401(K) Plans: Vesting and Amp - Withdrawals

In this three-part articles series on 401(k) plans, we've covered the basics of what a 401(k) plan is and what types of contributions can be made. In addition, there are other rules and guidelines that participants should be familiar with.

Vesting

Vesting is a term used to describe the point at which a 401(k) plan participant is entitled to 100% of the employer matching contributions in his or her retirement account. The participant is, of course, always entitled to 100% of his or her own contributions, but employer matching contributions are typically subject to a vesting schedule, ranging from three to seven years. The purpose for the vesting schedule is to encourage employees to remain with the employer. The 401(k) plan document and your employer can tell you what your plan's vesting schedule is.

Here's a brief example. Let's say Suzy Smith contributes to her 401(k) plan and her employer matches her contributions up to 50%. The employer has selected a 5 year vesting schedule for the plan, with Suzy being vested 20% each year. Her vesting would look like this:

After year 1: 20% vested in employer matching contributions After year 2: 40% vested in employer matching contributions After year 3: 60% vested in employer matching contributions After year 4: 80% vested in employer matching contributions After year 5: 100% vested in employer matching contributions

401(k) Withdrawals

Before contributing to a 401(k) plan, you want to be familiar with the ways in which you can withdraw your money. To an extent, those conditions will be dictated by your 401(k) plan document. Here are the acceptable withdrawal methods:

- Loans - Hardship withdrawals - Termination of employment - Retirement - Disability - Death

401(k) Loans

Not all 401(k) plans allow loans, but those that do will require repayment. Loan payments, including interest and principal, are repaid directly to the employee's 401(k) account. The plan document will specify if the plan allows loans, and if so, what conditions apply.

401(k) Hardship Withdrawals

Some 401(k) plans have provisions for hardship withdrawals, allowing a participant to withdraw contributions within certain limits and for specific reasons. Those reasons typically include medical expenses, the purchase of a home, college tuition for the next 12 months or to prevent eviction or foreclosure from the employee's primary residence. Again, the plan document will specify any rules that apply.

Termination of Employment

When a 401(k) plan participant leaves an employer by quitting or being fired, he or she is entitled to the vested balance in his or her 401(k) account. The plan document will specify how and when this withdrawal takes place. To avoid adverse tax consequences, the participant should speak with his or her financial advisor to determine if a rollover to another retirement plan like an IRA is appropriate.

Retirement Distributions

401(k) withdrawals made at retirement age are called distributions. Before age 59 1/2, distributions are taxable and generally subject to a 10% penalty. After age 59 1/2, lump sum distributions will be taxed and current income tax rates, but the distributions may be eligible for special 10-year averaging tax treatment. Money can also be withdrawn and rolled over to another qualified plan, IRA, 403(b) or 457 plan. For additional information about these options, participants should talk to their financial and tax advisors.

We've covered a lot of 401(k) info. in the last three articles, but there is still so much more to know. If you are investing in a 401(k) plan, or are considering it, and have questions, please contact your financial and tax advisors for recommendations based on your financial situation.

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Is My IRA Income Safe If The Market Goes Down?

Is your IRA income safe if the market were to take a tumble? The answer is maybe. Are you worried about the market going down again? Would you have enough income if you had to reduce your monthly withdrawals by 25% or more? Is your IRA income safe?

With all of the economic turbulence in the world right now asking the question about safety is the right thing to be doing. How do you tell if your IRA income is safe? It has to do with your underlying investments and how you generate IRA income.

Bonds

If your income is coming from bonds you are probably safe. You just need to make sure the issuer of the bonds is doing OK financially. How do you do this? One way is to check your statement, if you bond value is down it is worth looking into further for sure. Google your issuer name and see if there is any bad news associated with the company or government. Call your broker and discuss your options. You can sell bonds but if it looks like temporary problems or just general bond market problems you not need to sell.

Stocks and Mutual Funds

If your IRA income is coming from equity investments then you have more to worry about. Bonds going down in value do not affect your IRA income stream but the market going down most definitely can. How do you make sure your equity investments are safe? Stocks should be researched individually and discussed with a broker. Even though you can't be certain, you can be reasonably sure the company will not go out of business if you will do the proper research and make sure it is fact and not just you hoping the company is doing OK. The stock being down does not necessarily mean the business is in financial trouble.

For mutual funds you need to research the fund but also the fund manager and fund company. If you still believe in the company and the manager after doing your research then you will probably be OK.

Annuities

Variable annuities should be researched basically like mutual funds. Except that for all kinds of annuities you need to check the financial health of the annuity company. Look for their current ratings and how the current ratings have changed over the last 5 years or so. You might have to call the insurance company for the ratings information.

Fixed annuities are different in that the value will not go down. The insurance company's ratings are still important to know.

These are all ways to check on your investments to make sure the underlying investment is sound but your IRA may still be volatile. A better question to ask may have been, Is my IRA income going to still be there when I need it even though the market is so volatile and interest rates are up and down? It is a long question but more accurate.

The answer is still maybe! Bonds are usually OK if the company checks out. Fixed annuities are almost always OK.

If you are in the market or variable annuities and your investments are going down in value then pay close attention.

Basic retirement planning practices are to take out a certain percentage of your investments each year as your IRA income and leave the rest in to grow your account value. If your investments are not growing at that percentage or more, you need to lower the percentage you are taking out each month or year. If you decided that 5% was a good number to withdraw each year then you must make certain that you earn 5% or more each year to break even.

Is your IRA income safe? As long as you don't take out more than you earn, the underlying company that issued the investment is sound, and you have checked out the insurance company if it is an annuity your IRA income should be safe.

Unfortunately since there are no absolutes in the investment arena and the lack of information or the ability to read the massive amounts of financial information you need to use your best judgment. You also need to seek the help of a competent financial advisor to help with the research and consult with before making any changes to your investments.

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Roth IRA and Its Advantages

Planning your retirement is a very important step. You need to balance and stabilize your financial future. Many have questions about different retirement plans that you hear about quite often. One of the best options is to open an IRA, which is an Individual Retirement Account or Arrangement. It allows individuals to set aside money annually with tax-deferred earnings till the onset of the withdrawals which begin generally at the age of 59 ½ years. These IRAs can be established at banks, mutual funds or stock brokerages.

A Roth IRA is a special type of IRA, which flourished under the Tax payer Relief Act of 1997, under the tax laws of the United States government. It is named after its Chief legislative sponsor and late senator of Delaware, William V Roth, Jr. It can be an individual retirement account or a joined one or even can be an annuity contract purchased from a life insurance company. It is acceptable for a Roth IRA to have investments in securities or stocks, bonds, Real estate and mutual funds etc.

Even though, very much similar to IRAs in general, a Roth IRA has few benefits.

One benefit is the after-tax money or dollar system that is particular only to a Roth IRA. The tax for the money being contributed is deducted at that time itself is not left for later deductions and hence, the withdrawals are totally tax-free under the conditions that you are above 59 and ½ years old and that your account has been established at least five years before the year of withdrawal. In short, you will not be taxed for the money or investments after you cross the age of 59 and ½ years.

Another benefit of this system is that you can make withdrawals at any time you want without being taxed for it. And, there are no mandatory minimum withdrawals from the age of 70 and ½ which is a common feature of most of the other IRAs. This means that you do not have to pay early distribution penalty on withdrawals and can save more at the same time. This also means that your investments or earnings grow tax-free. It makes it easier for you to save your money and take it out any time you need it. And one more plus point of a Roth IRA is that there is absolutely no age limits, neither for contribution nor for distribution or withdrawals.

Anyone who has an income within the limits of an IRA is eligible to open and use a Roth IRA. The limit is actually calculated and set on your modified adjusted gross income. Your outside incomes like dividends and interest rental properties etc cannot be considered and used as funds for a Roth IRA. You might not be able to enrol if your income crosses the limit.

Opening a Roth IRA will be a decision that turns your financial future around. Also to take control of that future, it is best to open a Roth IRA and start saving for retirement.

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Real Estate in a Self Directed IRA: Transferring Real Estate

Although most investors are looking forward to a wealthy retirement, some of them are not aware if their retirement plans are diversified. The assets that can be invested in traditional IRAs are limited to mutual funds, bonds and stocks which is the main reason why this retirement plan investment is unstable and volatile. However, investing into real estate in a self directed IRA is an excellent move provided that the investor is going to rollover his traditional IRA to a self directed IRA.

Real estate in a self directed IRAshould give the investor a passive yet steady income for his retirement. Even if the funds are locked up in the IRA account, an investor can still purchase a property. Having a self directed IRA account will help the investor to own a property. However, there is a limitation here because the investor can purchase a property but he cannot use the property for his personal use. The best thing that he can do is to rent out his property to someone that is not within his family or closely related to him. This is to avoid any self dealing that comes with a heavy penalty or even worst.

Besides the plain investor, an employee can also invest real estate in a self directed IRA. However, he should possess an existing employer's retirement account or a 401K account before he can do this. All he needs to do is to rollover his 401K plan to a self directed IRA and invest in a property. He can perform this provided that he left or lost his job. This is extremely beneficial on the investor's part because he can transfer all funds that have been invested in his 401K plan. A IRA rollover is the best option for the employee if he has invested his 401K funds in a property. Aside from the funds that he will be transferring into his new IRA account, he will be able to transfer his real estate as well.

Importance of a Custodian

Education plays an important role when having a real estate IRA rollover. The new account owner should have knowledge about the transaction at hand in order to make the most of the prime opportunities. To be able to do this, he will need the service of a custodian. A custodian will ensure that all rules and regulations are followed. In addition, he will provide assistance to the employee in completing the paperwork comprehensively and on time. Most investors who invest in a real estate in a self directed IRA look for the services of a reputable custodian to guarantee their funds' safety.

Using the funds in a retirement plan is the easiest way to have a property. An employee can have a real estate IRA rollover to access the funds he has invested in his 401K retirement plan. If an investor wants to have a profitable retirement asset then he must invest in his real estate in a self directed IRA. Even with the economic struggles, there are no reasons why the investor or the employee won't have a dollar to spend the rest of their retirement years.

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Tips for a Peaceful Retirement Life

While today seems so blissful, we often forget the tomorrow that comes with aging issues and retirement. After living the youth peacefully with no financial tension, retirement comes with its own stress, as there is no income in the end of the month to look forward to. Therefore, if you are looking forward to make your retirement life as peaceful and stress free as youth was, you must have a retirement plan charted out and prepared well in advance. The earlier you plan, the better off you can be.

Here are a few tips that will help you live a peaceful retirement life.

1. Start your retirement life planning early- like we discussed before the earlier you plan the safer and better is the life ahead. There are a number of retirement plans that are specifically designed so that you have a steady income by the end of your working career. These involve regular savings from your income which grows steadily to be the back bone support when all other sources of income cease to exist. Realizing that retirement is a phase that one cannot escape is always better, the earlier you realize, the faster can you begin your savings.

2. Invest your money in Traditional IRA or Roth IRA to reap retirement benefits. Both these plans are designed for the benefit of the retiring person. Though not very different in their aim, the mode of functioning is a little different. In traditional IRA, one does not have to pay tax while saving the amount, but on withdrawal after retirement, the sum is subjected to tax. Besides, in traditional, the rules are rigid, and do not allow withdrawal up to 59 ½ years old. Where as in Roth IRA, which is a more recently introduced retirement plan, the account owner can withdraw his saved sum before maturity, if he is in dire requirement of money. Besides, after a few pre-conditions, if fulfilled, he can withdraw without paying a penalty or tax. But, in Roth IRA, the account holder makes the first savings after paying his income tax. Thus the money saved does not belong to the taxable sum. On withdrawal post retirement, he can enjoy the entire tax free sum.

3. If you are someone keen to have a career or a small time businesses plan early. You can always set up the pre-requisites before, and once you are free and no other engagement, you can start your new career. Many retirees find the retirement phase lively and energetic. The entire life was spent on earning to make a living, and shouldering a lot of responsibilities. With all the responsibilities now done with, this phase is the time many spend for themselves, fulfilling ones own desires.

4. Many people start consulting services in their retirement period. With the amount of knowledge and experience they have gathered over their entire career can be put to use by starting consulting and counseling service. Besides being a service, it also gives a satisfaction to be the rolling stone!

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Roth IRA Account Is Better Than Traditional Accounts

You should consider investing in the Roth IRA funds because of several benefits. If you have already made investments in other traditional IRAs, you may think in the term of considering the change or conversion to the Roth IRA accounts. If you are enjoying a different retirement benefit plan sponsored by your employers, you can also plan to accept another investment through Roth IRA due to its advantages.

There may be other reasons of not being satisfied with the represent investments elsewhere or the present IRA investments and you need to provide value to your financial savings in a better manner. You are trying to accommodate alternatives in the fields of investments; Roth IRA is the ideal channel to make savings for the retirement in a great way. Before considering the participation in the Roth IRA funds, you should make it clear to understand several points regarding the same so that you know the real findings of making investments in the Roth IRA funds.

The Individual retirement account or IRA is a proper medium, which is capable of acquiring tax relief on the investments that are made for retirement benefits. Such provision of tax relief is offered by the government to citizens to enjoy on the investment made through IRAs. This group of citizens has been able to come out of the government pension structure and enjoy all the tax relief programs and is not dependent of any kind of government pensions. Citizens are allowed to make contributions to such funds through the money, which is able to enjoy the tax relief. It means that citizens are not charged income tax on the money and take the advantage of tax holiday on investments.

In the case of the conventional IRA plans, citizens are allowed to invest tax-free money in the scheme and hence they enjoy the tax relief on income tax of the contribution amount. It gives the advantage of investing the gross money in the particular form of IRA. The money develops into a large sum of money with the addition of compound interest and saves the income tax amount of the citizen year after year. In this system, the withdrawal of money becomes taxable as the amount is withdrawn for the retirement needs. Such forms of investments are managed by administrators as required under government laws and rules.

Certain regulations are extremely strict regarding the contributions or minimum distributions of the amount for the fund and administrators are to run the fund according to set guidelines of the government. All appointments of custodians and rules must be authorized by the government. It is generally observed that traditional IRAs are run with the custodian being a bank and the investment amount is used to finance products of the particular bank, which are not always in the interest of the investor and bring forth reduced returns. In a Roth IRA account, your contributions are tax-paid amount and the final distribution is entirely tax free. You are able to save a chunk of money from the advantage.

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What's an IRA and What Are My Options for Investing?

IRA stands for individual retirement account and was set up to help individuals later on in life when they reach an age where they stop working. As of today, the IRS deems retirement age to be 59.5 years old. IRA's are a great way to start saving for retirement because there are several benefits when you set up an IRA.

One of the biggest advantages of setting up an IRA are taxes. Money in your IRA account grows tax-deferred... meaning that any earnings that are made that year and not taxed, but rather re-invested. This allows your IRA to compound and grow each year.

The IRS only allows you to contribute so much of your earned income each year into your IRA, however this is also a deduction from your taxable income. This is a nice benefit for most people because that means they pay less taxes in that current year.

As mentioned before, IRA's are designed to benefit the individual later on in life. So, if by chance you need to borrow or use the money anytime before you turn retirement age set by the IRS, they will penalize you 10% on the amount you take out of your account. There are some exceptions to this rule and they constantly change so it's best to consult with a good tax professional.

What are my investing options once I have an IRA?

Once your IRA has been established, there are lots of investment options for you to choose from. It's important to know all the different options and risks associated with each because this is your future we're talking about here. Some investments are riskier than others but because of the risk, the returns are much greater as well. The goal is to be educated to know where you stand based on your age, your income and how soon you plan on retiring.

Most individuals consult with a licensed financial planner who will share with them the different IRA investing options available. Most will recommend either stocks, precious metals, mutual funds, and cd's. However, very few will even mention one of better options available today... real estate.

Most don't even know you can convert your IRA or 401k into a self-directed IRA to invest in real estate. A safe CD will return anywhere from 2% to 4% tops. Stocks are very risky but the returns can be nice if you pick the right ones. Real estate right now is returning anywhere from 15% to 30% and the best part is that with the right help, it can be very low risk.

Banks are loaded with inventory because of all the foreclosures and they are dumping properties for $.10 - $.20 on the dollar in certain areas of the country. Areas where there is a huge demand for rental homes. So a $30K investment will produce you a $600 a month rent check which is a 20% return each year. It's not hard finding the properties, rather the more challenging part is finding the best neighborhoods, with low crime rates and good neighbors.

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Roth 401K - A Beneficial Twist On An Already Awesome Savings Plan

The Roth 401k is a retirement savings plan which combines a number of the most-positive features of the traditional 401(k) and the Roth IRA. And the best part is that it puts a beneficial twist on an already awesome retirement savings plan.

Under the Roth 401k, employees can choose to add money to their plans on an after-tax basis, along with, or as opposed to, the before-tax deferrals which are applied to their traditional 401(k) plans. This means the employee has the option of participating in one, or both of these plans, provided they meet the requirements set forth by the rules of each respective plan.

An employee's combined elective deferrals, whether placed in a traditional, Roth 401k, or both, are limited to a maximum of $16,500 for tax year 2011, provided that the account holder is under 50 years of age. If the individual is older than 50, the rules allow them to add an extra $5,500.

Matching contributions made by employers are not factored into the $16,500 cap. These are pretax dollars which are placed in a separate account, allowed to accumulate, and then taxed as ordinary income at withdrawal.

The primary difference between a Roth 401k and a traditional plan concerns when the monies are taxed. A Roth happens to be funded with after-tax dollars. A traditional 401(k) is funded using before-tax dollars.

What exactly does this mean?

After-tax dollars are funds for which you've paid taxes on for the current year. So, if your taxable income for the year was $75,000, you pay the taxes, and then make your contribution to your Roth 401k. Of course, this may drastically lower your take-home pay. However, these contributions, along with any accumulated earnings, can never be taxed again.

Before-tax dollars are those which are not counted in your taxable income for the current year. So, if you earned $75,000 for the year, and elected to contribute the maximum $16,5000 to a traditional 401(k), your taxable income would be reduced to $58,500. But this is only a tax deferral. When you year age 70 1/2 and become subject to mandatory distributions (withdrawals) you will then have to pay any and all applicable taxes.

A Roth 401k account is probably more-advantageous to individuals thinking about starting a Roth IRA. Employees at a younger age who usually find themselves in lower tax brackets, but who expect to be in a high tax bracket when they hit retirement age, would likely benefit from participation in a Roth.

However, if a worker is in their peak earning period, and they anticipate their tax bracket will be lower at retirement, they would most likely benefit from staying in a traditional 401(k) savings plan.

Another consideration which must be made when deciding to invest in a Roth 401k is that contributions are irrevocable. Once contributions have been made, you can't change your mind and transfer them into a traditional 401(k). That being said, however, funds from a Roth 401k can be rolled over to a Roth individual retirement account when an employee leaves their job.

Employers have been slow to offer Roth 401k, as well as, traditional plans in their employee benefits packages. The most common reason given for this reluctance is the fear of added administrative, record-keeping and payroll burdens. However, as more high-profile firms add both these plans to their benefits choices, it has been predicted that smaller business will likely jump on board.

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401K Withdrawal Rules Have To Be Followed

There are some 401k withdrawal rules which should be followed by everyone. These should be followed if you are going through problems like divorce, loss of job or a penalty. There was a creation of a new plan known as 401k retirement plan for those people who wanted to have a good sum of money at the time of their retirement. It's true that one has to save some part of the income earned by him so as to enjoy the benefits of this plan but this will be very beneficial for you at that time when you actually get the benefit. If someone is in a financial emergency and is in the need of money to pay some bills or other expenses then you can withdraw your money from 401k when there is no other option left for you. At the time of withdrawing money you should keep in your mind that you are withdrawing money from the part of money saved for your future needs.

At the time of withdrawing money, you must be aware of 401k withdrawal rules. The withdrawing of money is not such a simple task as many rules have to be followed and formalities have to be completed. You must be aware of all the rules before entering the 401k plan. The retirement plan will allow you to withdraw money only if you are going through some financial hardships like if you need cash immediately for the treatment of your spouse or someone in your family, for purchasing a home and paying its mortgage, to pay fees for your children for schools or colleges, divorce, etc. Many workers set these rules according to the revenue setup. It means one should get into the plan keeping in mind your income and you should see if the rules seem alright to you and you would be able to follow them.

The most important rule that should be remembered is that when you are withdrawing money from the plan for the above reasons then you can't make any contributions for the next 6 months. Also withdrawing money from 401k retirement plan will minimize your cash for future needs. It is the last option that is left for you. You should not withdraw your money from this plan as if at the time of any other emergency you need money then there will be no money left for you. Also if you withdraw your money before the age of 59 years then you have to pay tax for it and many penalties are imposed on you. According to 401k withdrawal rules you should withdraw your money only at the time of maturity if there is no such hardship. This will be very beneficial for you as your money will be saved for future needs and you can save yourself from any kind of penalty and taxes. So just avoid withdrawing money from the retirement plan before the maturity of the plan and only then it will prove to be beneficial.

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IRA Income - Does an Annuity Bonus Help With Retirement Money?

Your IRA income can be greatly enhanced with the use of an annuity bonus. When used right it can be a major increase to your IRA income but when used wrong it can do more harm than good. A good place to start is a thorough understanding of how to make an annuity bonus work for you.

An annuity bonus is basically an incentive from the insurance company to attract your business to a certain company. Originally they were promoted as help in recovering losses and surrender charges but since most annuities do not allow a straight lump sum withdrawal of the money this idea is not really true. You could say it was true and it is kind of but it is a little bit of a stretch. The annuity bonus is really meant to increase your retirement income in the future.

Example Case Study Let's work with an easy small number to give a good example. If you invested$100,000 into a bonus annuity to create IRA income and you got a bonus of 15% you would then have $115,000. The amazing thing is that you now have $115,000 earning money for you. If you were invested in a CD then you just got 3-5 years of earnings in one move, amazing!

While the bonus is great for future retirement income you must understand that usually this isn't cash that is available right now for use. You usually have to wait 5-10 years depending on the size of your bonus. It sounds like a long time but it's not considering how long you have probably had your CD to begin with and if you have jumbo CD you were very likely not planning on ever spending the money anyway. Now, hurry up and wait!

Your bonus annuity will earn plenty of IRA income over the next ten years for use as needed but remember we are talking about the bonus part of the bonus annuity. Where the extra money comes in is to enhance your IRA income in the future as it has been growing along with your annuity value for quite some time when you start using it. Add that value into your regular annuity value and you get an amazing boost to your IRA income so the answer is yes! A bonus annuity can help with your retirement income.

It is a little like starting a separate $15,000 investment and letting it grow for 10-15 years until you need it! In good interest rate or market environment it could double the value or maybe even more! And that is just extra money! A little thank you from the insurance company just or doing business with them!

Alright, maybe it isn't a thank you as every investment has downsides but we are only talking about the bonus part of your bonus annuity. Enjoy the free money!

Bonus annuities that are used for IRA income are a complicated investment idea. Be sure to seek competent advice from your annuity professional before making any changes to your investments. And remember there is never a bad time to make more money!

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Self Directed IRA the Best Tool for Retirement Wealth Accumulation and Preservation

Are you frustrated with the slow growth of your IRA? There is an option that you may not be familiar with. It's called a self-directed IRA. This type of IRA offers an abundance of benefits not limited to potentially generating more retirement savings.

What Is A Self-Directed IRA?

A self-directed IRA is an investment tool that provides you with more investment opportunities than an IRA at a traditional financial institution. It's called "self-directed" because you are in control - you chose how your money is invested. However, you do need to have a custodian or administrator. A professional IRA custodian can provide you with administrative support and transaction services to help you manage your IRA.

As with any IRA, you cannot invest in collectibles, S corporations, or life insurance. You also can't invest in personal property. You also cannot use the funds to benefit a beneficiary of the account (you or any named beneficiary) or other disqualified person. A disqualified person is someone who is a family member or custodian of the account.

So What Can You Do? Why is A Self-Directed IRA So Great?

Self-directed IRAs put you in the driver's seat. Instead of your investments being managed by a fund manager or plan manager, you are the boss. You decide what investments to buy and sell, and how to manage your retirement savings. You can open your self-directed IRA quickly and easily. You simply need to decide if you want a custodian to manage the administrative tasks. Either way, you can roll over some of your existing retirement savings to open your self-directed IRA.

How Can It Help You Accumulate Wealth And Preserve Your Savings?

Self-directed IRAs offer you the best of both worlds. You can invest in traditional stocks, bonds and funds. You can also invest in real estate, businesses and even earn income by offering loans or mortgages. This type of IRA enables you to diversify like no other type of retirement savings tool.

This diversification helps you preserve your savings. When you're able to invest in a variety of opportunities, your savings doesn't suffer a major blow if an aspect of the market struggles. And because you can generate multiple streams of income with your investments, you can literally watch your savings grow.

What Do You Need To Know Before Starting A Self Directed IRA?

It's important to know that not all IRAs are created equally. You can probably go right over to your bank and open a self-directed account. However, they will likely have limitations on what products you can invest in. When searching for a custodian or administrator, make sure you're able to invest in the opportunities you're interested in. You can invest however you want, as long as you stick to the rules the IRS has set forth. A good IRA custodian will be there to help you every step of the way as you set up and manage your IRA account. Look for an IRA custodian with excellent service, support and education that will guarantee that you will be in total control of your own financial future.

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Two Overlooked Issues With Real Estate in an IRA (Individual Retirement Account)

I've recently been sharing steps to consider before investing in real estate in your IRA.

There are layers and layers of complexity when it comes to this topic. Right now, I'm going to wrap it up with two commonly overlooked issues when it comes to real estate in an IRA.

When I create a wealth strategy with a client, two components I always discuss are:

1 - How will they use leverage in their wealth strategy?

2 - What will their role be in their wealth strategy?

Successfully identifying these two key components can make it possible to achieve their goals faster than they thought possible.

These two concepts are even more significant if an IRA is involved because these are two areas where many people get unpleasant tax surprises.

While I am referring to the U.S. tax law here, the importance of analyzing the impact of specific retirement plan rules on your wealth strategy is universal.

#1 Using Leverage in Your IRA Most of the wealth strategies I develop with clients include leverage. The most common form is a mortgage on piece of property.

Leverage can present a few challenges in an IRA.

First, there are tax consequences of using leverage in an IRA.

To the extent an IRA produces income from assets that are leveraged, that income (even if it is tax favored income that is normally not taxed in an IRA) is subject to tax within your IRA.

There are some exceptions to this rule, but the strategy of regularly using the appreciation in a property to fund new deals can present tax consequences to an IRA.

Second, finding a lender who will finance real estate in an IRA may be difficult because you cannot personally guarantee a loan made to your IRA without jeopardizing the tax benefits of your IRA (this is explained more in #2). Therefore, the mortgage must be non-recourse financing secured only by the IRA's assets.

Most banks and financial institutions will not finance residential home loans without a personal guarantee. Those lenders who are willing to do this usually require a higher percentage of cash which then diminishes the role of leverage in the overall wealth strategy.

#2 Your Role with Your IRA With more and more people using self directed IRAs, I see more and more people getting in trouble with the prohibited transaction rules.

Your role with your IRA can have serious tax consequences.

If an IRA engages in a prohibited transaction, it loses its favorable tax status and the entire value of the IRA (not just the portion involved in the transaction) is taxable to the owner as a distribution and may include penalties.

What is a prohibited transaction? A prohibited transaction is a specific transaction the IRS has disallowed if it takes place between your IRA and a "disqualified person."

A disqualified person includes, but is not limited to: - You - Your spouse - Your parents - Your grandparents - Your children - Entities that are controlled 50% or more by any of the above - A person providing services to the IRA

The following are examples of prohibited transactions.

The sale, lease or exchange of property

Example: Your IRA purchases a property from your parents (even if everything is done at fair market value).

Lending money or extending credit to or from your IRA

Example: You personally guarantee the mortgage on a property owned by your IRA. This is an example of extending credit and is the reason why the mortgage on a property in an IRA must be non-recourse and not guaranteed by the owner

Providing services to the IRA

Example: Your spouse performs repairs on the rental property owned by your IRA. Be aware of these potential issuesThe examples I have provided here are just a small glimpse at the prohibited transaction rules. The important thing to remember here is that any time your IRA is dealing with you or a person or entity related to you, you should take the time to make sure you are not engaging in a prohibited transaction.

Focus on your wealth!

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Roth IRA - A Wise Saving

A wise man has his every step planned, whether it is his present or his future. Many who may have though he was a miser, or a fool, may be forced to later call him wise, as he designed his future.

When you are in your youth, you hardly take effort to understand what your parents went though, and how they are managing their finances. But with time life teaches you life needs to be planned. With responsibilities adding up, we have family, home, and kid's education to mange. But along with these, we also need to manage a future which is as important as today. After living a particular lifestyle today, it is not easy to slip into a cocoon, as you have no income being a retiree. Moreover with age, health problems cannot be overlooked too.

Thus, saving for future is as important as today. Understanding the problems and the difficulties f the normal IRA Sir William Roth, the Senator of Delaware introduced Roth IRA in the year 1997. This is a very flexible individual retirement account scheme. Therefore more numbers of people are opting for the Roth IRA than the traditional IRA.

Let us understand what Roth IRA is and what are its benefits, and how does it suit the retiree. In Roth IRA the amount saved is post tax payment. This plan allows tax free growth.

Thus the amount deposited is the non-tax liable sum. The contributor can withdraw the amount any time he wishes to, thus in emergency, he need not worry, as he has a savings with him that he can count on. After 5 years of maturity of the account, the person can withdraw without being subjected to penalty. Apart from the 5 year law, there also a few other conditions in which he the contributor can withdraw penalty free.

If he need to build or construct his first house if the person has completed 59.5 years of age medical needs If he suffers from any disability.

Roth IRA does not impose any strict rule as to how much minimum amount a person has to deposit. The money deposited can be invested by the account holder, in investments like stock market, or real estate, or bonds etc. thus he can also earn profit on the stocks or market gains.

Thus Roth IRA with its flexible terms and conditions is preferred by many. Another benefit is the withdrawal in this scheme is tax deferred. You are not taxed on withdrawal after retirement when every penny counts. Many people attach their property and real estate along. Since this is a non taxable withdrawal, they also choose to distribute and attach. Thus on withdrawal, you can gain and also your assets are secure.

If the Roth IRA account holder passes away, the account can be merged with that of his/her spouses, to become one single account. Thus many people who have analyzed these benefits and compared with the terms of the traditional IRA, have felt Roth IRA is better for it is flexible in many areas.

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Sources for Borrowing Money

When you are in a money pinch, there are several sources of capital at your disposal. They all have various interest rates, fees, and terms. When you need to borrow money, consider all these items carefully.

Bank Loans

The most efficient, lowest-cost form of loan is usually to borrow money from a bank. It requires good credit and a good relationship with your bank. Depending on your reason for borrowing money, you may need to put up collateral for the bank. You will get the lowest interest rates with secured loans. These are loans against an asset, such as a house or a car. They carry lower risk to the bank so they also come with lower interest rates. Unsecured loans and lines of credit carry higher interest rates.

Credit Cards

Credit cards are a very easy but very expensive way to borrow money. If you only need cash for a few weeks, the cost can be reasonable. But if you need cash for an extended period of time, there are usually cheaper ways to borrow money. Also make sure you understand your payment cycle, interest rates, and payment information before using this method.

Loans from Family Members

Getting a loan from a family member or friend can be very flexible. You can set the terms with the lender. However, borrowing from family members and friends can stress your relationship. Make sure you set everything out in writing, including the interest rate, payment schedule, and penalties for late payment.

Peer Lending

If you need a loan for a small business venture, you can borrow money online through peer lending. Peer lending websites connect borrowers and investors who can connect to fund a business idea, pay off debt, or finance another type of purpose.

401k Loans

If you have money saved in a 401k plan with your employer, you can usually borrow up to 50% of the value of your account. You pay interest on the loan, but the interest goes back into your account. Be aware that you have an opportunity cost with this option. The money you borrow is not able to grow as an investment until you repay the loan. Also be aware that you will have to pay back the loan in full shortly after you leave the company. Consult your tax professional to understand the tax ramifications that this may cause in retirement. Your interest is usually considered pre-tax money and will be taxed upon retirement, even though you paid it with after-tax dollars.

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A Safe Winning Strategy Pairing Bullish and Bearish ETFs

I want to start by focusing on the S&P 500 - it's essentially an index of the 500 largest companies in America. Actually it's more. Contrary to a popular misconception, the S&P 500 is not a simple list of the largest 500 companies by market capitalization or by revenues.

Rather, it is 500 of the most widely held U.S.-based common stocks, chosen by the S&P Index Committee for market size, liquidity, and sector representation. "Leading companies in leading industries" is the guiding principal for S&P 500 inclusion. We are starting here to achieve safety and diversity.

If you use the S&P 500 as your investment base you won't have to worry if the CEO has resigned, the CFO has just been indicted, the stock has missed its forecast or any number of things that make stock prices flagellate unsuspecting investors and traders.

You ask: How can you make money investing on the S&P 500?

The S&P 500 goes up and down similar to stocks and hasn't done so well over the past 3 years.

Wouldn't we do better with a mutual fund? [Actually, you're getting warmer.]

According to the Motley Fool, "During the 1990s, the S&P 500 has provided an annualized return of 17.3%, compared with just 13.9% for the average diversified mutual fund." Over the past 3 years only 10 mutual funds had more than a 12% total return [data through 6/4/2010 from 12392 funds,Morningstar]. You can see that the S&P 500 has not done well, but you would have actually done worse using mutual funds.

Instead of considering mutual funds, I'm going to restrict our consideration to just two ETFs, i.e., SSO and SDS. I said simple; this is simple.

We're going to invest in SSO when the market is rising and SDS when it's falling. Both SSO and SDS are based on the S&P 500. They track its traded index, SPX. [You have to trade SPX because the S&P 500 is an index that isn't traded.] The SPX is among the most traded equities and is also one of the most liquid. As an investment,it brings diversification.

SSO and SDS are mirrors of each other. Whenever SSO rises the SDS falls, and vice versa. This allows us to trade in rising and falling markets. Simply, pick the correct ETF.

These ETFs have one other unusual property. They move twice the speed of the SPX; they are leveraged 2 to 1. [Proshares has a number of similarly behaving ETFs. They are called Ultra ETFs.]

Are leveraged ETFs safe? Wouldn't it be safer to invest in sound American stocks?

Rather than give a large list of recently failed stocks, I decided to find if there were any stocks among the current S&P 500 that I would like to have held over the past 3 years. Only 2 emerged, Family Dollar and Autozone. More than 15% of the S&P 500 had more than a 75% draw-down and an additional 35% had losses over 50% at some time during the 3 years. These statistics do not include companies like Enron and Lehman that are no longer included. If they were included these statistics would be much higher.

I don't know about you, but I'm not much of a stock picker. I want something truly safe. If you are comfortable with your results trading stocks, don't bother reading further.

What about investing in utilities?

When I began investing, my Dad told me that utilities were always a safe investment. They paid a good dividend that never went down. Their customer base is locked in. Their rates are determined by the states and these always increase. What could be safer?

During the last 3 years, Duke Energy fell over 40% from a high of 20.66 to a low of 12.39. Over the same period, the index of gas utilities had a high of 33.84 and a low of 20.11. Electric utilities fared worse falling from a high of 40.01 to a low of 20.85. Even utilities don't look safe anymore.

From my point of view, it's the story of the turtle and the hare.

Stocks are like the hare:

You can make good money trading stocks, but you must be able to predict the direction in which they are going to run. This is incredibly difficult to do. However, if you do it right, you make out well. If you do it wrong, you are really hurt.

ETFs are like the turntle:

These two ETFs, SSO and SDS, in comparison are turtles; admittedly turtles with racing stripes. At this point we do not have anything more than a rough plan for investing in the S&P 500. This is not enough to qualify as an investment strategy.

We shall begin to upgrade this plan into a practical trading strategy. First, we need an unbiased indicator to determine on which ETF we should place our money, SSO or SDS. Any day, the majority of pundits on CNBC will tell you the market is going to rise. But on the same day, many of their pundits will provide reasons why it will fall. So, you cannot rely on them. Also, the Futures, prior to the Open, seem no more reliable for choosing either SSO or SDS.

After many years of trying, I developed a market timer that combines the market movement of the SPX with market sentiment. - called the SPXTimer. There are many market timers available. I'll let you be the judge which one to choose.

Timers are invaluable for making a well guided decision about which ETF to select. Mine gives you three choices. When it's bullish take SSO; bearish SDS and when it's neutral stay in cash. What could be simpler?

The results of trading SSO and SDS from 9/12/2007 until 5/5/2010 only using the SPXTimer. with $10,000 invested on 9/12/2007 grew to $13,737. Most investors and funds didn't do that well over this difficult period.

Sometimes these ETFs do not move in sync with the market timer. A little patience is required before charging into the market.. I added a mild momentum constraint to the strategy to ensure the entry is in sync with the timer. The ETF's momentum, not necessarily the price, is required to be rising over 2 days.

By adding the entry constraint, the $10,000 investment grew smoothly to $16,525. That's over 20% per year! There were pull backs, but you could sleep soundly.

I was still concerned with giving back profits. After each big run-up in profit, it seemed there was a comparably big pull back. Many investment managers recommend adding to a position as it is rising in value. I decided to try subtracting from the position size as the profit rises.

If timed properly, this might reduce the amount of profit given back. Plus, it would reduce the risk while adding some of the profit to the bank. To do this, I decided to incorporate the following Money Management with the two strategies that were in place.

Include Money Management

Say you started with $10,000. The idea is to keep the money at risk between $9,000 and $11,000 [+/- 10% of the initial investment].

Whenever your equity grows over $11,000 sell enough shares to withdraw $1,000. This should reduce your money at risk to under $11,000. The next time it appreciates over $11,000, do it again.

If, on the other hand, the investment falls below $9,000 add $1,000 worth to the ETF investment.

The results are remarkable. This investment grew to $17,780. That's close to 30% annually; not bad for a turtle! 75% of these trades were winners.

I repeated this test on three more broad based indexes: the Nasdaq 100, S&P Mid-Cap 400 and the Russell 2000 changing only the two ETFs. Each did better.

The basic plan: buy one of these ETFs when bullish and the inverse ETF when bearish, or stay out of the market in cash. This strategy is as simple as it can get. Using a timer brings order and safety to the investment because you know whether to buy the bullish ETF or the bearish ETF.

The entry condition, combined with this money management strategy, will improve your investment results beyond what you might hope to achieve with stocks or mutual funds - with much less risk. Now isn't that what you wanted all along?

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