Exchange Traded Funds, bigger than super and mutuals?

Exchange Traded Funds (ETFs) are becoming a real threat to the big super and mutual funds. They’re easy to manage yourself, useful for SMSF operators, and their returns are pretty good, given the state of the global markets and the soggy, slow moving cash and bond rates. The most important thing about the ETFs is that they provide direct access to the highly mobile indices that the funds use themselves.

ETFs and indices- Portfolio structures

Another thing investors need to consider when setting up working portfolios which indices to target. Getting the structure right, and creating exposure to indices used to be very hard work indeed, even for professional fund managers. With ETFs, it’s very easy. The ETFs are designed to work on specific indices.

One of the reasons ETFs are so investor- friendly is that they take the arduous decision making out of the stock selections. Buying in to an ETF means buying in to the pick of that index. Indices are much easier to target than trying to buy a range of stocks, all with different returns on investment and those adorable deferred dividends, etc which drive most investors up the wall at some point.

Getting started with ETFs.

That means you can set up your portfolio to cover a range of indices. If you’re new to the ETF market, it’s a good idea to keep things simple. The ETF market includes some quite complex products. You need to learn this market step by step, so your judgment and investment instincts are kept well informed at all times. A typical starter ETF portfolio will include things like blue chips, always useful for getting returns from this often pricey, as well as jumpy, index.

Note: The blue chips are also a good way of seeing how ETF performance, market performance and stock performance interact. These are valuable lessons in themselves, and you’ll also be able to put dollar figures on your choices and your investment options.

Unlike mutuals and super, there’s also direct access to real time market values for ETFs. The simple fact of being able to sell ETFs in the market is a working valuation of your holdings when you need one. That’s particularly useful when you need verifiable asset values in a hurry.

Riding the indices

Using indices as investment vehicles compared to individual stocks is effectively providing yourself with multiple income streams, rather than the snail- like effect of investing in a stock and hoping it goes up, not down. The critical risk factor of putting all your eggs in one shaky corporate basket during earthquake season on the markets is also avoided.

If you’re doing DIY superannuation, your natural need is for something a bit more trustworthy than a CEO’s glowing review of his own performance as the basis for investment. ETFs are a type of natural insurance against the very debatable merits of reliance on “market sentiment”, “pundits” and the rest of the equity sales pitch culture. Indices aren’t sentimental. They can be analyzed, but not particularly influenced by rhetoric and other non- cashable commodities.

The ETF ride on the indices is a lot less bumpy than the ride on the markets themselves.

Want an incentive to start saving for retirement early? How’s this – if you contribute to your retirement plans every year from age 18 to age 30, you never have to save for retirement again!

Suppose that, at age 18, you start working part-time. We’ll say you’re going to college so you can’t put in a lot of hours, but you’re still able to set aside $100 per month. After two years, you double that to $200 per month. (Yeah, that’s a big jump, but we’re just trying to make the math easy; in practice, just increase what you’re saving whenever your income increases).

After you graduate, keep living simply and start putting aside $1000 per month. Yes, that’ll hurt – you won’t be able to live it up the way you’d like – but if you’re used to living frugally as a student, you should be able to do it. Continue to save until you turn 30; the money should be going into either a Roth IRA or a 401(k).

After 12 years, you’ve saved:

$2400 at $100/month
$4800 at $200/month
$96,000 at $1000, month

Pretty impressive, huh? Just by living frugally for a decade, you’ve put aside  $103,200! Now let’s assume that you’re earning a reasonable 7.2% return on your investment, which means it doubles every ten years. In this case, your savings have grown to a whopping $144,794! Finally, let’s assume you want to retire at age 65. At age 30, after 12 years of saving, you stop contributing to your retirement account for the rest of your life. Thirty-five years later, your account should be worth just a shade under two million dollars.

Of course, with inflation, two million may or may not be enough to comfortably retire on, but then, nobody says you have to stop saving when you turn 30! Ask yourself, though…is it worth living frugally for a few years while you’re young in order to have two million dollars in savings waiting for you when you retire? If that’s not an inventive to start saving, I don’t know what is!

IRA’s, or formally known as Individual Retirement Accounts, are a transcendent way to stash money away for the retirement years.  The Roth IRA is built from monies that have already been touched by Uncle Sam; therefore it is a tax free option to a path of saving.  Having covered that, you must be aware  of the Roth IRA withdrawal rules when it comes to the Roth IRA Withdrawal.  Rules are connected to this particular savings plan and you will need to comply or find yourself involved with Uncle Sam’s tax penalties.

The penalties for a Roth IRA Withdrawal prior to your retirement age will bring on a 10% automatic penalty.  It is not an option, the holding company along with you will be mandated to pay the taxes on those funds immediately.  There will be an additional penalty, also.  All of the taxes and penalties together that are levied against whatever withdrawal amount can add up to as much as the withdrawal itself; up to half.  It is highly discouraged when it comes to making withdrawals before you retire.

If making a Roth IRA Withdrawal is a must, there are certain instances where you can do it without paying that dreadful penalty.  If you need the money for emergency medical expenses or the purchase of a home, borrowing against your principle can be the way to go.  These withdrawals do not have penalties attached to them.   Otherwise, you should wait until you are at least 59 1/2 .  Again, this will then be tax-free withdrawals.

The Roth IRA Withdrawal at retirement age will allow you to avoid fines and penalties from the government.  As an alternative to making a withdrawal, some lenders will allow the account to be used as collateral.  This can give a lender the confidence to approve a loan that would have otherwise been denied.

In the USA, if by this year you’ll become 70 ½ years of age, the Internal Revenue Service necessitates you to start taking minimum distributions from your traditional IRA account. This article will inform you about the IRA rules so you can carry out your withdrawal the right way.

Minimum Distribution Essentials

If you are going to turn to that magic age of 70 ½, then you most likely know that the tax law enforces you to get mandatory payouts every year. If you’ll be 70 ½ years old by this year, you should procure your first minimum distribution no later than the 1^st of April, 2011.

Getting money from your IRA, definitely, delineates that you’ll have to stick with the resulting income-tax bills. In actual fact, the main reason why the Congress enacted the rules on minimum withdrawals is to let you hand over the government’s share of your traditional IRA sooner than later. Remember, if you will not get at least the minimum distribution amount every year, you will incur 50% penalty on such shortfall. You can also obtain more than the minimum amount and just recompense the additional income taxes. In reality, the IRS will be pleased if you do so.

Bear in mind that the IRA minimum distribution regulations are applicable to SEP accounts as well as SIMPLE IRAs, because these two are deemed as IRAs for this purpose. These rules however exempt Roth IRA owners, provided that the original Roth account owner is still alive.

As you turn 70 ½ years of age, you have to make a choice. You can either take your very first minimum distribution during the year you became 70 ½ years old, or you can get such amount by the 1^st of April after the year you turn 70 ½. For every subsequent year, you should get at least the required minimum distribution by the 31^st of December of that particular year.

Note that tapping your IRA has vital tax implications on your account, so understanding both the IRA distribution rules is critical. If you fail to acquire your first minimum distribution during the year you became 70 ½ years old, you should take two – and compensate the resulting double tax penalties – the next year.

In the excitement of landing a new job, you might want to neglect the housekeeping of leaving your old job. Or if like so many Americans, you’ve been out of work for awhile and you’ve just gotten hired on, you might not be thinking about your old 401k account. It’s sitting at your old company, in a 401k rollover account, waiting to see what you want to do with it. It’s not the worst place for it to be. It is still earning money in what ever funds you’d put it in, way back when.

Now that you are moving to a new company, starting a new 401k account, go ahead and do the 401k rollover. What you are doing, when you execute a 401k plan rollover, is putting all your money together to work on growing for your retirement. This is not the proverbial putting your eggs in one basket, instead it is getting your team all facing the same way so that you are pulling the load together. All of your money needs to be working together to grow into the nest egg you need to retire comfortably.

401k rollovers are easy enough to deal with. Your Benefits administrator or Human Resources person can get you the necessary forms. In most cases, it is a one page form to fill out. If you are doing a 401k rollover/IRA you will need to have the IRA set up already. As you would expect, of course. Get the IRA account active with the firm you choose and then, once it is in place, you can prompt the rollover. Even if you plan on keeping your regular 401k, a rollover to an IRA is a great way to fund a secondary account. For some people more diversification is desirable. You can look towards funding a Roth IRA — a post-tax dollar account with your 401k rollover.  A 401k rollover/Roth functions just as an IRA rollover does. Get the account set up and then execute the transfer.

You can have several retirement accounts and in fact this sort of tax shelter diversification is ideal. It is good to have a taxable account and a non-taxable account for your retirement. Taxes on the 401k or IRA is something that most people forget when they are budgeting for retirement expenses. Taxes are certainly lower in your golden years, but they are still a fact of life. What matters, in the long run is being mindful of your money. Make sure that you know where all of it is. If you have any lingering accounts at old companies, do the rollovers to get all the money in line and focused on growing for you.

The 401k retirement savings plan is a voluntary contribution made by an employee to fund his own retirement savings plan. All contributions made by the employee are not subjected to tax deductions prior to depositing them into the account. As such, this offers certain advantages to the individual concerned. Because these contributions are regarded as deferred payments and not deductions, the actual monthly income of the employee is lower. This means that the tax bracket of that employee will put him in a position to pay less in taxes while saving something for his retirement.

On top of that, the earnings of the 401k retirement savings account will all be tax free. The money is invested into a variety of mutual funds (These are companies which accept contributions from its members and combines the funds to invest in established indexes). A portion of the savings may also be devoted to buying individual stocks and bonds. In fact, many companies offer their stocks for sale to their own employees. In this way, they get to benefit from the savings of their employees. Additionally, the money market is another form of investment that is popular with retirement savings accounts.

Another form of this retirement savings is called Roth 401k. This type of retirement savings plan is a combination of the standard 401 and Roth IRA(Individual Retirement Arrangement). The main aspect of Roth IRA which was borrowed is the after-tax deduction requirement. This new type retirement savings plan which was spearheaded in 2006, requires all the deferred payments to be deducted the appropriate amount of tax. As a result of this, when eventually the savings funds are withdrawn by the account holder, they can be acquired tax-free.

An after-tax arrangement are preferred by some people over a pre-tax arrangement because although the tax status of the person can work to lessen the amount of tax to be paid, if the amount of savings accumulated is enormous, so will the tax be.

At the option of the account holder, a traditional 401k plan may be converted into a Roth plan. In turn you may be able to rollover into a standard Roth IRA arrangement. Employees with less than $1,000 in their account may often be required by the employer to perform a 401k rollover to a Roth IRA plan.

Investing your retirement savings may be done by you or by a trustee company appointed by your employer. The disadvantage of leaving it all in the hands of the trustee is that most of these companies will simply use your money to augment their own capital by selling you their own stocks. Alternatively, they may also invest in other businesses from which they stand to earn in some way.

Obviously, for more control over your own funds, you would want to determine the way that your funds are invested. However, this will require some knowledge about stocks, bonds and the money market. If you don’t have the kind of exposure to those modes of investment that warrants making decisions by yourself, you should get tips from friends an professional advisors who have had good returns from their stock purchases.

Retirement planning education can cover a large variety of topics such as Individual Retirement Accounts (IRAs), Self Employment Plans (SEPs), Roth IRAs and IRA rollovers just to name a few.

Deciding on which investment vehicle is better for you overall can be a daunting task.  Below we’ll compare the Traditional and Roth IRAs since these are two investment options that often confuse a lot of people.

Investing in the wrong type of IRA could potentially have large financial consequences but it’s important to note that it’s better to choose one than not to invest at all.  Both IRA profiles are excellent ways to save for your retirement, although each offers distinct and different advantages.

Description

Both are savings plans created by the government that offer certain tax advantages for individuals who are willing to set aside money for retirement.  In a Traditional IRA your contributions are made with pre-tax dollars and under the Roth IRA profile your contributions are made with after-tax dollars.

Tax Advantages

Under the Traditional IRA your investment grows with all of the taxes deferred until you begin to withdraw funds.  Under a Roth IRA your account balances are allowed to compound tax deferred and the funds are withdrawn tax-free if the account is at least 5 years old and the owner is over the age 59 ½.

Eligibility

Under the Traditional IRA the participant must be under the age of 70 ½ and have earned income.  With the Roth IRA your adjusted gross income cannot exceed $120,000 for single individuals and $176,00 for married couple.  These amounts change frequently so its best to verify the income limitations the year in which you decide to invest.

Tax Deductions on Contributions

A Traditional IRA allows the participant to deduct their contributions from their income but a Roth IRA does not.

Penalty for Early Withdrawal

Both the Traditional and Roth IRA profiles impose a 10% penalty on withdrawals made before the age 59 ½.  However, the 10% penalty on the Roth IRA is only on the earnings and not the principal.

Required Distributions

The Traditional IRA mandates that you begin making minimum withdrawals from the account after the age of 70 ½ but there are no required distributions imposed on the Roth IRA participant.

The difference between a Roth and Traditional IRA are just a few nuances and which one you choose depends on your individual situation.  Most of the time the Roth IRA will be your best choice providing you within the income limitations.