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