Investment Basics
TAXES AND INVESTMENTIt matters!
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
Insurance Ordinary
No Income Tax Yes Estate Tax
Loans instead of withdrawalsEarly withdrawal: Ordinary
Annuity Ordinary Ordinary
Taxable Account
Ordinary NA LT : Capital Gains
ST: Ordinary
Investment CalculatorNow 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 Options Vehicles Why?
1. Pay Tax Now Roth 401(k)/Roth IRA
Pay low taxes NOW. Expect taxes to go up in the future.
2. Pay Tax Later Traditional 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 account Need withdrawal flexibilityMax 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 featuresNeed additional tax shelter
ASSET CLASSWhere do you put your money?
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?
Fees• Stocks
Bid Offer Spread, trading fees• Bonds
Commission• Mutual Funds (load/No load)
– Expense Ratio (Investment Management,
Marketing, Legal Custodial Fees)– Share Class: A,B,C,R, I– Transaction Fee
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.
Contact UsRETIRE NOW NYC
Address: 9 Leone Close, Scarsdale, NY 10583
Phone: 914-574-5023
Email: [email protected]
