and commissions.
Hourly rate.
Flat fee to complete a specified project.

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:

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.
Your heirs will receive your Roth funds tax-free.
Roth IRA conversions may be re-characterized if your financial situation changes that year.

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:

The Costs

Management fees
Administrative costs
12b-1 fees

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.

Other Issues

Mutual Fund Alternatives

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:

Stocks
Bonds
Mutual Funds
Savings Accounts
Certificates of Deposit (CDs)
Exchange Traded Funds (ETFs)
Money Market Accounts
Treasury Inflation Protected Securities (TIPs)
Real Estate Investment Trusts (REITs)
Unit Investment Trusts (UITs)
Alternative Investments

As a general rule, you may not invest your IRA in either of the following categories:

Collectibles
Cash Value (or Whole) Life Insurance

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.

When should you sell a bond?

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.

Interest rate risk: If you hold your bond to maturity interest rate risk will not be a concern. Although if it is a long term bond and you find yourself needing the cash then you may have to sell at a loss if interest rates have gone up from the time the bond was purchased. Conversely, if interest rates have gone down since you bought your bond then that could create an opportune time to sell your bond and take the appreciation in the price of the bond as well as the income you have already received. You would want to do the math to see if it makes since to sell versus collecting the remaining income on the bond. Also, if rates are lower where will you reinvest those funds to get a similar yield.
Default risk: This has to do with the quality of the issuer and/or if the bond is insured. If your issuer defaults on the bond by not making the payments then the price will certainly be reflected and you could lose most or all of your principal.

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.

If a company is selling shares via an IPO, but there are already shares being traded on the market, are those shares the same thing?

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.

When people reference a business's market cap, why are they referring to the value of the business as a whole?

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:

Mega-cap companies have a market cap in excess of $200 billion
Large-cap companies have a market cap of $10 billion to $200 billion
Mid-cap companies have a market cap of $2 billion to $10 billion
Small-cap companies have a market cap of $300 million to $2 billion
Micro-cap companies have a market cap of $50 million to $300 million

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

Set up SEPPs Before Retirement

When you shift assets during retirement, the additional provisional income causes your Social Security to be taxed.

How to Raise or Lower SEPP Amount

Exceptions to the 10% Early Withdrawal Penalty

The following are specific circumstances that will allow exceptions to the 10% penalty under IRS Section 72t:

Age 59.5
Upon death paid to the beneficiaries
Disability
Series of substantially equal periodic payments (SEPP)
Certain qualified medical expenses
Health insurance premiums
Qualified higher education expenses
First-time home purchase

For a new college graduate with a good paying first job, do you recommend a Roth IRA or Traditional IRA?

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:

Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Any withdrawals from the Roth account after achieving the age of 59.5 will be tax-free.
Eliminate your Required Minimum Distribution (RMD): Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose an excise tax. It is a 50% penalty.
When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.
Your heirs will receive your Roth funds tax-free.

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 70½ 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 70½. 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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