Investing tips: Part 2
Investment vehicles vary, so compare options carefully before making your final choice.
Investment vehicles vary, as was mentioned in Investing tips: Part 1, and it is important that you have specific investment goals. Your goals will help you identify the vehicles that best meet your needs. When comparing pay attention to investment types, earning payout schedules and tax ramifications.
- A Traditional IRA and Roth IRA are both personal savings plans. In a Traditional IRA, contributions may be tax deductible and the earnings are not taxed until they are distributed. In a Roth IRA, earnings that remain in the account are not taxed and contributions are not tax-deductible. Investments for both may include a variety of securities. The risk levels for both vary according to the holdings in the IRA.
- Money Market Funds are mutual funds that typically pay better than savings accounts interest rates however, they don’t pay as well as CD’s (certificates of deposit). The funds invest in short-term bonds. These are low risk.
- Bonds and Bond Funds pay a fixed amount when the bond is sold and are therefore know as fixed-income securities. Investments include corporate or government debt obligations. These are low risk.
- Index Funds are passively managed and they reflect the performance of the stock or bond index that they are aligned with. Investments are in particular markets. The risk depends upon the index the fund uses.
- Stocks are shares in a company that fluctuate with the company’s value. The risk is medium to high.
- The cost of Mutual funds vary, and they invest in a variety of securities that could include stocks, bonds or money markets. The risk level varies according to the holdings in the mutual fund.
- Employer investment options that promote retirement savings include a 401(k) (which often includes employer matching), a 403(b) and a 457(b). These options require employees to have a set amount of their income deducted from their paychecks which is not subject to income taxes.
Earning pay-out schedules: Some investment vehicles pay earnings monthly, quarterly, annually or a final pay out amount. When considering investment options, review whether the payout schedules of each will meet your investment goals and timeline. To reduce investment risk, consider the benefits of diversifying your investment portfolio. Diversification can help reduce investment risk by putting money into several investment vehicles at one time versus only one.
Tax ramifications: Certain investment options have tax incentives, others have tax free contributions but the earning is taxed, or vice versa. Remember, not all investment vehicles are the same. Lastly, another tool that can be helpful when considering investing is an investment calculator. An investment calculator will help you review your present financial situation as well as project your readiness for retirement.
Should you encounter problems with an investment advisor or an investment product you can file a consumer complaint at usa.gov. Additional assistance can be found with your state’s securities administrator, the Securities and Exchange Commission or the Financial Industry Regulatory Authority (FINRA).
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