What Is an IRA Investment?

Most people are curious to know about the different IRA investment options. They want to know how to invest money in the best way so that they are secure in their retirement. No matter how young you are, it is best to start putting aside a part of your earning for your retirement even though that might seem far away. Most organizations no longer keep on paying their employees after retirement. So, you should make provisions for your own living and medical expenses as early as possible.

The Advantages and Disadvantages of IRA Investments

IRA refers to individual retirement account. You can set up this account as soon as you begin earning. In fact, the sooner the better, if you save enough money you can actually retire early. You put aside a percentage of your pay check which is paid into the IRA each month. The advantage of this scheme is that you will be forced to save a certain amount and, if invested wisely, your portfolio will grow. Another great advantage is that an IRA enjoys several tax exemptions. In addition, the deposit you make into IRA is tax-deductible.

If you start early, you will be able to ride out the speculative nature of the market in the short run. However, the amount of money that you can deposit in an IRA has a ceiling. Moreover, you cannot withdraw the money before your retirement without paying a huge fine.

Different IRA investment options

The money that you put into your IRA can be invested in different sectors. The type of sector chosen depends on your own goals and the purpose of investment. Young holders of IRA generally prefer more aggressive investment options. The reason is that they have more time to wait out the market and build up their portfolio anew.

The most common IRA investment options are a prudent mix of stocks, bonds and mutual funds. Take the advice of the professional who helps you to set up the IRA about your investments. Choose stocks and mutual funds which are credible and will give good long-term returns.

Certificate of deposit (CD) is one of the safest of all IRA investment options though the return is small. Apart from this, other IRA investment options which are also approved by the IRS is precious metals like gold, silver and platinum. You can either buy stocks in mining companies or can buy gold and silver bars and coins. These are inelastic commodities and will prove to be a great protection against inflation.

Money market funds and mutual funds are other conservative IRA investment options. Both yield moderate but long-term returns which is what you are looking for in an IRA investment.

Finally, if you have started early, you can speculate in the stock market with your IRA. Carry out careful research and invest wisely to improve the health of your IRA.

Types of 401(K) Contributions   

An Overview of "Prohibited Transactions" in a Self Directed IRA

IRAs were created in 1975 as a way for citizens to take control over their retirement savings. They were established in response to ERISA, The Employee Retirement Security Act, which was passed in 1974 to put the responsibility of retirement savings into the hands of employees.

IRAs are a wonderful retirement savings tool. They provide an abundance of tax benefits and can make saving for retirement safe and relatively secure. However, they do come with a set of rules and regulations. Self Directed IRAs, which provide the most investment opportunities, also come with a list of "Prohibited Transactions." It's important to understand what's prohibited to make sure you don't incur penalties.

What is a Prohibited Transaction?

The IRS prohibits certain transactions within an IRA. Any activity that improperly uses the account's funds is considered a prohibited transaction. These prohibited transactions center around two key terms:

Self Dealing

Self dealing is defined as "The conduct of a trustee, an attorney, or other fiduciary that consists of taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the beneficiaries of the trust or the interests of his or her clients." (Source: http://legal-dictionary.thefreedictionary.com/Self-Dealing )

It means that you cannot make a transaction that directly benefits you. For example, you can't borrow money from your IRA. You also can't use it as security for a loan nor can you buy personal property with it.

Disqualified Person

A disqualified person is anyone who is directly related to you or to the account. Your spouse, dependents, and the fiduciary of your account are all disqualified people. Additionally, if someone owns more than 50% of a business or estate that is held by the fiduciary, they too are a disqualified person. This means you cannot use your IRA to their benefit.

Common Prohibited Transactions

Here's a short list of the most common prohibited transactions. You cannot:

Borrow money from your Self Directed IRA Sell property to it. Receive compensation for managing it. Use it as security for a loan. Use it to purchase real estate that you use. Use it to issue a mortgage on a relative's new residence. Buy stock in a closely held corporation or from a disqualified member.

It's important to make sure you understand the terms disqualified person and self dealing. Make sure you don't break the rules! If you engage in a prohibited transaction the account is treated as distributing all its assets to you at their fair market value. The distribution is then subject to taxes and penalties.

So What Can You Do With Your Self Directed IRA?

The possibilities for permitted investments are virtually endless. In addition to being able to make traditional investments like stocks and bonds you can also:

Invest in real estate including farm land, developments and rental properties Issue a mortgage Issue a loan Buy a franchise Invest in private equity Invest in tax liens Almost any other than life insurance or collectibles

A Self Directed IRA provides you with an abundance of investment opportunities. The good news is that if you're concerned about prohibited transactions a good custodian can be your facilitator and educator.

Types of 401(K) Contributions   

What Is An IRA? Your Questions Answered

What is an IRA? The acronym IRA stands for Individual Retirement Account. It is a type of savings account, available in the United States, that is designed to allow people to save for retirement. There are tax benefits associated with paying into this kind of account. Other countries have similar schemes in place.

The term IRA covers many different types of accounts. Choosing the correct one means taking your individual circumstances into account. It can be a confusing decision to have to make.

The two main types of IRA are traditional and Roth IRAs, although there are also SEP IRAs, SIMPLE IRA accounts and self directed IRAs.

The feature that is common to all IRAs is that payments into the account are tax free or tax deferred. Income taxes are either paid on the money when it is withdrawn during retirement, or before it is paid into the account, but not both.

A traditional IRA is an account that an individual can pay money into to save for their retirement, up to a certain yearly limit. The limit is increased for people who are over the age of 50. The depositor does not have to pay tax on any money that they put into this type of account, but they do have to pay income tax on anything they withdraw. If money is withdrawn before age 60, an additional penalty of 10% must be paid on top of the standard income tax. The penalty is waived if the money is to be used to pay for the purchase of a home or to pay for higher education.

A Roth IRA is more flexible. The money deposited in a Roth IRA is not tax deductible. However, withdrawals are not subject to income tax. There is no penalty for early withdrawals from this type of account, providing the money has been in the account for at least five years. This type of account gives a lot more flexibility to savers. It can also be financially beneficial because it often works out less expensive to pay income taxes at the time of earning the money rather than during retirement.

There are other types of retirement account, such as a SEP IRA. SEP IRA is an acronym that stands for Simplified Employee Pension Investment Retirement Account. This is an account that an employer pays into for the employee. This can be a better option than a pension plan held in the name of the company because administration costs are often lower.

There is also the option of a SIMPLE IRA, which both the employer and the employee can pay into. This type of account is best suited to people working for companies with only a few employees.

Choosing the correct IRA can be a difficult process. You have to take into account your current and future financial situations, and consider how much flexibility you are likely to need. If choosing the right account is difficult for you, you could enlist the services of a professional financial planner to help you.

Types of 401(K) Contributions   

Top 5 Advantages of a 401k Plan

We all know we need to save for retirement. The question becomes: Where should I save my money? The simple answer for many will be their work 401k plan. I want to give you five advantages of a 401k plan. Most people have a 401k plan, but they do not know how to take full advantage of a 401k plan.

#1 Just start saving money in 401 Plan

Most people associate a 401k plan with the stock market. The stock market is viewed as a risky investment. Therefore they do not want to save any money in a 401k plan. First of all you do not have to invest in the stock market if you feel it is too risky. This is a great advantage of a 401k plan because you can choose to invest only in bonds or even a guaranteed investment.

Now investing in only bonds may not give you the higher rates like stocks, but you will not have to worry about huge declines in value. However, a big mistake people make is not to save any money at all. Following a plan of not saving will only guarantee you will work forever.

#2 Company Match = Pay Raise

Typically employers offer a company match if an employee saves money in the 401k plan. A common company match is a 3% match. For you the employee a 3% match means if you save 3% of your paycheck in the company 401k plan then your employer will match this same 3%. Here is a mistake many people make when saving in a 40k1 plan. They decide only to save 1% of their paycheck, but the employer will only match the same 1% and not 3%.

Do not give up a 3% pay raise by not saving any money in the 401k plan. The company match is one of the great advantages of a 401k plan. Just by saving a little amount of your pay will lead to a pay raise. What a great benefit.

#3 Pay Less in Taxes

Who likes to pay taxes? No one. Well by saving money inside of a 401k plan can reduce your taxes. The government allows you do deduct any money you save inside your 401k plan. For example, you decide to save $2,000 into your work 401k plan the government allows you to deduct the $2,000 from your wages. If you earned $50,000 the government allows you to subtract the $2,000 from your income. In other words you would only have to pay taxes on $48,000 vs. $50,000.

All during your working years you can continue to save money in your 401k plan without having to pay income taxes. However, when you retire the government does want to start collecting taxes on your 401k savings. When you do start withdrawing money after age 59 1/2 you will pay current income taxes only on the amount your withdraw from your 401k.

Remember you only pay taxes on the money you withdraw; the remaining balance continues to grow tax-deferred. Deferring your taxes later in life is one of the huge advantages of a 401k plan. As I stated earlier just starting to save money in a 401k plans opens up all these advantages.

#4 Professional Money Management

In a 401k plan you only have to pick the mutual funds, not the individual stocks or bonds. Professional money managers who have expertise in researching companies pick the investments inside the mutual funds. By investing in mutual funds inside your 401k plan saves time and money. You do not have to do your own research on each individual company. A typical mutual fund has between 100 to 300 different companies.

As an investor I know I do not have the time or expertise to research 100 companies to decide how to invest my money. Not having to pick our own individual investments is another one of the skey advantages of a 401k plan.

#5 The Money is Yours, Not the Companies

A common mistake people think about a 401k is the money is tied to the company. People believe if the company goes out of business they will lose their money. This is incorrect because the money is invested separately at a mutual fund custodian company. Your employer does not have any access to your 401k plan money.

The only amount of money an employer could keep if you leave the company is the company match. Some employers have a required amount of time you need to be employed at the company before you receive the amount they matched in your account. This is known as the vesting schedule. Companies may require you work at the company for three years before you receive the money the company contributed to your 401k plan.

However, they never have any right to the money you personally saved in the 401k plan. This is your money, not theirs. Not having to pick all your own investments is another one of the advantages of a 401k plan vs. a pension plan. Potentially an employer does not have to honor a pension plan if the company goes out of business. If you believe this could not happen to you just look at some of the airline and steel companies. When the companies went out of business they did not have any money to pay for the employees pensions.

Final Thoughts

We all plan to retire someday. To retire successfully we need to have some cash saved up to pay our living expenses during retirement. We cannot depend entirely on Social Security or a company pension. We do not have any control if the government or your employer decides to make changes in the future.

A 401k plan can give you some control of your retirement plan and your future. However, you do need to review your account periodically to see if changes need to be made.

Overall there are significant advantages of a 401k plan to your retirement plan. Take the time to review these advantages for your own retirement savings.

Types of 401(K) Contributions   

The Penalties for Self Dealing in a Self-Directed IRA

Having a self-directed IRA can open up your retirement savings to a new set of investing possibilities. With this type of IRA account you can invest in real estate, make private equity investments, invest in tax liens and even make mortgage loans to unrelated third parties.

But because you have more control over the investments you make with your IRA assets, it's especially important that you don't run afoul of the prohibited transaction rules that govern all IRA accounts. In order to understand the full impact of not following these rules, let's take a look at the penalties for self-dealing in a self-directed IRA.

Self-Dealing Overview. Self dealing is generally considered to be doing business with any disqualified person, including engaging in any transaction that benefits the account holder. "Disqualified persons" include your spouse, any direct descendants (children, grandchildren, great grandchildren, etc.) as well as parents and grandparents. When you engage in self-dealing with your self-directed IRA, you risk facing the imposition of significant penalties.

Disallowed Tax Benefits. Prohibited self-dealing transactions put the statutory tax benefits of your entire account at risk. If your account is no longer considered to be a self-directed IRA, you'll have to deal with the consequences of having your account assets deemed to be immediately distributed to you, as well as face any applicable early withdrawal penalties.

Immediate Distribution. Perhaps most significantly, engaging in self-dealing could lead to your entire account balance being deemed distributed to you. If your self directed IRA is set up as a traditional IRA, this means that the entire value of your account will be included in your current year's taxable income, which will undoubtedly generate a significant tax bill. This might prove doubly problematic if the property held within your self directed IRA is not liquid - as is the case with real estate. If you don't have the cash or other liquid assets necessary to pay your tax bill, you might be force to sell the property in order to pay the taxes on it. If you originally made your investment decisions based on a very long-term outlook, having to sell them early just to pay the tax bill can damage your overall financial status even more.

Early Withdrawal Penalties. If they deemed distribution of your account assets occurs before you reach age 59½, then you may also be assessed a 10% early withdrawal penalty on the full amount of the distribution. This penalty is in addition to the taxes you'll owe on the distribution amount.

No Tax-Free Growth. If the tax-advantaged status of your account is disallowed, you'll miss out on the most powerful advantage of a self-directed IRA - the ability for your account assets to grow tax free. Over the years and decades that many retirement savers hold their accounts, this tax savings component often comprises a significant portion of their overall savings.

Having an experienced self-directed IRA custodian such enables you be confident that you'll never face any of these penalties at any point of time. This is a big relief!

Types of 401(K) Contributions   

The 401k Vs A Traditional Pension Plan - Which Is Best For You?

The American Dream traditionally involved getting a job with a company for 40 years, building up a big pension and then retiring to enjoy your golden years on that pension. Sadly, this notion of the American Dream has become a fantasy for most Americans over the last 20 years. Although retiring and living comfortably is still an option, the 401k plan has surpassed the pension plan as the retirement vehicle of choice.

Pensions

When most people think of pensions, they are really thinking of retirement platforms known as defined benefit plans. These plans offer a guaranteed payout amount when one retires. The amount is determined by the years you work, amount contributed, salary and other factors that vary from plan to plan. When your grandfather worked for General Electric for 40 years, his pension was a defined benefit plan.

401k

The 401k is a more modern retirement platform and one that has become increasingly popular with companies. Ready to be surprised? 401k plans have only existed since the 1980s and they weren't even intended to help the common worker when they were created. Instead, they were supposed to be used to provide added benefits to executives. Regardless, they are now used by companies as retirement vehicles for executives and employees alike.

The modern 401k plan is really a defined contribution plan. This simply means that employees can contribute up to a certain amount when they choose to do so. Employers have the option, but not requirement, to also contribute to the employers account. Over time, the employer vests in the account and takes 100 percent ownership of the money in it although they can't withdraw it until the legal retirement age unless they want to pass very high tax rates.

Control

One of the major differences between 401ks and traditional pension plans is the issue of control. Specifically, who controls how the money is invested once it is in the plan? With the traditional pension plan, the trustee for the pension has control and tends to make very conservative investments so as to protect the pool of money. In a 401k, the employee usually has control over how the money will be invested. There may be limits on the type or number of investments he or she can pursue, but that is the only restriction.

Which Is Best?

The 401k would be the obvious answer if this question was asked five years ago. Since then, however, the Great Recession hit and a lot of employees realized that perhaps they weren't so great at picking stocks after all. The idea of having a stable, conservative investment like those found in pensions has started to seem a lot more attractive to such people than it did before the economic troubles came along.

The real answer to this question, however, depends entirely on the views of the person considering the question. If one is comfortable with the investment world, than a 401k makes sense. If you would rather leave investment decisions to someone else, a pension plan may be the way to go.

Personally, I prefer the 401k plan for a couple of reasons. The first is I want control of my investments. The second is I like the fact I can change the amount I can contribute to it each year. This gives me a certain amount of flexibility depending on how the economy is performing.

Ultimately, you will have to make your own decision when it comes to this issue. Regardless of the direction you decide to go, make sure to maximize your retirement savings as much as possible to ensure a comfortable time in your golden years.

Types of 401(K) Contributions   

401(K) Plan Beneficiary Designations

Most adults have completed a beneficiary designation form at some point. We complete it when we are hired, or become eligible for the company 401(k) Plan, and then we forget about them. But your beneficiary designation for your retirement plan is a critical part of your tax and estate planning. While many of us make sure that other important documents such as wills are updated on a frequent basis, it is easy to overlook your retirement account information.

Often people think "I have a will; I'm covered". But having a will is not enough. Most people are not aware that your beneficiary designations for your retirement account override your will.

The primary purpose of naming a beneficiary is that those assets can pass directly to whomever you designate. They won't have to go through probate, which can be a lengthy and expensive process.

You can name almost anyone your beneficiary, including individuals, charities, and trusts. However, if you are married, Federal Law mandates that your spouse is your default beneficiary and he or she must consent in writing to any other beneficiary. While children can be named as beneficiaries, they cannot control the assets until they reach the age of majority (age 18, in the state of Indiana). Therefore, it is advisable to set up a trust in their name and then name the trust as your beneficiary. That way you have control over who the trustee of the trust will be rather than have the court decide who will handle the money until the child reaches 18 years old. Also, unless you want the child to have complete control of the money when they turn 18 years old, there are other reasons to set up such a trust.

If you have been divorced, married or remarried, or had children since your retirement plan account was established, you should review your beneficiary designation on file to be sure it still reflects your wishes.

Here are some tips:

• Periodically review your beneficiary designations to make sure they still reflect your wishes

• Update your beneficiary designations after any major life change (marriage, divorce, birth of children, job changes, etc.)

• Keep a copy of your beneficiary designation form for your records

• Be sure that contingent (secondary) beneficiaries are named in the event your primary beneficiary dies before you do

• Keep in mind that your beneficiary designations will override your will

• If you are married, your spouse must consent to any other beneficiary

• Do not name your minor children. Set up a trust for them first and then name the trust as your beneficiary

• Seek the professional advice of an estate planner or tax or financial advisor if you have any questions regarding how to allocate your assets

Types of 401(K) Contributions   

Self Directed IRA: Non Traditional Investments

People often say that self-directed IRAs are for everyone. At some point, this is true but realizing things, it seems that a self directed IRA is only for an individual who has a detailed knowledge about investing. Another good reason is that this type of an IRA account is for people who focus on their retirement investments choices. Only the knowledgeable and creative investors have the tendency to benefit from a self directed IRA.

At some point during the whole process of having a self directed IRA, retirement plan companies and firms often speak of non traditional IRA investments. Most of these custodial companies do not allow investors to invest in these investments because they cannot implement numerous procedures electronically. This is a far cry from what is done in a traditional IRA. Although there are custodians who are allowing these investments, they tend to charge very expensive fees just by withholding the assets. If an investor was unable to follow a certain rule that was mandated by the IRS then he is required to pay hefty penalties. If the violation is intolerable, the IRA account is subjected for disqualification or the funds will lose their tax deferred status. Therefore, it is very important to search for articles or reviews concerning the rules for non traditional IRA investments.

Non traditional IRA investments are often disregarded from the other retirement plans. In a self directed IRA, however, traditional investments are considered viable options. A lot of the investors are unfamiliar or lack the knowledge on the rules of IRS concerning non traditional IRA investments. Asking for advices from financial professionals like CPAs and investment advisers is a great move for an investor. These financial professionals should be able to help an investor in analyzing each retirement investment. As a result, he will be able to choose which retirement investment is the best for his lifestyle. The investors will determine if he can cope up with the requirements needed in the whole process as well.

There are many non traditional IRA assets that the account owner can invest in his self directed IRA. Here are some of the investments:

· Gold Bullion and other Precious Metals

· Loans

· Non Public Offerings

· Real Estate

· Some Securities Offerings

People cannot deny the truth that the stock market plays a major role on the value of retirement assets. Most investors venture outside the comfort zone of traditional investments that include bonds and stocks. Aside from studying these investments, investors have learned that investing in real estate properties, gold bullion, and other non traditional assets can generate huge incomes. Some of these assets are tangible and are not affected by any economic fluctuations. By investing in these assets in their IRA account, they are diversifying their IRA portfolios. Using the funds in their IRA accounts to purchase real estate or other non traditional IRA assets give them numerous benefits. Two of the most resounding benefits that they can get are favorable tax advantages from appreciation and the property's cash flow.

With a self directed IRA, taxes will never be a concern for the investors since funds in the IRA account are all tax deferred. This is a good way to build something for the investor's future.

Types of 401(K) Contributions   

Is a Roth IRA Good or Bad?

Like a knife, a Roth IRA is neither inherently good nor inherently bad. In the hands of a thug, a knife can be a deadly weapon. In the hands of a skilled surgeon, a knife is a life-saving device!

Roth IRAs are a special type of individual retirement account (IRA). When "traditional" IRAs were originally made available, it was on a tax-deductible basis. You could contribute up to $3,000 and if you were not participating in another retirement plan or did not make too much money, you could deduct the $3,000 on your tax return.

For 2010 and 2011, the amounts are $5,000 for people under 50 years old and $6,000 if you are 50 or older. If you are a participant in another retirement plan, you cannot contribute to a normal IRA if you make more than $109,000 in AGI (married filing jointly), or $66,000 (single). In a Roth IRA, you cannot contribute if you make more than $177,000 in AGI (MFJ) or $120,000 (single).

Under a Roth IRA, the difference is that these contributions are NOT tax deductible. The tradeoff is that if you meet certain conditions, such as holding the account for at least five years, then the increase in value of the account (interest, dividends, and capital gains) are ALSO not taxable!

Generally, the younger you are, the better it is to start putting into a Roth. The number of years of tax-free earnings will far outweigh the benefit of a traditional IRA. Conversely, the older you are, the less advantageous the few years of tax-free earnings will be. Your income tax bracket also comes into play here. If you are going from a high income tax bracket in your earning years and into a low one in your retirement years, perhaps the deferral is not as attractive.

In 2010, there was a big frenzy to convert traditional IRAs to Roth IRAs. The government was putting this forth as a taxing measure to offset some spending. If you converted to a Roth IRA, be sure to speak with a tax advisor to get the best tax treatment on the conversion.

My biggest concern over Roth IRAs is what I like to call the "Social Security dilemma." They TOLD us that Social Security would never be taxed, until they needed the revenue from it! I fear that the same thing will happen to Roth IRAs. That they will not allow the tax deduction up front, but will later decide that Roths were a "bad investment" and decide to tax the earnings down the road!

For all of your investment, retirement and financial questions make sure to contact a trusted and experienced financial advisor.

Types of 401(K) Contributions   

5 Benefits of an IRA

1. The traditional IRA, which is coincidentally the original type of IRA, is good for people who don't have an employer option because contributions are fully deductible. The IRA must be used before you turn 70, and can not be used before 59 and a half without incurring a 10% penalty on the amount withdrawn.

2. Roth IRA's, along with traditional, allow a person to contribute up to $3000 a month towards the fund. The added benefits of a Roth IRA include the ability to withdraw cash without penalty for certain purchases (such as first time home purchase and disability)

3. As the cost of tuition continues to rise by 5 to 10 percent each year in some cases, many families are deciding to use the educational IRA to plan for their children's college education fund. The benefit of this type of IRA is that typically, money invested today will be worth 20 times as much in 20 years, so that education won't be nearly as expensive. However, there are penalties for taking out the money if it is not used for tuition.

4. A few situations where the 10% penalty does not kick into effect include: the death of the account holder, withdrawals are used to pay non-reimbursed medical expenses, and the money is used to pay back taxes to the IRS after a levy has been placed against the IRA.

5. There are at least 2 things to watch for with IRAs and qualifying exemptions; the holder of an IRA is subject to a 5 year waiting period. A speculator couldn't, as an example, deposit $3,000 in their IRA this year and withdraw it next year penalty-free whether or not it might otherwise qualify as an exemption.

Additionally, if you do not want to take risk, you would invest your money in certificates of deposit or money market funds that provide a risk-free interest rate upon maturity. However, these interest rates are lower than the percentage returns provided by riskier stocks. If you make losses on your IRA (Individual Retirement Account) investments, you can deduct them from your tax return ONLY if certain conditions are fulfilled.

In the end, the benefits of an IRA seem to outweigh the risks involved (being as there are essentially none) and provide a higher rate of return as compared to certificates, or bonds. Please choose your financial adviser properly and research all of your options before coming to a decision.

Types of 401(K) Contributions   

How Wide Is Your Moat?

In the middle ages moats were built to defend castles from the attacks of enemies. Moats were quite useful in keeping attackers at bay and keeping the kingdom safe. This concept is critical, and not just for medieval castles, but also when assembling an investment portfolio. The wide moat concept applies to publicly traded companies and is a critical factor in a sound portfolio. Economic moats are structural business attributes that help companies generate high returns on capital for an extended period of time. There are several sources of economic moats, which we won't get into here, but think of companies like Walmart, Visa, & Lockheed Martin. The companies mentioned here have one or more critical factors that have created an economic moat and give the company a sustainable advantage over its competition. For example, Walmart has developed a procurement model that allows it to drive its costs down and deliver lower prices to customers. Some would argue Walmart's practices are detrimental to its suppliers, but for purposes of this discussion we only need to understand that Walmart is successful at keeping costs low, which provides a sustainable moat.

Warren Buffet once said, "the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Obviously Warren Buffett has used this principle to acquire a vast amount of wealth and while the average investor doesn't have billions to play with the concept can be used by anyone. Morningstar, whom we are not affiliated with, does a wonderful job of assigning economic moat ratings to companies and there are actually mutual funds now established that only purchase stocks of companies with wide economic moats. The concept behind economic moat is not rocket science, the companies that fall into this category are typically more profitable than narrow moat companies, they have more sources of competitive advantage, and they have sustained their moats for a long period of time.

What does the wide moat strategy mean for your portfolio? Clearly, no one strategy is suited for all investors, but the wide moat strategy definitely has its place in a well balanced, properly allocated portfolio and over the long term (at least 10 years) you would be quite pleased with how a wide moat strategy performs in comparison to the S&P 500 Index.

So, what to take from this little tidbit? Slow and steady typically wins the race. The wide moat strategy is a long term, buy and hold play that isn't immune to some volatility, but our belief is that most average investors are better suited giving up short term risk and receiving long term gain.

Types of 401(K) Contributions   

The Major Benefits of A Roth IRA

Below is a list of the potential Roth IRA benefits that could affect you, read each of them carefully to see if they apply to you or your contribution limits.

Roth Benefits

Tax Free Withdrawals - You are allowed to withdraw any contributions (money that you have put in) from your Roth IRA tax free whenever you'd like. However any money earned in the account can only be withdrawn tax free if 5 years has passed or you are over the age of 59.5 years old. Unlike normal IRAs which you will be taxed for withdrawals if you are under 59.5 years old, as long as the 5 years has passed you will not pay taxes.

Conversion Rules - You are permitted to convert a traditional IRA to a Roth IRA in many circumstances, although there may be some fees, the withdrawals will be tax free after certain conditions are met. After the standard 5 year period, you can withdraw the full amount of converted funds without any penalties.

Flexibility - You can have both a Roth and Traditional IRA and contribute to both at the same time. You can also have a 401k as well if that makes sense for your situation.

Family Safety - If each spouse owns a separate Roth IRA, and one of them dies, the surviving spouse can combine the accounts with no penalty. Similarly, if a single parent dies, their account can be passed on to one of their descendants.

Certainty of Taxes - While it may seem like a negative sometimes that you must pay taxes on deposits, it protects you from any higher effective tax rates in the future when you wish to withdraw, so you can know with more certainty how much money you will have available to you when you are older.

Passing on Wealth - Previously mentioned was that the IRA's assets could be inherited from the owner upon death, but to expand on that point, there is no mandatory age at which you must start withdrawing from your Roth IRA. This means that you could simple allow your assets in the account to keep appreciating to pass onto your family if you do not need it.

Principal Residence Benefits - $10,000 in earnings in the Roth IRA are completely tax free when the money is used to buy a house (first time buying a house). This money can be used when the owner of the Roth IRA is purchasing the house, or can be used if a spouse or children are buying the residence as well. There are some minor restrictions to this, but is something that should be looked into.

Contribution Limits - Here's a benefit that can be deceiving at first, while the total maximum contribution limit is the same for your traditional and Roth IRA, the maximum contribution for each individually is effectively different. For example, if your maximum contribution is $5,000, and you want to put it all in a traditional IRA, you simply put in the $5,000. However, if you want to put the same $5,000, that is in after tax dollars, which means you are really contributing $5,000/(1- Tax Rate), where your tax rate is between 0 and 1 converted from a percent. In essence you can contribute more to your Roth IRA because you are paying the taxes on the deposit versus the withdrawal.

Types of 401(K) Contributions   

Choosing the Right Individual Retirement Account for Your Future

If you're looking to save for your future, an individual retirement account, or IRA, is one of the best investment vehicles you'll find. IRAs offer workers a low-risk way to save and earn interest. Though financial experts agree that people should begin saving for retirement as early in their careers as possible, many workers have difficulty setting aside additional funds each month for far-off times. An IRA is a good solution, as you'll earn interest on your investment and, in many cases, receive tax benefits on your contributions. By setting up an IRA now, you'll be better prepared for retirement. To begin planning for your retirement, consider one of the following types of IRAs.

Traditional IRA Without a doubt, the most common type of individual retirement account is the traditional IRA. When you open a traditional IRA, any contributions you make are tax-deductible. The amount you contribute is subtracted from your taxable income, so you could pay reduced taxes or even drop to a lower tax bracket. Most IRAs limit your contributions to 5,000 dollars per year, though you can sometimes contribute more if you are over the age of 50. Eventually, you will need to pay taxes on the money you withdraw from your IRA when you reach retirement, as withdrawals are considered to be taxable income.

Roth IRA The Roth IRA works similarly to the traditional IRA in many ways. However, tax benefits differ between the two types. When you choose a Roth IRA, you'll enjoy tax-free withdrawals during retirement. Unlike a traditional IRA, you'll still pay taxes on your full income during the contribution period. Many people prefer to pay taxes while they're earning other money, so the Roth IRA offers a good way to maximize retirement benefits. Roth IRAs are often a good choice for people who plan to reach higher tax brackets later in life.

Coverdell Education Savings Account The Coverdell Education Savings Account is a great way for parents to begin saving for educational expenses. This account used to be known as the Educational IRA. Investors earn tax benefits that are similar to both the traditional and Roth IRA, as there are no taxes on contributions or withdrawals. Money from a Coverdell Education Savings Account can be used on educational expenses for students in grade school, high school or college. Additionally, when the parent owns the account instead of the child, the funds are not considered to belong to the child when he or she applies for federal financial aid.

Self-Directed IRA With a self-directed IRA, you have the freedom to invest in a number of projects, property or funds on behalf of your individual retirement account. Many people enjoy self-directed IRAs, as they offer the flexibility to truly diversify your investments. If you're worried about the market crashing or about a particular type of investment performing poorly, a self-directed IRA is a good way to broaden your horizons.

Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA Though most IRAs are funded by individuals, the SEP and SIMPLE IRAs are intended for small businesses and people who are self-employed. Both types work similarly to a traditional individual retirement account, as contribution amounts are deducted from an individual's taxable income and taxes are paid on withdrawals. People generally determine whether they need a SIMPLE or SEP IRA by considering their income or number of employees. Self-employed people who do not have retirement plans from employers often choose one of these IRAs, as both offer a simple way to manage a retirement account. Small businesses can also contribute to SEP and SIMPLE IRAs for their employees instead of setting up pension plans.

Types of 401(K) Contributions   

My Spouse Left Me An IRA, What Are My Options?

There are many considerations taken into account in determining what a surviving spouse can and should do with an IRA received from a deceased spouse. Breaking down each consideration will simplify the decision-making process and help determine how to handle this important asset. Below is a breakdown of the options and considerations for a surviving spouse who has received a traditional IRA as a designated beneficiary.

First, a person receiving an IRA from a deceased IRA owner generally must begin taking minimum distributions following the death of the account holder. However, in the case of a surviving spouse beneficiary the distributions would be based on the surviving spouse's life expectancy if the predeceased spouse has not yet reached the age where they were required to begin taking distributions (i.e. 70 1/2 years old). If, on the other hand, the predeceased spouse has begun taking his or her required distributions, then the surviving spouse may take distributions over the spouse's life expectancy (recalculated annually). But you, as the surviving spouse, can elect to take over a period of time shorter than any of the above situations should you so choose. The other option a surviving spouse has is to wait until the predeceased spouse would have reached the age of 70 1/2 years old to begin taking distributions, if the spouse has not yet begun to take required distributions.

Second, after deciding the timing of distributions, a decision needs to be made as to how to hold the funds. In addition to deciding whether you want to begin taking distributions now or later, you have the ability to take distributions from the account as it stands, change the name on the account to your own name or roll the assets of the account into your own IRA. The latter option is available only where the spouse is the sole beneficiary and has an unlimited right to withdraw amounts from the IRA, but this can frequently be accomplished by segregating the funds into a separate account.

The decision on how to hold the funds will again depend on the surviving spouse's financial goals. Typically, the goal is to defer taking payments as long as possible so that the surviving spouse is retired and taxed on the income while the surviving spouse is in a lower tax bracket. Therefore, if the surviving spouse is younger than the predeceased spouse it may be more advantageous to roll over the IRA into the surviving spouse's name. If this occurs, the surviving spouse is treated as the owner of the account for all purposes and is required only once the surviving spouse reaches the required age for distributions (currently 70 1/2 years old). If, instead, the surviving spouse is older than the predeceased spouse it may be more advantageous to leave the assets in the predeceased spouse's IRA and begin drawing at the later of either: (1) December 31 of the calendar year after the predeceased spouse died; or (2) December 31 of the calendar year in which the IRA owner would have attained age 70 1/2. If the surviving spouse chooses to leave the IRA in the predeceased spouses name the surviving spouse must take distributions over the surviving spouse's life expectancy or a shorter period.

Finally, you should know the timing of taxation to make an informed decision. Regardless of how and when you take your distributions, you will be required to claim this income on your taxes and will be taxed based on your income tax bracket. This is because it is a Traditional IRA on which tax has never been paid. Generally, you will be taxed in the year you receive the payout. Thus, if you take it as a lump sum, you will be taxed on the total immediately. If you elect instead to receive income via distributions, you will be taxed at the time of each distribution. If you were to transfer the account to another person, then you would be taxed on the entire IRA at the time of the transfer to that individual. However, if you roll over the IRA into another retirement plan, there will be no tax until those funds are withdrawn. The same will apply if you decide to treat the predeceased spouse's IRA as your own.

In addition, distributions made before the predeceased spouse would have attained the age of 59 are generally subject to a 10% penalty. However, distributions made to the participant's death beneficiary are not subject to this penalty. This applies even if the payments are by distributions. But, if you are under the age of 59 and roll over the payments to an IRA in your name and then seek to withdraw you will be subject to the 10% penalty (though planning may be done to avoid this).

In conclusion, before you make a decision about what you should do with an IRA left to you by a surviving spouse, be sure to consider the following: when you would like to receive this income, how you want to hold the investment and the what tax implications of your decision will be. A tax and finance attorney or financial advisor will help ensure you make the best decision for preserving this hard earned asset.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with Treasury Department Regulations, we inform you that any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Types of 401(K) Contributions   

The Rules of a 401k Rollover

There are many important 401k rollover rules that everybody considering a 401k rollover should know. The idea of a 401k rollover is to relocate the savings from a former retirement plan into an Individual retirement account or into a new employer's retirement plan. The main advantage of this is to keep the tax benefits on all the money that's in your account, but these benefits might be reduced as a result of breaking these important 401k rollover rules.

In order to know the rules thoroughly you need to understand the different varieties of 401k rollover choices first. Having a complete comprehension of the numerous ways to approach a 401k rollover is the ideal way you can make a sensible, well-informed choice.

A direct 401k rollover is the first choice. This is when the existing balance is rolled into a different account without having to go directly through you. There are numerous advantages to this approach. Preserving the tax benefits on your 401k savings is definitely the most important advantage. Your previous employer will not withhold any of the money and you won't have to pay income tax on it either. An additional benefit is that this method is relatively simple. You just need to open a new account and then complete some forms. If you'd like to rollover your 401k directly but you are given a payment for the account balance anyway, it's very important that you don't accept this money. Inform your previous employer right away for them to fix the issue.

An indirect 401k rollover is the second way of closing your previous 401k. This approach is much like the direct rollover because it's quite possible to keep the tax benefits of your previous retirement savings. With this approach, your old account holder distributes your money straight to you, and you then deposit the balance into your IRA or 401k. You basically work as the middleman. Should you take more than 60 days to perform the transfer, the money that has been given to you is subject to income taxes. Because of this your previous employer withholds 20% of your balance. The issue here is that you have to make up for that 20% once you transfer into the new account, or the money is going to end up being subjected to taxes and perhaps an early distribution charge.

The easiest method of moving out of your old retirement plan is called a cash distribution. This approach is also the worst. The main reason for this is that your distribution is seen as income that can be taxed. You'll end up paying the rate for the income bracket that this payment places you in. This can be more than the 20% that is withheld when your old company distributes the payment to you. This kind of distribution will also likely be subject to an early distribution fee. You should make an effort to avoid a cash distribution because it will eliminate all the tax deferral advantages of your former 401k plan.

The previously mentioned methods are the most common methods of handling your 401k rollover. A direct 401k rollover is the ideal option, though some individuals may want to pursue the other methods. This is certainly all right provided that the significant downsides of doing so are understood, though the majority of individuals will want a direct 401k rollover.

Types of 401(K) Contributions