Why Tax Matters? Consider how much you pay on taxes versus what you make on your investment. Taxes take a huge bite off your return. During Contribution During Accumulation During Withdrawal You always have to pay! Pay now or pay later Taxes!!
Different Investment Vehicles and how it helps to minimize tax bite PAY NOW (CONTRIBUTION) PAY LATER ( WITHDRAWAL) ACCUMULATION 401(k)/ Traditional IRA Ordinary Roth 401(k)/ Roth IRA Ordinary InsuranceOrdinary No Income Tax Yes Estate Tax Loans instead of withdrawals Early withdrawal: Ordinary AnnuityOrdinary Taxable Account OrdinaryNA LT : Capital Gains ST: Ordinary
Investment Calculator Now try the Investment Calculator and see how taxes impact the final outcome on your investments.
How do you pick which investment vehicle to use and why? Tax OptionsVehiclesWhy? 1. Pay Tax NowRoth 401(k)/ Roth IRA Pay low taxes NOW. Expect taxes to go up in the future. 2. Pay Tax LaterTraditional IRA/ Traditional 401(k) Needs tax shelter now. Expect lower tax in the future 3. Pay Tax Now Pay Tax on Accumulation (Capital Gains/Interest/ Dividend ) Taxable accountNeed withdrawal flexibility Max out on tax deferred accounts. 4. Pay Tax Now No Tax during Accumulation Tax at Distribution on Gains Annuity/ Cash Value Life Insurance (early withdrawal) Need other safety features Need additional tax shelter
Cash (Defensive: Focus on income generating) Risk and Potential Return Generally refers to investments in bank bills with a short investment timetable. They provide a stable, low risk income. Money Market Guaranteed Accounts/Fixed Account /Stable Value No Minimum Investment Timeframe
Bonds (Defensive: Focus on Income Generation) Risk and Potential Return Income return is in form of regular interest payments for an agreed period of time Government Bonds Municipal Bonds Agency Bonds Corporate Notes & Bonds Hybrid securities (loans) International Bonds
Bonds (Defensive: Focus on Income Generation) Risk Factors: Time Horizon: 1-3 years, 5-7 years, > 7 Years Credit Quality: Government, Government backed, AAA, AA, BB, subprime Currency: US versus non US dollar securities Inflation, Interest rate, company specific, liquidity Minimum Investment Timeframe: 1 to 3 years on short term, higher quality securities
Stock (Focus on Capital Growth and Income) Risk and Potential Return: A share represent a part ownership of a company, normally bought and sold on a stock exchange. Returns include capital growth (or loss) and income through dividends Stocks can be classified by: 1.Size of Company: Large Cap(>10 $B) /Mid Cap($2 to $10 B)/Small Cap(<$2 B) 2.Style (P/E Ratio and Div Payouts: Growth/Value/Income/Defensive/Cyclical 3.Geographic: Domestic/International/Emerging Mkts 4.Sector: Technology/Utilities/Health/Energy/Real Estate Minimum Investment Period: 7 – 10 years
Real Assets Risk and Return Potential Investment in physical assets Real Estate Farmland Timber Precious Metals (Gold, Silver, Platinum) Oil Fields Direct Investment Minimum Investment Period: 7 – 10 years, probably more
Mutual Funds An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks and bonds. Advantages: 1.Professional money management 2.Low Minimum 3.Diversification 4.Liquidity 5.Transparency (NAV and ticker symbols)
ETFs Exchange-traded funds (ETFs) hold a basket of shares similar to an index fund. Unlike mutual funds which only trade once a day, they can be bought and sold continuously during the market open. Today, there are 500 different ETFs, and they all follow different indices or benchmarks related to geography, maturity, capitalization, and style. Advantages of ETFs: passive style management, low cost
How do you track your return? Benchmarks: Dow Jones, Standard & Poor, Barclays Bond Index, Morningstar Publicly traded (ticker symbol): WSJ, Barrons, Yahoo Finance, Morningstar Not publicly traded (Annuities/Insurance products): Not available through public sources. TASK: Look up your investments and compare them against their respective benchmarks (ex: large cap against large cap) in the last 3 year, 5 year and 10 year horizon. How did you do?
More on Fees Beware of fees. Over time, it can do serious damage to your nest egg. Average Expense ratios (from Morningstar): Bonds (Intermediate term): 0.92% Large Caps: 1.19% Small Caps: 1.35% International: 1.39% Energy: 1.8% The more exotic, the more expensive Make sure what you pay commensurates with your return.
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