Archives For Investing

Contribution Limits

       The maximum amount you can contribute to a Roth IRA depends on your age and income. These are the correct Roth IRA contribution limits for 2009 and 2010. This limit can be split between a Traditional IRA or Roth IRA, but the combined total of your contributions to your Traditional and Roth IRAs cannot exceed this limit.

  • Under age 49 at the end of the year: $5,000
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  • Age 50 or older by the end of the year: $6,000


Income Limits

       You are only eligible to contribute to a Roth IRA if your adjusted gross income (AGI) falls under certain limits. These limits depend on your tax filing status.

  • Married Filing Jointly or Qualifying Widow(er): You can make a full contribution if your AGI is less than $166,000 (or $167,000 in 2010). If your AGI is more than $176,000 (or $177,000 in 2010), you cannot make a contribution to a Roth IRA. If your AGI is between $166,000 and $176,000 (or between $167,000 and $177,000 in 2010), then the amount you can contribute is reduced proportionately.
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  • Married Filing Separately but you lived with your spouse at any time during the year: If your AGI is more than $10,000 (same in 2010), you cannot make a contribution to a Roth IRA. If your AGI is between $0 and $10,000 (same in 2010), then the amount you can contribute is reduced proportionately.
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  • Single, Head of Household, or Married Filing Separately and you did not live with your spouse at any time during the year: You can make a full contribution if your AGI is less than $105,000 (same in 2010). If your AGI is more than $120,000 (same in 2010), you cannot make a contribution to a Roth IRA. If your AGI is between $105,000 and $120,000 (same in 2010), then the amount you can contribute is reduced proportionately.


Deadline for Contributions

       Contributions for a year can be made any time that year or until the due date of your tax return for that year. Contributions for 2009 must be made between January 1, 2009 and April 15, 2010. Contributions for 2010 must be made between January 1, 2010 and April 15, 2011. You can designate for which year (current or previous) you are making contributions if you contribute between January 1 and April 15.

Tax Deduction for Contributions

       There is no tax deduction for Roth IRA contributions. However, you may be eligible for the Retirement Savings Contribution Credit.

Contribution Limits

       The maximum amount you can contribute to a Traditional IRA depends on your age. These are the correct Traditional IRA contribution limits for 2009 and 2010. This limit can be split between a Traditional IRA or Roth IRA, but the combined total of your contributions to your Traditional and Roth IRAs cannot exceed this limit.

  • Under age 49 at the end of the year: $5,000
  •  

  • Age 50 or older by the end of the year: $6,000


Deadline for Contributions

       Contributions for a year can be made any time that year or until the due date of your tax return for that year. Contributions for 2009 must be made between January 1, 2009 and April 15, 2010. Contributions for 2010 must be made between January 1, 2010 and April 15, 2011. You can designate for which year (current or previous) you are making contributions if you contribute between January 1 and April 15.

Tax Deduction for Contributions

       How much of this contribution you can deduct on your tax return depends on your adjusted gross income and whether or not you are covered by an employer-sponsored retirement plan at work.



       You may also be eligible for the Retirement Savings Contribution Credit.

       In our last Investing Basics article, we talked about securities and what that term includes. The next few articles in this series will focus on the specific types of securities available. We’ll look at stocks, bonds, mutual funds, options, futures, and short-term savings options. Today, we’re going to talk about stocks.

What Is a Stock?

       As I explained in the post about securities, a stock represents ownership. Stocks are also referred to as equities, which simply means they represent an ongoing ownership interest in a business. Each share of a company’s stock represents a piece of ownership interest in that company. When you own a share of stock, you own a part of a company.

       The return you get from owning a stock comes in one of two ways: dividends or capital gains/losses. Dividends are payments the company makes to its shareholders (owners) from its earnings. If a company declares a dividend of $1.00 per share and you own 100 shares, you’ll get $100 in dividends.

       Capital gains or losses result from changes in the price of the stock. If the stock’s price goes up from where you bought it, you’ll have a capital gain when you sell it. If the stock’s price goes down, you’ll have a capital loss when you sell.

       Stocks are considered riskier investments than bonds because of what happens when a company liquidates or goes bankrupt. Stockholders are the last people to be paid when a company goes belly-up. Bondholders get paid before stockholders, so there’s less risk. If there’s no money left when it comes time to pay the stockholders, then they get absolutely nothing.

       Finally, there are two main types of stocks: common stock and preferred stock. The biggest difference between the two is in how dividends are paid out. Common stock comes with no dividend guarantees. Preferred stock comes with a stated dividend rate (either a specific dollar amount or a percentage of the stock’s par value – the face value). Also, preferred stocks have priority over common stocks when dividends are paid. That means that dividends owed to preferred stockholders must be paid out before common stockholders receive anything. They’re a little more complicated than that, but that’s the basic difference.

       In the next article, we’ll look at bonds. Make sure you sign up for free updates to Provident Planning if you want to learn more!

       Once you understand what an investment is, you can begin to learn about the different types of investments available. We’ll start by looking at the broadest types of investments first, and then later we’ll narrow it down by looking at more specific types of investments.

What Is a Security?

       There are two main types of investments – securities and property. We’re going to look at securities today.

       I’m sure you’ve read about the securities markets in the newspapers or heard about them on TV. But what does that mean exactly? A security is any kind of investment that represents debt, ownership, or the legal right to buy or sell a security.

       Bonds are an investment that represent debt. When you invest in a bond, you’re basically loaning money to the person who issued the bond.

       Stocks are investments that represent ownership. When you invest in a company’s stock, you are becoming an owner of that company.

       Finally, options are investments that represent a legal right to buy or sell a security. An option is basically a contract that you purchase to give you the right to buy or sell a certain amount of a security at a certain price for a certain amount of time (until the contract expires). The person who sells you the option is legally obligated to sell that security to you or buy that security from you at the specified price whenever you choose to use your rights.

       So when you hear someone talking about securities (or the securities market) they’re talking about stocks, bonds, and options. Securities would also include mutual funds, which are simply a portfolio (a collection) of securities. These are very basic things in the investment world, so it is important you understand what they mean.

       As I continue this series on investing basics, we’ll go into more depth about all of these types of investments so you’ll understand what they are and how they work. Make sure you sign up for free updates to Provident Planning if you want to learn more! You can also enter your email address below to get free updates in your email: (Don’t worry, I’ll never share nor sell your email address.)

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       I’m not posting today because I had a guest post published yesterday on Free Money Finance titled “Is It Possible to Beat the Market?“. Check it out if you want something to read!

       A fiduciary is a person in a position of trust who obligates himself to always act in the best interests of those who trust him. For example, the trustee of a trust is considered a fiduciary and must always act in the best interests of the trust’s beneficiaries. Fiduciaries are legally required to act in the best interests of those they’re serving, and they can never put their own interests first.

Why Does It Matter?

       So why should you care what (or who) a fiduciary is? In the financial world, there are two types of advisors:

  1. Those who are fiduciaries.
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  3. Those who are not.



       If you understand what a fiduciary is, you’ll see that advisors who are fiduciaries are required to do what’s best for you. Advisors who are not fiduciaries are not held to such a standard. It’s perfectly legal for them to put their own interests first – to act in a way that might not provide the best benefits to you. Obviously, you want to use a fiduciary advisor whenever possible because of their legal responsibility to you.

       There are very clear guidelines on who is considered a fiduciary in the financial world and who is not. The following people are NOT considered fiduciaries:

  • Stock Brokers
  • Insurance Agents
  • Real Estate Agents acting on the other party’s behalf (This is common when you are buying, as most real estate agents are acting on behalf of the seller.)



       ”Advisors” in this group do not represent you. They represent themselves, their company, or someone else. They have no legal responsibility to act in your best interest. They are simply not permitted to commit fraud or provide you with “unsuitable” recommendations. But the “unsuitable” standard is very broad and difficult to impose.

       On the other hand, people in these groups are considered fiduciaries:

  • Registered Investment Advisers (RIAs) or Investment Adviser Representatives (IARs)
  • Insurance Brokers
  • Real Estate Agents acting on your behalf
  • CPAs
  • Attorneys



       Advisors in this group are legally required to act and advise you only for your benefit and interests. They can never act in a way that is contrary to what is best for you. They must act with undivided loyalty to you. If they fail to do so, you are entitled to legal action against them. It’s not enough for them to just provide “suitable” recommendations. They must try their hardest to provide you with the best advice possible.

       Let’s use a simple example. If you go to a stock broker, the broker can recommend you invest in Fund A (as long as it’s “suitable”) even though Fund B is better for you. Why would he do this? Probably because Fund A will give him a higher commission.

       Now let’s say you go to a Registered Investment Adviser (or an Investment Advisor Representative – someone who works for an RIA). Because RIAs have a fiduciary duty to their clients, they’ll always be required to recommend you invest in Fund B since it’s your best option. RIAs can’t receive commissions or do anything that’s not in their client’s best interests. So who do you want to get your advice from? The stock broker or the RIA?

       It’s quite clear that fiduciaries are held to a much higher standard than non-fiduciaries. Whenever possible, you should seek to obtain advice from people who are held to a fiduciary standard. Ask your advisors if they are fiduciaries. Ask them if they are required to always act in your best interests. They are required to answer truthfully, and you should be wary of those who cannot answer with a confident and resounding “yes”.

       Have you ever heard of the term “fiduciary” before? Is there any aspect of the fiduciary duty/standard you’re not clear on? Let me know in the comments, and I’ll do my best to answer your questions!

       Because I spent four years in college studying personal finance, most of the basic questions don’t occur to me any more. It’s called familiarity blindness. I’m just so used to this stuff that I no longer realize what other people might not know. That’s not to say they’re stupid. They just haven’t spent as much time studying these things.

       Part of my purpose for writing on Provident Planning is to educate people. I want to teach people enough to make good financial decisions on their own. So it’s with that mindset that I’m approaching several topics from here on out by focusing on the basics. I’m planning on looking at the basics of investing, insurance, taxes, retirement planning, and estate planning. These will start off very basic (like today’s post), and I’ll look at more complex issues as time goes on. So let’s get on to today’s post.

What Is an Investment?

       If you’re new to the idea of investing, a great place to start is to define what an investment is. An investment is simply anything you put money in with the expectation (or hope) that it will generate income and/or increase in value. An investment return is the reward you get from investing – basically current income or increased value.

       For example, money in a savings account provides income in the form of interest payments. A share of stock is expected to increase in value over time while possibly providing income in the form of dividends. A rental home could be considered an investment because you expect to generate rental income while the property value increases over time. You can even consider education to be an investment because you expect it will help you earn more income or increase your value to employers. While that’s true, this series is going to look more at things like stocks, bonds, options, mutual funds, real estate, and other such traditional investments.

       So that’s a basic definition of an investment – something that is purchased with the hope that it will provide income or go up in value. But be sure you don’t get “investing” and “speculating” confused. Investing involves the creation of wealth through legitimate means. Speculating is often a zero-sum game, where someone else has to lose so you can win. No wealth is created in speculating – it simply changes hands.