| Opening an IRA and other investments |
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sleep4ever
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| Opening an IRA and other investments |
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Hi, I am doing a presentation in a week about investing money. I have to talk about IRAs. How they work, how to go about opening one, etc. I've read quite a bit - but it's almost always the same information, so I came up with some questions I hope someone could answer. Some questions won't have a definate answer - but an average would be nice!
1) Can I use any type of account for my IRA? CDs, Money Market, etc
2) How do I open an IRA? (besides speaking to a professional)
3) Will the interest I gain be determined by the account type I get?
4) If I pick a CD as my account, normally I would set it for say five years. How does this work with an IRA? Does it just go until I reach 59 1/2? What if the bank no longer wants my account (doubful, just asking)?
5) What's the average tax taken out on Traditional IRAs? I'm sure it varies by state, but on average.
Other investing questions
1) Does no-load and loak apply to all account types or just certain types?
hypothetical
A company creates a mutual fund, and 50 people invest. Then the company invests in a money market. *Insert confusing question* - is a money market like a mutual fund? a company that pools money & invests it? or simply a category for accounts? - Then the money market invests into a CD or something.
1) Woudn't it be more profitable for the 50 to simply open their own accounts? It's still the same amount of money be compounded. They will still earn the same amount?
2) If the CD gains 5%, then the money market people get like 4% (and the company gets 1%), then the mutual fund company gets 1%, then they pay out to the 50 people 3%, when they could have got 5% by opening their own? The only thing I could see is an interest bonus because of the size (like a jumbo CD).
Thanks ahead of time for reponses to any questions.
If you are constantly waiting for the weekend, you are missing out on 5/7 of your life!
If you're not part of the solution, you're part of the problem.
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Fri Apr 29, 2005 12:09 am |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
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Joined: 05 Oct 2004
Location: Illinois
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I'll give your questions a shot:
1) IRA's can be instested in any US-based security. This includes mutual funds, UITs, CDs, Money Markets, individual stocks, individual bonds, limited partnerships, closely held corporations, and many others. There are some restrictions, (I'm working from memory here, so these might not be totally accurate) including collectibles, direct investment in real estate, and international-based investments.
2) Besides speaking with a professional, you could go to an online brokerage or mutual fund company and open an IRA account.
3) Various securities earn various different returns, in different circumstances.
4) The bank would contact you when the CD is ready to mature, asking you how you want to re-invest your funds, unless you had already arranged this. This will continue until you move your account to another custodian or withdraw the funds for use. I can't imagine a bank not wanting a sweet deal like this, so the last question is moot.
5) This depends on the taxpayer. The draws from your trad IRA are taxed as ordinary income. I don't fathom that anyone has had so much time on their hands to research this.
Other:
1) loads and lack of loads apply to all types of accounts.
hypo:
Usually a money market is similar to a mutual fund, which invests in short-term, cash equivalent securities, which could include short-term CD's.
1) usually money market funds provide two things that a personal CD doesn't: high liquidity, and convenience to other investing options. Most folks use mm's as emergency (ready cash) funds, or as a parking place until an investment opportunity arises.
2) see #1 above (the most recent #1 above).
Hope this helps. I hope you don't mind my asking, how did you get involved in giving this presentation? Who is the audience?
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Fri Apr 29, 2005 2:57 pm |
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sleep4ever
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Ok, so people invest in mutual funds or money markets for liquidity, and lose a small % for it?
And, can I open an IRA at a bank then? I basically say "i want to invest $5000 into this CD for a 7 year period at 4.1%, btw it's also my roth IRA - so it's tax free!"? Then after 7 years, I can move the $5000 + interest to another count if I choose to without penalties?
If you are constantly waiting for the weekend, you are missing out on 5/7 of your life!
If you're not part of the solution, you're part of the problem.
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Fri Apr 29, 2005 9:22 pm |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
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Joined: 05 Oct 2004
Location: Illinois
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Money market funds are typically used for their liquidity. Depending upon the type of mutual fund, it may or may not have liquidity as a characteristic.
Yes, you can open an IRA at a bank. If you had an existing IRA and wanted to roll it over into a CD at a bank (the situation you described), this could be accomodated.
There would be no penalty from the IRS for moving the account (as you describe, in 7 years), but there may be fees that the custodian charges, depending upon the custodian.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Fri Apr 29, 2005 11:07 pm |
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sleep4ever
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Ok, I think this would be my last question.
How on earth does a mutual fund investor make good money? Wouldn't they top like 3% interest? And if the liquidity is poor, then what's the point?
I mean, if a mutual fund investor earns more than 5%, the company is definately not going to make money, right? They would top at like 5% interest?
1 last question -
In your opinion, what's the best investment for low risk, high risk, and liquidity?
If you are constantly waiting for the weekend, you are missing out on 5/7 of your life!
If you're not part of the solution, you're part of the problem.
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Sat Apr 30, 2005 12:05 am |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
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Before I answer your questions, I asked you earlier how you got this assignment, and who is the audience.
No disrespect intended, but I'm having a hard time believing that you were sought out as an expert in the field... and the information that you're asking about is far from a complete look at investing.
On to your questions:
Mutual fund investors make money in the fashion you described, but the "cut" that the mutual fund company takes is generally much less than the percentage that you were using as an example. Typically expense ratios for mutual funds are anywhere from 2% on down to 1/4% and less. So, in your example, if a mutual fund investor makes 5% on a $1000 investment ($50), the mutual fund's expenses could range from 2% to 1/4% ($21 to $2.63). So the net account would be worth between $1029 and $1047.37 at the end of the year.
The expectation is that a mutual fund with a higher expense ratio will result in better returns (although this is not always the case). Lower expense ratio funds also deliver good returns, by comparison. The onus is on the investor to determine if the expense ratio delivers the return they are expecting versus all other possible options.
I can not give you specific investment recommendations, but high risk investments would include futures and options, specific individual stocks, and other speculative ventures. These are risky when considered on their own, not necessarily in the context of a diversified portfolio.
A low risk investment, which also is considered a liquid investment (generally), includes a savings account at a bank, a CD, or a US treasury security.
Good luck.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Sat Apr 30, 2005 3:30 pm |
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sleep4ever
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Ah, I'm sorry, I wasn't too clear. This presentation is a project for school; I'm definitely not an expert. I have almost all my information, except IRA's were confusing me.
So your saying a mutual fund with high expenses (say 2%) might yield 5% interest, while a lower expense fund (say 1%) might only earn 3%. Then the high expense one earns an additional 1%?
What I was trying to say last post, how does an investor make more money by going to a mutual fund company, rather than directly going to a CD or something? You said mutual funds may or may not have liquidity as a characteristic. If it doesn't, do mutual funds get higher percents because the large amounts being invested? If not - why not go to a CD, rather than a mutual fund?
If you are constantly waiting for the weekend, you are missing out on 5/7 of your life!
If you're not part of the solution, you're part of the problem.
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Sat Apr 30, 2005 10:36 pm |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
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Okay, now I understand your situation. I had kind of guessed that you might be a student.
Mutual funds of varying expenses will yield varying returns, not dependant upon the expense ratio, but rather on their investment results. The reason that some funds have such high expense ratios is because there is more involvement by a manager - which may or may not result in a higher yield.
An investor makes money by going into a mutual fund because the fund is invested in a security that makes money - like stocks, bonds, gold, and even CD's. The benefit of a mutual fund is that you get diversification across several securities (for example, 50 to 100 different individual stocks), without having to purchase each one separately. From the gain or yield of the fund, expenses are taken out before the investor gets the return.
The reason that you would go with a mutual fund instead of a CD is because a CD, because it is insured and liquid, doesn't return at a very high rate relative to the potential returns of other securities.
Hope this helps - and good luck with your presentation. Tell us how it goes!
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Sun May 01, 2005 10:10 pm |
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sleep4ever
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Cash: $ 1.50
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Joined: 27 Apr 2005
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quote:
The reason that you would go with a mutual fund instead of a CD is because a CD, because it is insured and liquid, doesn't return at a very high rate relative to the potential returns of other securities.
Fragment - my small brain can't handle it...
Are you saying mutual funds return higher rates? BTW - If they invest in stocks, mutual funds have the potential to be risky then, right?
If you are constantly waiting for the weekend, you are missing out on 5/7 of your life!
If you're not part of the solution, you're part of the problem.
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Mon May 02, 2005 3:15 am |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
Posts: 390
Joined: 05 Oct 2004
Location: Illinois
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In investing, higher return nearly always equals higher risk. Mutual funds that invest in riskier investments (than CD's or other cash equivalents) have the potential to return at a higher rate - but, because of the risk, they may also lose money.
The investor must decide if the additional risk taken is worth the additional potential return as they choose investments.
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Mon May 02, 2005 11:12 am |
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sleep4ever
New Member
Cash: $ 1.50
Posts: 7
Joined: 27 Apr 2005
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BlankenshipFP, thank you. You have answered all my questions now. My presentation is on Friday. I'll let you know how it goes. Thank you again.
If you are constantly waiting for the weekend, you are missing out on 5/7 of your life!
If you're not part of the solution, you're part of the problem.
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Mon May 02, 2005 2:46 pm |
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