Retirement, Investment & Estate Planning FAQs

Stocks, Mutual Funds, Annuities, IRA’s and the list keeps going. You hear the terms but do you know what they mean and how they fit into your retirement planning?

We understand how important planning and saving for retirement is for many investors. We also understand it can be very confusing so we have tried to provide some simple explanations and answers to some common questions. We hope that you find it helpful and remember our dedicated staff is always ready to assist you.


  • What’s a stock?
    A stock represents a stake in a company. When you own a share of stock, you are a part owner in the company with a claim – however small it may be – on every asset and every penny in earnings. Now, unless you own a significant chunk of one company’s stock, it’s not as if you have a real say in how things are done. Owning 100 shares of Microsoft makes you, technically speaking, Steve Ballmer’s boss, but that doesn’t mean you can call him up and give him a tongue-lashing. Nevertheless, it’s that ownership structure that gives a stock its value. If stockholders didn’t have a claim on earnings, then stock certificates would be worth no more than the paper they’re printed on.
  • How do you make money on stocks?
    There are two possible ways. The first way is when a stock you own appreciates in value – that is, when people who want to buy the stock decide that a share is worth more than you paid for it. They might decide that because the company that issued the stock has earnings that are improving, for example. If you hang onto a stock that has gone up in value, you have what’s known as unrealized gains. Only when you sell the stock you can lock in your gains. Since stock prices fluctuate constantly when the market is open, you never really know how much you’re going to make until you sell. The second way is when the company that owns the stock issues dividends – a payout that companies sometimes make to shareholders.
  • What are the advantages of stocks for retirement?
    Stocks historically have produced long-term gains that are bigger than those of any other asset class. Since 1926, large stocks have returned an average of 9.8% per year. What’s more, they didn’t lose ground during any period of 20 years or longer during that time. Those qualities make stocks much more appealing for long-term savings than, say, Treasury bonds (which have had about 5.4% average annual gains since 1926) or stashing cash under your mattress. Stocks’ return potential gives them the best chance to beat inflation over long periods. That’s why they’re an essential part of a good retirement portfolio.
  • What are the risks with stocks?
    Stocks carry a much greater risk of short-term losses than bond and cash (the other two major asset classes). Since World War II, Wall Street has endured a dozen bear markets (defined as a sustained decline of more than 20% in the value of the Dow Jones industrial average). As a result, it’s generally not a good idea to invest a big chunk of money in stocks if you’ll need to spend the money within five years or so.
  • What are the different types of stocks?
    There are thousands of stocks to choose from, so investors usually like to put stocks into different categories: size, style and sector. Thinking of stocks this way helps you diversify – that is, to choose several stocks that are different enough from each other that they won’t all tank at the same time. (Ideally, at least.) By size. A company’s size refers to its market capitalization, which is the current share price times the total number of shares outstanding. It’s how much investors think the whole company is worth. Companies are typically referred to as either “small-cap,” “mid-cap” or “large-cap.” Large-cap companies (those with market capitalizations in the tens of billions of dollars) tend to have more stable stock prices than small caps, so they’re less risky. But small caps usually have higher growth potential. By style. There are two major styles: growth and value. A growth stock is issued by a company that is expanding at an above-average rate. Catch a successful growth stock early on, and the ride can be spectacular. But the greater the potential, the bigger the risk. Growth stocks race higher when times are good, but as soon as growth slows, those stocks can tank. A value stock tends to be slower and steadier, with strong fundamentals. In general, it trades at a lower-than-average earnings multiple than the overall market. A value investor might think the underlying business is still sound and that its true worth isn’t yet reflected in the stock price. By sector. Standard & Poor’s, a well-known data provider, breaks stocks into 10 sectors and dozens of industries. Generally speaking, different sectors are affected by different things. So at any given time, some are doing well while others are not.
  • How do I buy a stock?
    The most common way is through a broker. Brokers are paid to trade stocks and other securities on behalf of customers. (This is different than giving investment advice, though some brokers may also be registered investment advisers.) There are two kinds of brokers: full-service and discount. Full-service brokers dispense advice and can even manage your portfolio – for a price. For example, a full-service broker may charge between 1.0% and 1.5% of the dollar amount of a stock purchase. So if you were to buy $5,000 worth of stock with a broker fee of 1.0%, you would have to pay $50 for that transaction. Some full-service brokers offer flat fees instead. By contrast, discount brokers may do little more than complete transactions for you – at a more reasonable price. Some online discount brokers, for instance, offer trades for under $10. One type of discount broker, known as a share broker, charges a fee per share traded. Share brokers typically charge less per share for larger trades. No matter what kind of broker you choose, read the fine print about fees. For example, sometimes there are strings attached to cheap trades, such as requirements to make a certain number of trades per month or to maintain a minimum balance
  • Can you buy stocks through a mutual fund?
    Definitely – and this is often a better idea than buying them individually, in part because you get greater diversification for your dollar.
  • How are stocks taxed?
    Yes. Put as much money as you can into tax-sheltered retirement accounts, such as 401(k)s and IRAs. That’s because the investments in those accounts grow tax-free until retirement – meaning you’ll wind up with way more money in your old age than you would have otherwise. When you own stocks outside of tax-sheltered retirement accounts such as IRAs or 401(k)s, there are two ways you might get hit with a tax bill. If your stock pays a dividend, those dividends generally are taxed at a rate of up to 15% at the end of each year. In addition, if you sell a stock, you pay 15% of any profits you made over the time you held the stock. Those profits are known as capital gains, and the tax is called the capital gains tax. One exception: If you hold a stock for less than a year before you sell it, you’ll have to pay your regular income tax rate on the gain – a rate that’s usually higher than the capital gains tax.
  • What are dividends?
    A dividend is a payout that some companies make to shareholders that reflects the company’s earnings. Often paid out quarterly (every three months), dividends give stockholders a steady return, regardless of what happens to the stock price. Typically, older, well-established companies pay dividends, while newer companies do not. Dividends are not guaranteed, so a company can stop paying them at any time. To keep your money growing as fast as possible, it’s smart to keep reinvesting your dividends rather than spending them when you receive them. The easiest way to do this is to sign up for a dividend reinvestment plan (DRIP), which will make reinvestment automatic.
  • What are dividends?
    A dividend is a payout that some companies make to shareholders that reflects the company’s earnings. Often paid out quarterly (every three months), dividends give stockholders a steady return, regardless of what happens to the stock price. Typically, older, well-established companies pay dividends, while newer companies do not. Dividends are not guaranteed, so a company can stop paying them at any time. To keep your money growing as fast as possible, it’s smart to keep reinvesting your dividends rather than spending them when you receive them. The easiest way to do this is to sign up for a dividend reinvestment plan (DRIP), which will make reinvestment automatic.


  • What’s a bond?
    Essentially, a bond is a fancy IOU. Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money to the issuer – be it General Electric or Uncle Sam – for a certain period of time. In return, you get interest on the loan, and you get the entire loan amount paid back either on a specific date (known as the bond’s maturity date) or at a future date of the issuer’s choice. The length of time to maturity is called the bond’s term. Bond investors have a language all their own. A bond’s value when it’s issued is known as its “par value,” and its interest payment is known as its “coupon.” For example, a $1,000 bond paying 7% a year has a $70 coupon. Expressed another way, its “coupon rate” is 7%.
  • How much money can I make on a bond?
    It depends on the company, government or agency that’s issuing the bond, as well as what the bond’s maturity is. Generally, the less stable the issuer, the higher the interest rate it will pay. That’s because the issuer has to make it worthwhile to investors, given the greater risk that a less-stable issuer will default on its bond payments. Treasury bills, issued by the U.S. government, are considered the safest of all. Typically, the longer the bond’s term, the higher the interest rate it will pay.
  • How do bond returns compare with stock returns?
    Over the long term, stocks do better. Since 1926, large stocks have returned an average of 9.8% per year; long-term government bonds have returned between 5% and 6%, according to investment researcher Ibbotson Associates.
  • What are the advantages of bonds for retirement?
    Bonds might not provide as much bang as stocks, but they are an essential part of everyone’s retirement portfolio. Here are some of the benefits they can provide: Stability. Bonds are less likely to lose money than stocks are. So buying some bonds and some stocks can reduce your portfolio’s losses during stock market declines. Income. Bonds pay interest regularly, so they can help generate a steady, predictable stream of income from your savings. Security. Next to cash, U.S. Treasurys are the safest, most liquid investments on the planet. Short-term bonds can be a good place to park an emergency fund, or money you’ll need relatively soon. Tax savings. Certain bonds provide tax-free income. These bonds usually pay lower yields than comparable taxable bonds, but may provide higher after-tax income to investors in high tax brackets. For more on tax considerations, see How are bonds taxed?
  • How are bonds taxed?
    Bonds generate income which may be taxable. Interest on corporate bonds is taxable, but some government bonds may be exempt from certain taxes. For example, Treasurys are free from state and local taxes, but you will owe federal taxes. Munis, on the other hand, are federal-tax free and may be exempt from state and local taxes if you live in the state that issued them. You can also make your portfolio more tax efficient by taking advantage of certain retirement accounts.
  • What are the risks in bonds?
    Here are three of the major ones: Inflation risk. Most bonds’ payments are fixed. But prices of the things you need to buy keep on going up. The longer a bond’s term, the greater the chance that the payout won’t keep pace with inflation. Credit risk. This is the risk that your bond issuer will be unable to make its payments on time or at all. U.S. Treasury bonds are considered to have virtually no credit risk, while high-yield, or “junk,” bonds – issued by companies with weak finances – have high credit risk. Interest rate risk. Though a bond’s life span and interest payments are fixed – thus the term “fixed-income” investment – its overall return can vary based on changes in the economy and the markets. Bonds are traded just like stocks, so changes in the economy and the markets can cause bond prices to rise or fall. Bond prices move in the opposite direction of interest rates – that is, when rates rise, bond prices fall. The longer the term of the bond, the greater the price fluctuation that results from any change in interest rates. (Note that price fluctuations matter only if you intend to sell a bond before maturity, or if you invest in a bond fund whose manager trades regularly.)
  • Which bonds are good for a retirement portfolio?
    In order to get adequate diversification, it’s a good idea to spread the bond portion of your portfolio among various Treasury bonds, high-grade corporate bonds and, if you’re in a high tax bracket, municipal bonds (because interest on munis is tax-free). You’ll probably want to steer clear of riskier high-yield bonds – also known as junk bonds.
  • What are TIPs?
    TIPS are Treasury Inflation Protected Securities, and they can be a terrific idea for retirement investors. TIPS pay a fixed coupon rate of interest that’s lower than that of regular Treasury bonds. But the principal, or face value, of TIPS is adjusted to keep pace with changes in the consumer price index. The result is that as inflation rises, so do the interest payments and the face value of your TIPS. That gives you a sure hedge against inflation – a great thing if you’re worried about outliving your money in retirement.
  • How should I buy bonds?
    You can buy just about any bond through a broker, just as you would a stock. Transaction costs can be much higher than they are for stocks, though. However, if U.S. Treasurys or TIPS are what you’re after, you can (and probably should) buy them directly from the Feds. By doing so, you’ll save yourself the fee you’d pay at a bank or a broker. U.S. Treasurys are sold by the federal government at regularly scheduled auctions. For more information, go to the TreasuryDirect Web site. Getting your bonds through mutual funds is smart for most small investors. The biggest reason is diversification. Because bonds are sold in large units, you might only be able to purchase one or a handful of bonds on your own – but as a bond fund holder you’ll own stakes in dozens, perhaps hundreds, of bonds. You’ll need about $25,000 to $50,000 to achieve adequate diversification among individual bonds; if you don’t have that, then you’re better off in a bond mutual fund.
  • How much of my portfolio should be in bonds?
    In general, the further from retirement you are, the more you should favor stocks’ long-term growth potential over bonds’ stability and income. As you approach and enter retirement, you can gradually shift more assets from stocks to bonds to get greater stability.
  • Should I buy short-term or long-term bonds?
    All else being equal, a bond with a longer maturity usually will pay a higher interest rate than a shorter-term bond. For example, 30-year Treasury bonds often pay a full percentage point or two more interest than five-year Treasury notes. The reason: A longer-term bond carries greater risk that higher inflation could reduce the value of payments, as well as greater risk that higher overall interest rates could cause the bond’s price to fall. Bonds with maturities of one to 10 years are sufficient for most long-term investors. They yield more than shorter-term bonds and are less volatile than longer-term issues.


  • What is an IRA?
    RA stands for Individual Retirement Account, and it’s basically a savings account with big tax breaks, making it an ideal way to sock away cash for your retirement. A lot of people mistakenly think an IRA itself is an investment – but it’s just the basket in which you keep stocks, bonds, mutual funds and other assets. Unlike 401(k)s, which are accounts provided by your company, the most common types of IRAs are accounts that you open on your own. Others can be opened by self-employed individuals and small business owners. There are several different types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Unfortunately, not everyone gets to take advantage of them. Each has eligibility restrictions based on your income or employment status. And all have caps on how much you can contribute each year and penalties if you yank out your money before the designated retirement age.
  • Why is an IRA a good deal?
    Because money in the plan grows free from the clutches of Uncle Sam. That is, the income from interest, dividends and capital gains can compound each year without taxes nipping away at it. In addition, you also can escape taxes on either the money you put into the plan initially or on the money you withdraw in retirement, depending upon whether you choose a traditional or Roth IRA. So what’s the catch? The government limits the amount of money you can put into an IRA each year. Most people under 50 can contribute no more than $5,000 a year; that limit rises if you’re older.
  • How much should I put into an IRA?
    It’s generally a good idea to put as much in an IRA as the government allows you to. That’s because the more you save in a tax-favored account, the more tax-protected gains you can rack up. If you’re younger than 50, your 2012 contributions to a traditional IRA or a Roth IRA are limited to $5,000 or the total of your taxable compensation, whichever is smaller. If you’re 50 or over before the end of the year, you’re allowed to contribute up to an additional $1,000 for a total yearly contribution of $6,000; this is the IRS’s way of encouraging you to save more in the final years before retirement. However, the amount you can contribute to a Roth IRA also depends on your income. To make the full contribution, your modified adjusted gross income must be less than $125,000 if you’re single, or $183,000 as a married couple filing jointly. If you earn slightly above those amounts, you may be able to make smaller contributions.
  • Who can put money into an IRA?
    It depends on what kind of IRA it is. Almost anyone can contribute to a traditional IRA, provided you (or your spouse) receive taxable income and you are under age 70 ½. But your contributions are tax deductible only if you meet certain qualifications. For more on those qualifications see Who can contribute to a traditional IRA? Roth IRA contributions are never tax deductible, and you must meet certain income requirements in order to make contributions. For 2012, your modified adjusted gross income must be $183,000 or less if you are married and filing jointly; $125,000 or less if you are single, head of household or married filing separately (and didn’t live with your spouse at any point during the year). Those who make slightly above these limits may still be able to make partial contributions. For more see
  • Who can contribute to a Roth IRA?
    SIMPLE and SEP IRAs are for self-employed individuals or small business owners. To set up a SIMPLE IRA an employer must have 100 or fewer employees earning more than $5,000 each. And the employer cannot have any other retirement plan besides the SIMPLE IRA. Any business owner or individual with freelance income can open a SEP IRA.
  • How do my IRA withdrawals get taxed in retirement?
    Your withdrawals from a Roth IRA are tax free as long as you are 59 ½ or older and your account is at least five years old. Withdrawals from traditional IRAs are taxed as regular income, based on your tax bracket for the year in which you make the withdrawal.
  • When can I access money in my IRA?
    You can take money out of an IRA whenever you want, but be warned: if you’re under age 59 ½, it could cost you. That’s because the government wants to discourage you from raiding your IRA until you’re retired. (It’s a retirement account, after all.) If you are under 59 ½: If you withdraw any money from a traditional IRA, you’ll be slapped with a 10% penalty on the amount you withdraw. That’s in addition to the regular income tax you’ll owe on your withdrawal. Bad idea. Roth IRAs offer a bit more flexibility. Generally, you may withdraw your contributions to a Roth penalty-free at any time for any reason, as long as you don’t withdraw any earnings on your investments (as opposed to the amount you put in) or dollars converted from a traditional IRA before age 59 ½. In that case, you’ll get hit with that same 10% penalty. Not sure which money is considered a contribution and which is considered earnings? The IRS views withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and then earnings. So if you take out more than you’ve contributed in total, then you’re starting to dip into conversion dollars or earnings, and will be penalized and taxed accordingly. If you’re 59 ½ or older: You can usually make penalty-free withdrawals (known as “qualified distributions”) from any IRA. But you’ll still owe the income tax if it’s a traditional IRA. To make qualified distributions from a Roth IRA, you must be at least 59½ and it must be at least five years since you first began contributing. And if you converted a regular IRA to a Roth IRA, you can’t take out the money penalty-free until at least five years after the conversion. Just to make it more confusing, there are several exceptions to these rules.
  • When are IRA withdrawals penalty-free?
    If you’re 59 ½ or older you’re usually all clear. But if you’re younger than that, you will get hit with a penalty for early withdrawals from traditional IRAs, or early withdrawals onearnings from Roth IRAs. But you can escape that 10% tax penalty if you’re withdrawing the money for a few specific reasons. These include:

    • Paying college expenses for you, your spouse, your children or grandchildren.
    • Paying medical expenses greater than 7.5% of your adjusted gross income.
    • Paying for a first-time home purchase (up to $10,000).
    • Paying for the costs of a sudden disability.

    Also, if you put money into your IRA but then decide you need it back, you can generally “take back” one contribution made to a traditional IRA without paying tax, as long as you do it before the tax filing deadline of that year and do not deduct the contribution from your taxes. You can also withdraw money from a traditional IRA and avoid paying the 10% penalty if you roll the money over into another qualified retirement account (such as a Roth IRA) within 60 days. But then you wouldn’t actually be able to spend it. Are you really that desperate for cash? Well, if so, it is possible to take money out of your traditional IRA in what’s called “substantially equal periodic payments.” Here’s how it works: The IRS will determine what amount you can receive each year based on your life expectancy. That’s the amount you mustwithdraw each year. Sound too good to be true? The method is certainly not without risks. Once you start substantially equal periodic payments, you can’t stop the payments until you’re 59½ or five years have passed, whichever is longer. So there’s no changing your mind. If you change or stop these withdrawals at any time, you’ll get hit with that 10% penalty – applied retroactively from the time you first began receiving payments. So it’s generally not a great idea if you’re under 50. Even if you are over 50, you’ll be eating away at your retirement nest egg, rather than building it up. That means you’re likely to come up short when you actually do retire.

  • When do I have to start taking the money out of an IRA?
    If you have a traditional IRA, you must take required minimum distributions starting in the year you turn 70 ½. The amount of the distribution depends on how much you have saved in the account and on your life expectancy, according to tables published by the IRS. If you own a Roth, you can leave the money in for as long as you want.
  • What if I need the money in my IRA before retirement?
    If you withdraw money from a traditional IRA before you turn 59 ½, you must pay a 10% tax penalty (with a few exceptions). The same rule applies if you withdraw investment earnings from a Roth IRA. The exceptions involve cases in which you use the withdrawal to pay for college expenses, to buy your first home (up to $10,000) or for medical expenses greater than 7.5% of your AGI (adjusted gross income), or in case of disability. For more, see Can I take money from my IRA without penalty?
  • How should I invest the money?
    The IRS dictates a few ways in which you can’t use the money in your IRA, including lending money to yourself, using it as collateral for a loan and buying real estate for your personal use. Beyond those exceptions, you can invest in just about anything: mutual funds, individual stocks and bonds, annuities and even certain real estate. It’s a good idea to diversify your assets among stocks, bonds and cash. Stocks can provide long-term growth potential, while bonds and cash offer some protection against market setbacks. The allocation that’s right for you comes down to how long you’ll have your money invested and what sort of short-term ups and downs you’re willing to accept in the value of your portfolio. The longer your investment horizon, the more it makes sense to invest in stocks. But if you can’t stomach occasional market downturns, you might want to hold a larger share of bonds. For more on asset allocation, see What’s the best way to divide my retirement investments? And for instant advice on how to divvy up your portfolio among different types of stocks and bonds, depending on your particular time horizon and risk tolerance, go to our Asset Allocation tool.
  • Stocks? Bonds? What’s the right mix?
    We know: You want to pick a home-run stock, cash out at the top and – bam! – enjoy an instant retirement. Unfortunately, it rarely works out that way. The good news, however, is that smart retirement investing is actually much, much easier. The key is having the right mix of stocks, bonds and cash. The mix of those three asset classes is known as your “asset allocation.” Pick your asset allocation wisely, and it will do the work for you.
  • Should my asset allocation change as I get older?
    Absolutely. That’s because different investment mixes are riskier than others, and your tolerance for risk decreases as you age. Stocks – which are shares of ownership in a corporation – provide the most juice for long-term growth. But they’re volatile, so they can lose you a lot of money in the short term. When you’re young, the long-term growth potential of stocks outweighs the risks. When you’re older, not so much. So you should scale back on the percentage of stocks in your portfolio over time. Bonds – which are basically interest-bearing loans that you provide a company or government – give you weaker long-term returns than stocks do, but less volatility. So you should increase the percentage of your holdings in bonds over time. Cash – or “cash equivalents,” such as money-market funds – are the least risky of all. But they also have the lowest returns. You might not need cash in your retirement account at all until you’re approaching retirement age or in retirement.

Investments-Mutual Funds

  • What is a mutual fund?
    It’s simply a pool of money from thousands of people like you that invests in certain things. One mutual fund might invest in the stocks of large U.S. companies. One might invest in Treasury bills. Another might invest in a huge assortment of stocks, bonds, real estate, cash equivalents and other securities. You name it, and there’s probably a mutual fund that’s already investing in it. Each investor in the fund gets a slice of the total pie, sharing in the fund’s gains – or losses.
  • What types of mutual funds are there?
    There’s a truly dizzying array of choices. For example, there are funds that invest just in stocks. There are funds that invest just in bonds. There are funds that invest in both stocks and bonds all over the globe. There are funds that invest just in tiny companies that whittle wooden birdhouses in Slovenia. (OK, we made that one up. But it’s probably on its way.) Needless to say, all this variety can make you insane. Don’t let it. When it comes to investing for retirement, you need only a few basic kinds of mutual funds – and, if you really want to make things as simple as possible, you can get away with just one fund.
  • Who manages a mutual fund?
    A professional fund manager – or a team of managers – makes the decisions about what to buy and sell within the fund. Those decisions should follow the investing philosophy laid out in the fund’s prospectus (a document that you should read and agree with before investing). Individual mutual funds are usually part of a large company known as a mutual fund “family,” such as Fidelity, T. Rowe Price or Vanguard. Each family typically has lots of fund options to choose from. To make your life easier, you can stick with one good fund family and buy different funds from within it. In fact, if you’re investing in a company-provided retirement plan, such as a 401(k), you may have only one family’s funds available to you.
  • What are the advantages of mutual funds?
    The biggest advantage is the instant diversification a fund can give you. Many people don’t have enough money to buy a portfolio of stocks and bonds that is varied enough. Pooling your money with thousands of other investors solves that problem, ideally spreading your money across enough investments to reduce the risk of you being wiped out by any single bad bet. Another advantage is that investing in mutual funds saves time. You’ve essentially hired a professional investor to monitor your portfolio’s holdings and do his or her best to buy and sell at appropriate times. You don’t have to spend your time poring through stock Web sites and company news in order to make those decisions yourself. (Of course, if you love doing that, then investing in individual stocks and bonds may be right for you.)
  • What kinds of stock funds should I consider?
    Funds are broken down into various categories. Here are a few you should look at: By size. For the best diversification, you want to buy stock funds that invest in companies of different sizes – that is, small-cap, mid-cap and large-cap companies. You can do this by choosing three different funds that invest in each sized company. Or you can choose one broad fund that invests in all of them at once, perhaps via a stock index fund. By type. If you think that small growth stocks are going to outperform the market, you could invest in a fund that chooses only growth stocks. If you think value stocks are the way to go, you could select a fund that invests in those stocks. For more, see What are the different types of stocks? By region. You also want to buy stock funds that invest in companies not just in the United States, but overseas as well. You can do this by adding an international fund to your mix. (Make sure you know what you’re buying. An international fund might invest in stable regions like Europe, or it might invest in riskier “emerging markets” regions, such as Latin America, Eastern Europe and mainland Asia. Or it could do all of the above.) By sector. You could also invest in a “sector” or “specialty” fund that holds stocks in just one industry, such as energy, technology or financials. There’s nothing wrong with devoting a percentage of your total stock holdings to such funds, as long as you remember that a hot sector one year could crash the following year. If you do choose to buy such funds, make sure the rest of your stock fund holdings are well diversified. That will limit your overall risk.
  • What’s a bond fund?
    Bond funds work just like stock funds, but they invest in – you guessed it – bonds rather than stocks. You can invest in bond funds just like you can stock funds. There are bond index funds, too, and they can be just as advantageous as stock index funds. The no-brainer approach is to choose something called a “total bond index fund,” which invests in – duh – the entire bond market. Bond funds that specialize in Treasury securities (including TIPS) are the safest, but offer the lowest potential return. Bond funds that invest in more volatile types of bonds tend to offer higher potential returns.
  • What kinds of funds are best for retirement?
    A good retirement portfolio should include both stocks and bonds – and maybe a little cash. Therefore, if you decide to do your investing via mutual funds, you need funds that invest in all of those asset classes. In order to be adequately diversified, you could pick a few different stock funds that invest in different kinds of stocks, plus a few different bond funds that invest in different kinds of bonds. Or, if you’d rather simplify things, you can buy a fund that invests in all that stuff at once. These funds are known as balanced funds, life-cycle funds or target-date funds.
  • What’s a stock index fund?
    Glad you asked, because it can be a terrific part of a retirement portfolio. But first you need to know what a stock index is. Thousands upon thousands of individual stocks are traded in the United States and around the world. A number of so-called indexes have been set up to track how a particular part of the stock market – or the stock market as a whole – is doing. There are indexes that track large-cap companies, small-cap companies, the entire stock market and so on. One of the most common indexes is the Standard & Poor’s 500, known as the S&P 500, which represents a broad cross section of 500 large American companies. What an index fund does is simple: It invests in the entire index. For example, an S&P 500 index fund buys all the stocks in the S&P 500 index. And that’s it. Just about every major mutual fund family offers index funds.
  • What makes an index fund a good choice?
    For one thing, you know exactly what you’re getting, and you know exactly what part of the market you’re tracking. Funds based on the S&P 500, by definition, will never outperform the market: If the S&P rises 20% next year, your S&P 500 index fund should return about the same. But they won’t underperform the market, either. What’s more, because index funds aren’t “actively managed” – that is, the fund manager isn’t spending lots of time and effort scouting around for which stocks to buy and which to ditch – the annual fees for index funds tend to be lower than those for actively managed funds. (For more, see How much do mutual funds cost?) Those lower fees mean that index funds outperform the vast majority of actively managed funds over time. That’s more money in your pocket when you need it in retirement. Index funds also tend to rack up lower taxes each year than actively managed funds do.
  • Bonds vs. bond funds: Which is better?
    Well, the pros of bond funds are the same as for stock funds. Namely, you get professional research and management, and you get lots of diversification for your dollar. You can also reinvest bond payouts automatically – something you can’t do with individual bonds. Lastly, it’s easier to sell shares of bond funds than individual bonds. The biggest drawback to bond funds is that they don’t have a fixed maturity, so neither your principal nor your income is as certain as it would be with individual bonds. Fund managers are constantly buying and selling bonds in their portfolios. That means your interest payments will vary, as will the fund’s share price.
  • How much do mutual funds cost?
    Every company that manages a mutual fund charges an annual fee – generally 0.5% to 2.5% of assets – as well as certain other expenses. In addition, some funds slap you with a sales charge over and above those fees. Those funds are called “load funds.” (Funds that do not impose sales charges are known as “no-loads.”) Those sales charges are either a cut of new money you put into the fund, or a cut of withdrawals you make from the fund.
  • With fund expenses, how high is too high?
    Say you send two teams of runners out to run a marathon, but require one team to carry 25-pound backpacks. Which team do you think is likely to have the better average time? A fund’s expenses are like those backpacks: They can drag down your total return. By contrast, a mutual fund with low expenses will have an easier time delivering you solid returns. So you want to make sure you choose a fund with an “expense ratio” – the annual cost of owning the fund, divided by your investment – that’s reasonable. What’s reasonable? It depends on the kind of fund. Index funds should have the lowest fees, because they cost relatively little to run. You can easily find an S&P 500 index fund with an expense ratio of less than 0.2%, for example. For mutual funds that invest in large U.S. companies, look for an expense ratio of no more than 1%. And for funds that invest in small or international companies, which typically require more research, look for an expense ratio of no more than 1.25%.
  • Which is better, a load fund or a no-load fund?
    Here’s another question: Who benefits from the sales charges that a load fund imposes? Why, the oh-so-wise broker who steered you into the fund. You don’t benefit at all – in fact, usually quite the opposite. Say you’re looking at a fund with a 4.5% load. By paying it, you’re immediately putting yourself $45 in the hole for every $1,000 you spend. That’s $45 extra you have to make to match a similar no-load fund’s performance – and remember, that’s on top of the annual expenses you’d pay with any fund. And there’s no evidence that the typical load fund outperforms the typical no-load fund. The moral here: Stick with no-load funds if you can.
  • How can I tell if a fund is performing well?
    You can’t know how well it will perform in the future. If there were a foolproof way to know how well a given fund will do in the future, we could all retire at 30. But no one can know for sure. But you can check out a fund’s past performance relative to that of its peers. That is, if you’re considering a small-cap fund, compare its performance to the average for all small-cap funds. Be sure to compare performance over the long term – at least three years and preferably five years. You can get a fund report with this information by punching in a mutual fund ticker into the quote box above. But even though a good track record might offer some insight into whether the fund is well-managed, you still can’t be certain whether that past performance will continue.
  • How do I know when should to sell a fund?
    Just because your fund is down doesn’t necessarily mean you should sell. Markets move in cycles, so an investment that’s doing poorly this year might do much better next year. However, here are three clues that the time to sell may have arrived. The fund is a persistent loser. That is, it has trailed similar funds for two years by a substantial margin – say, two percentage points or more. The fund’s investment strategy has changed. A small-cap fund manager should be sticking to small-cap stocks; a large-cap value fund manager should be buying large-cap value stocks. If that strategy changes – say, because the fund has a new manager – it messes up your overall asset allocation. You could use the tax loss. (This applies only to funds in a taxable account.) Let’s say you own shares in a large-cap growth fund that are worth less than you paid for them. If you sell, you can use the “realized” loss to offset your gains in other investments, thereby lowering your tax bill for the year. In order to keep your asset allocation on target, you can turn right around and buy another large-cap growth fund. Or even buy back the very same fund after 31 days.
  • What’s an exchange-traded fund?
    Exchange-traded funds, or ETFs, were invented to combine the simplicity and low costs of index mutual funds with the flexibility of individual stocks. Unlike most mutual funds, ETFs trade on exchanges, where you can buy and sell them anytime the market is open. With ETFs you can track broad market indexes such as the S&P 500, gaining instant diversification. You pay super-low fees. And you don’t get hit with a tax bill (most of the time) until you sell. There are some 700 ETFs on the market today.
  • What’s an exchange-traded fund?
    Exchange-traded funds, or ETFs, were invented to combine the simplicity and low costs of index mutual funds with the flexibility of individual stocks. Unlike most mutual funds, ETFs trade on exchanges, where you can buy and sell them anytime the market is open. With ETFs you can track broad market indexes such as the S&P 500, gaining instant diversification. You pay super-low fees. And you don’t get hit with a tax bill (most of the time) until you sell. There are some 700 ETFs on the market today.
  • What’s better: ETFs or mutual funds?
    If you’re trying to track the performance of a large index, your results will be similar whether you choose an index fund or an index ETF. But which is right for you comes down to whether you want to invest a big chunk of money all at once, or smaller chunks of money over time. If you want to invest a big chunk at once – for example, you’re doing a rollover of a 401(k) or an IRA – you’re better off with an ETF. By contrast, if you want to invest $200 a month (or you tend to invest sporadically with modest amounts of money), you’re probably better off in a regular mutual fund; overall, the fees will be lower.
  • What do ETFs invest in?
    The first ETFs tracked plain-vanilla indexes, like the S&P 500. But as investors poured money into ETFs, investment companies eager to capture that business began engineering new, supposedly innovative ETFs that are complicated, risky and more expensive – just the reverse of what ETFs are supposed to be. Some of these new ETFs use borrowed money to boost returns. Others track narrow slices of the market, such as nanotechnology.
  • What do ETFs cost?
    The biggest plus of ETFs is their low annual operating costs. Their expenses are not only well below those of traditional mutual funds, but in many cases even less than the expenses levied by their index fund counterparts.
  • How do I buy an ETF?
    Probably the biggest disadvantage to ETFs is that you’ve got to buy them through a broker. Even with the low fees available at discount and online brokers these days, brokerage commissions can seriously erode ETFs’ low-expense advantage, especially when you’re investing small sums of money. For example, if you were planning to invest $100 a month in ETFs, even a cost of just $10 per trade would mean 10% of your investment is being siphoned off. So your ETFs’ price would have to rise 10% just to recoup your buying cost. And don’t forget that you’ll have to pay a commission when you sell, too.
  • How do I choose an ETF?
    Keep it simple. Forget about the fancy, complicated new ETFs hitting the market. Pick those that track broad market indexes. Among those, choose funds with strong performance records and rock-bottom fees. You can put together a simple yet fully diversified portfolio by spreading your money among just five or so ETFs.


  • What is an annuity?
    An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. Here’s how an annuity works: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. The size of your payments are determined by a variety of factors, including the length of your payment period. You can opt to receive payments for the rest of your life, or for a set number of years. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity’s underlying investments (variable annuity). While annuities can be useful retirement planning tools, they can also be a lousy investment choice for certain people because of their notoriously high expenses. Financial planners and insurance salesmen will frequently try to steer seniors or other people in various stages toward retirement into annuities. Anyone who considers an annuity should research it thoroughly first, before deciding whether it’s an appropriate investment for someone in their situation.
  • What are the different types of annuities?
    There are two basic types of annuities: deferred and immediate. With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement. If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment. For example, you might consider purchasing an immediate annuity as you approach retirement age. The deferred annuity accumulates money while the immediate annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments. Within these two categories, annuities can also be either fixed or variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.
  • What are the advantages of annuities?
    The biggest advantages annuities offer is that they allow you to sock away a larger amount of cash and defer paying taxes. Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs, there is no annual contribution limit for an annuity. That allows you to put away more money for retirement, and is particularly useful for those that are closest to retirement age and need to catch up. All the money you invest compounds year after year without any tax bill from Uncle Sam. That ability to keep every dollar invested working for you can be a big advantage over taxable investments. When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life, providing a steady stream of income. The annuity serves as a complement to other retirement income sources, such as Social Security and pension plans.
  • What are the disadvantages?
    Many annuities sound like great moneymakers, but there are often hidden fees that can cut into any profits the annuity pays out, so buyer beware. Commissions: For starters, most annuities are sold by insurance brokers or other sales people who collect a commission that can be steep – as much as 10% or so. Surrender charges: You’re also likely to face a prohibitive surrender charge for pulling money out of an annuity within the first several years after you buy it. The surrender charge typically runs about 7% of your account value if you leave after one year, and the fee generally declines by one percentage point a year until it gets to zero after year seven or eight. Note that some annuities come with even heftier surrender charges – up to 20% in the first year. High annual fees: If you invest in a variable annuity you’ll also encounter high annual expenses. You will have an annual insurance charge that can run 1.25% or more; annual investment management fees, which range anywhere from 0.5% to more than 2%; and fees for various insurance riders, which can add another 0.6% or more. Add them up, and you could be paying 2% to 3% a year, if not more. That could take a huge bite out of your retirement nest egg, and in some cases even cancel out some of the benefits of an annuity. Compare that to a regular mutual fund that charges an average of 1.5% a year, or index funds that charge less than 0.50% a year. Also, as with a 401(k) or IRA, in an annuity it’s generally not a good idea to take out any money until you reach age 59 ½ because withdrawals made prior to that are hit with a 10% early withdrawal penalty.
  • Are there tax benefits to annuities?
    Yes. Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate.
  • What investment options do annuities have?
    It depends on which type of annuity you have. If you choose a fixed-rate annuity, you are not responsible for choosing the investments – the insurance company handles that job and agrees to pay you a pre-determined fixed return. When you opt for a variable annuity, you decide how to invest your money in the sub-accounts (essentially mutual funds) offered within the annuity. The value of your account depends on the performance of the funds you choose. While a variable annuity has the benefit of tax-deferred growth, its annual expenses are likely to be much higher than the expenses on regular mutual funds – so ordinary funds may be a better option.
  • Do annuities have higher fees than other retirement options?
    No. Some investment companies sell annuities without charging a sales commission or a surrender charge. These are called direct-sold annuities, because unlike an annuity sold by a traditional insurance company, there is no insurance agent involved. With the agent out of the picture there is no need to charge a commission. Firms that sell low-cost annuities include Fidelity, Vanguard, Schwab, T. Rowe Price, Ameritas Life and TIAA-CREF.
  • What payout options do I have?
    When you invest in your annuity you also choose how you want your eventual payouts to be calculated. Your options include: Income for guaranteed period (also called period certain annuity). You are guaranteed a specific payment amount for a set period of time (say, five years or 30 years). If you die before the end of the period your beneficiary will receive the remainder of the payments for the guaranteed period. Lifetime payments. A guaranteed income payout during your lifetime only; there is no survivor benefit. The payouts can be fixed or variable. The amount of the payout is determined by how much you invest and your life expectancy. At the time of death all payments stop – your heirs don’t get anything. Income for life with a guaranteed period certain benefit(also called life with period certain). A combination of a life annuity and a period certain annuity. You receive a guaranteed payout for life that includes a period certain phase. If you die during the period certain phase of the account, your beneficiary will continue to receive the payment for the remainder of the period. For example, life with a 10 year period certain is a common arrangement. If you die five years after you begin collecting, the payments continue to your survivor for five more years. Joint and survivor annuity. Your beneficiary will continue to receive payouts for the rest of his or her life after you die. A popular option for married couples.
  • Should I hold an annuity within my IRA?
    Probably not a good idea. Since one of the main advantages of an annuity is that your money grows tax-deferred, it makes little sense to hold one in an account like an IRA, which is already tax-deferred. It’s a little like wearing a raincoat indoors. There are a few exceptions. If you’re retired or very close to retiring and you feel you need more guaranteed income than social security will provide, it can make sense to use a portion of your 401(k) or IRA money to buy an immediate annuity that will pay income for life.
  • How do I know the company will honor my future payments?
    It is possible you could lose your money if the insurance company you invested with goes belly up. When you purchase a deferred annuity you are giving an insurance company money today, and you may not receive your payments for a number of years (the earliest you can make withdrawals from an annuity without incurring a 10% penalty is age 59 ½). So it is critical to purchase annuities only from insurance companies that you’re confident will be in business when you retire. Check the insurer’s credit rating, a grade given by credit bureaus such as A.M. Best, Standard & Poor’s and Moody’s that expresses the company’s financial health. Each rating firm has its own grading scale. As a general rule, limit your options to insurers that receive either an A+ from A.M. Best or AA- or better from Moody’s and S&P. You can find the ratings online, or get them from your insurance agent. There are state guaranty funds that protect annuity owners if an insurance company fails, but the coverage is limited and varies from state to state.
  • How do I know if buying an annuity is right for me?
    Typically you should consider an annuity only after you have maxed out other tax-advantaged retirement investment vehicles, such as 401(k) plans and IRAs. If you have additional money to set aside for retirement, an annuity’s tax-free growth may make sense – especially if you are in a high-income tax bracket today. Annuities have some significant drawbacks. For one, you must be willing to sock away the money for years. If you make a withdrawal within the first five to seven years and you typically will be hit with surrender charges of up to 7% of your investment or more. Annuities frequently charge other high fees as well, usually including an initial commission that can be up to 10% of your investment. If you purchase a variable annuity, ongoing investment management and other fees often amount to 2% to 3% a year. These fee structures can be complex and unclear. Insurance agents and others who sell them may tout the positive features and downplay the drawbacks, so make sure that you ask a lot of questions and carefully review the annuity plan first. Before you invest, you should compare that fee structure with regular no-load mutual funds, which levy no sales commission or surrender charge and impose average annual expenses of less than 0.5% (for index funds) or about 1.5% (actively managed funds), and determine whether you might be better off going that route on your own. It’s also important to understand that earnings you withdraw from an annuity will be taxed as ordinary income, no matter how long you have owned the account. The maximum income tax rate today is 35%, but if you’ve got a while before you retire, you can be certain tax rates won’t increase.
  • What if I decide to withdraw the money?
    Withdrawing money from an annuity can be a costly move, so make sure you review your plan’s rules and federal law before you do. If you make withdrawals before you reach age 59 ½ , you will be required to pay Uncle Sam a 10% early withdrawal penalty as well as regular income tax on your investment earnings. (The amount you contributed to the annuity will not be not taxed.) If your withdrawals come within the first five to seven years that you own the annuity, you probably will owe the insurance company a surrender charge. The surrender charge is typically 7% or so of your withdrawal amount if you leave after just one year, and the fee then typically declines by one percentage point a year until it gets to zero after year seven or eight. Beware: Some annuities have initial surrender charges that can be as high as 20%. But check your plan’s rules, because some annuities allow you to withdraw up to 10% of your investment without having to pay the surrender charge.
  • What happens to my annuity after I die?
    It depends on the type of annuity and how your payouts are calculated. There are several different methods. You do have the option of naming a beneficiary on your annuity, and with certain types of payout options that beneficially could receive the money in your annuity when you die. Other options just pay out during your lifetime, and the payments stop when you die.
  • Should I exchange my existing annuity for a new one?
    Read all the sales documents yourself and make sure you are aware of every potential fee. Never rely on the salesperson’s explanation alone. Be especially cautious if anyone suggests you exchange your existing annuity for a new annuity. Annuity exchanges are known as 1035 swaps, after the section of the IRS code that regulates them. A salesperson may tell you a 1035 swap is a great deal, because it allows you to get the features of a new annuity without incurring any taxes. What you might not be told is that the exchange earns a fat sales commission for the insurance agent. What’s more, by moving into a new annuity, you will start a new surrender period. For example, say you have owned an annuity for 10 years. You probably could close out your account without paying a surrender charge. But if you swap that annuity for a new one, you will be hit with a surrender charge of about 7% to close the account within the next seven years or so. You can learn more about annuities, and how to protect yourself, at the Securities and Exchange Commission Web site.
  • What if I bought an annuity I no longer want?
    You can ask to surrender the annuity. If you have owned the annuity for less than seven years or so, you may have to pay a surrender charge. That fee can start at around 7% if you pull out in the first year you own the annuity, and then it typically declines by one percentage point a year until it disappears after seven or eight years. You also will have to pay income tax on all the investment earnings in your annuity, and if you are younger than 59 ½ you typically will be hit with a 10% early withdrawal penalty courtesy of the IRS. Alternatively, you can opt to transfer your money to another annuity in what is known as a 1035 exchange. The surrender charge, if any, still applies, but you won’t incur any tax or penalty. But this method has some risks, as you might have to pay another sales commission, and your surrender clock can also start over again.

Investments-Roth IRA’s

  • What is a Roth IRA?
    A Roth IRA is a retirement savings account that allows your money to grow tax-free. You fund a Roth with after-tax dollars, meaning you’ve already paid taxes on the money you put into it. In return for no up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you pay no taxes. That’s right – every penny goes straight in your pocket.
  • How is a Roth IRA different from a regular IRA?
    The main difference between the two types of IRAs is when you pay taxes on your investments. Traditional IRAs can delay the taxes until retirement, but with Roth IRAs, you pay tax now rather than later. Here’s how it works: With a Roth IRA, there is no up-front tax break, but you don’t have to pay tax on withdrawals in retirement. That’s the opposite of a traditional IRA, which may allow you to deduct at least part of your contributions if you qualify, but requires you to pay income tax on money you withdraw in retirement. Both accounts allow investments within them to grow without getting clipped by taxes each year. There are other differences too. Roth IRAs offer a bit more flexibility than traditional IRAs do. You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason (but you’ll be penalized for withdrawing any investment earnings before age 59 ½ unless it’s for a qualifying reason). If you converted money from a traditional IRA into a Roth IRA, you can’t take it out penalty-free until at least five years after the conversion. Roth IRAs also let you leave your money untouched for as long as you like. With a traditional IRA, you must start making withdrawals called “required minimum distributions” after you reach age 70 ½. And while you can no longer make contributions to a traditional IRA after you have turned 70 ½, you can keep contributing to a Roth IRA regardless of your age.
  • What are the advantages of the Roth version?
    Roth IRAs offer a bit more flexibility than traditional IRAs do. You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason (but you’ll be penalized for withdrawing any investment earnings before age 59 ½ unless it’s for a qualifying reason). If you converted money from a traditional IRA into a Roth IRA, you can’t take it out penalty-free until at least five years after the conversion. Roth IRAs also let you leave your money untouched for as long as you like. With a traditional IRA, you must start making withdrawals called “required minimum distributions” after you reach age 70 ½. And while you can no longer make contributions to a traditional IRA after you have turned 70 ½, you can keep contributing to a Roth IRA regardless of your age.
  • Who can contribute to a Roth IRA?
    Roth IRA contributions are limited by income level. In general, you can contribute to a Roth IRA if you have taxable income and your modified adjusted gross income is either:

    • less than $167,000 if you are married filing jointly
    • less than $105,000 if you are single, head of household, or married filing separately (if you did not live with your spouse at any time during the previous year)
    • less than $10,000 if you’re married filing separately and you lived with your spouse at any time during the previous year.

    For more on whether you should contribute to a Roth or a traditional IRA see Which is better for me, a Roth or traditional IRA?

  • When can I take money out of a Roth?
    You can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make “qualified distributions” in retirement, you must be at least 59½ years old, and at least five years must have passed since you first began contributing. You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½, unless it’s for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after the conversion. Not sure whether the money will be counted as contributions or earnings? Well, the IRS views withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let’s say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000.
  • When do I have to withdraw money from a Roth?
    You don’t. While traditional IRAs require that you take minimum withdrawals starting at age 70 ½, Roths have no mandatory withdrawal requirements. So if you retire and you have other assets to live off of, you can leave the money in your Roth and allow it to continue to grow for as long as you like. That’s a terrific advantage Roths have over traditional IRAs.
  • Which is better for me, a Roth or traditional IRA?
    Start by looking at your income. There are income limits for Roth IRAs, so if your income is above those limits, then it’s a no-brainer: a traditional IRA is the only one for you. Let’s say you’re eligible for both a Roth and a traditional IRA. Generally, you’re better off in a traditional if you expect to be in a lower tax bracket when you retire. By deducting your contributions now, you lower your current tax bill. When you retire and start withdrawing money, you’ll be in a lower tax bracket, thereby giving less money overall to the tax man. If you expect to be in the same or higher tax bracket when you retire, you may instead want to consider contributing to a Roth IRA, which allows you to get your tax bill settled now rather than later. But it can be difficult, if not impossible, to guess what tax bracket you will be in later in life, particularly if you’ve got a long way to go until you retire. So if you’re not sure, another rule of thumb is to keep your retirement savings tax diversified, meaning you have accounts that will be both taxable and tax-free when you cash out in retirement. For example, if you already have a tax-deferred 401(k) plan through your employer, you might want to invest in a Roth IRA if you are eligible. The Roth also offers more flexibility: You can withdraw your contributions (but not the earnings) without incurring a penalty so you have more access to your money. So if you’ve got a long way to go before retirement, and you’re concerned about locking away your money for too long and want to be able to get at it if you need it, a Roth might be the way to go.


  • What Is Estate Planning?
    The implementation of a plan to address the following objectives: 1) Provide for management of personal and financial affairs in the event of incapacity 2) Provide for the transfer of assets in the event of death 3) Avoid or reduce Federal Estate Taxes
  • How is Estate Planning beneficial?
    1. Eliminate probate expenses and delays 2. Minimize taxes 3: Protect estate from joint ownership liabilities 4. Maintain privacy 5. Maintain and distribute the maximum value of the estate to the intended heirs
  • How does a Living Trust work?
    A Living Trust is a legal entity that, just like a Will, contains your instructions for what you want to happen to your assets when you die. Unlike a Will, a Living Trust avoids probate at death, can cover all of your assets, and may prevent the court from supervising the management of your assets if you become incapacitated.

    There are three basic entities when setting up a trust. The first is the Grantor. The Grantor ts the person who creates the trust. Next, is the Trustee. The Trustee is the person who manages the trust.Third, is the beneficiary. The Beneficiary is the person who benefits from the trust assets. Usually the Grantor, Trustee and beneficiary are the same person(s) creating the trust.

    A Successor Trustee is the person who steps in to administer the trust after the original Trustee (or Trustees in the case of a married couple) passes away or becomes incapacitated. The children, or other Beneficiaries, will become the new Beneficiaries of the trust upon the death of the Grantor Trustee/Beneficiary, if they are the same person.

    This type of trust: if properly written and funded, can do very useful things. First, it allows your Successor Trustee to take care of you in the event of your disability. It also allows your Successor Trustee to take care of others in the circumstances that you have described in your trust document.At your death, your trust will avoid the probate court process and allow fairly quick distribution of the assets in the trust to your ultimate Beneficiaries. For married couples, your trust may also help avoid or delay federal estate taxes if you have more than the Federal Estate Tax exemption amount. Advantages of a Living Trust

    • May Eliminate Probate
    • May Eliminate or Reduce Federal Estate Taxes
    • Transfers Assets Quickly to Heirs
    • Maintains Privacy
    • Maintains Privacy
    • Allows for More Control within the Family


  • What is probate?
    Probate is the process by which a Personal Representative, as designated in the Will and/or appointed by the Probate Court, manages and distributes a deceased person’s estate to his/her heirs or beneficiaries. If a resident of Michigan dies owning property in excess of $19,000 (in the state of Michigan) after deduction of funeral and burial expenses, then a probate estate is required.
  • How does it work?
    The following is a summary of the main probate steps: 1) Admission of Will and/or Appointment of the Personal Representative 2) Identify all assets 3) Identify and pay all liabilities 4) Identify all beneficiaries/heirs 5) Distribute assets
  • Does my Will avoid probate?
    NO. The Will typically nominates the Personal Representative and designates the beneficiaries, but the estate must still be probated. Even estates that are not contested must go through probate when a Will is used.
  • How does Probate impact carry out my final wishes?
    Throughout the probate process, there may be disputes. Anyone may make a claim on the estate, either by petitioning the Personal Representative or the court. Any dispute generally causes the court to treat the probate process more formally, and it may reach the point where the court must approve every transfer of every piece of property.
  • What are the negatives of the Probate process?
    TIME :- 9 months to 2 years in Michigan is typical FEES :- 3% – 8% of the probate estate is typical LACK OF PRIVACY :- Public knowledge of assets, liabilities and beneficiaries STRESS :- Aggravation due to court proceedings during an emotional time
  • Is there a cost associated with Probate?
  • What can I do to avoid probate?
    Due to the potentially high cost and complexity of the probate process, many people have looked for strategies to avoid probate without the use of an attorney or a formal estate plan. Each of the following methods to avoid probate is simple to create, but each has some possible unintended consequences:

    • Draft a quit claim deed
    • Set up payable-on-death or in-trust-for bank accounts (PODIITF)
    • Register securities as transfer-on-death accounts (TOD) * Title property or assets in joint owners.
    Quit Claim Deed Pitfalls

    Quit claim deeds that are recorded are immediate gifts, which may have negative property, income or gift tax consequences. Quit claim deeds that are not to be recorded until after death may be misplaced, resulting in probate or an unintended distribution. All joint owners must agree to the sale of the property in the future. / PODrrOD/lTF Pitfalls Lawsuits against any joint owner could put the property at risk due to liens and judgments. The true cost basis of the property may be calculated incorrectly. Sornetirnes the entire value of the property should receive stepped up valuation. Other times, only a portion should receive the stepped up valuation. Determining this on your own is tricky and could lead to tax problems. Quit claim deeds do not avoid the problems of Lifetime Probate.

    PODrrOD/lTF Pitfalls

    Most accounts do not accept per stirpes designations. This means you may disinherit grandchildren in the event a beneficiary predeceases you. Not every financial institution is required to offer these account registrations. The rules vary from company to company allowing for confusion and unintended distributions. These designations do not avoid the problems of Lifetime Probate.

    Joint Tenancy Pitfalls

    Any joint owner can withdraw cash assets. Sometimes joint owners improperly access or spend joint assets. Jointly owned property can sometimes be subject to the claims of the· creditors of any joint owner. If any joint owner is sued or divorces, joint assets could be at risk. Joint ownership of land and stock requires the signature of all owners to sell. Sometimes joint owners are unable, unavailable or unwilling to sign. Joint ownership may trigger gift taxes. Placing someone else’s names (i.e. children) on your assets could be considered a gift according to the IRS and require gfft taxes to be paid. Joint ownership may increase taxes at death. Assets held in joint tenancy may not receive full stepped up valuation upon death. So the stock you purchased for $10 per share and is now worth $20 dollars per share could be subject to a capital gain when it is sold after your death. Joint ownership may pass property to unintended heirs. By putting your two children as co-owners of your accounts, you are at risk of disinheriting your grandchildren should one of your children predecease you.

    Joint ownership does not avoid the problems of Lifetime Probate.

  • Does probate go through the court system?
    Yes. Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your Will. If you don’t have a valid Will, your assets are distributed according to state law.
  • What’s so bad about probate?
    It can be expensive. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs. Costs vary in each state, but are usually estimated at 3-8% of an estate’s value. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. It takes time, usually 9 months to 2 years. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.

    Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned and whom you owed. The process “invites” disgruntled heirs to contest your Will and can expose your family to unscrupulous solicitors. Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.

  • Doesn’t joint ownership avoid probate?
    Not really-it usually just postpones it. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at the same time,the asset must be probated before it can go to the heirs.
  • Why would the court get involved at Incapacity?
    If you can’t conduct business due to mental or physical incapacity (Alzheimer’s, stroke, heart attack, etc.), only a court appointee can sign for you-even if you have a Will. (Remember, a Will only goes into effect after you die.)

Common Trust Questions

  • I have a Will, why would I want a Living Trust?
    Contrary to what you’ve probably heard, a Will may not be the best plan for you and your family-primarily because a Will does not avoid probate when you die. A Will must be verified by the probate court before it can be enforced. Also, because a Will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take cootrol of your assets before you die-a concern of millions of older Americans and their families. Fortunately, there is a simple and proven alternative to a WiUthe Revocable Living Trust. It avoids probate, and lets you keep control of yOLUa’ssets while you are living- even if you become incapacitated-and after you die.
  • Does a durable power of attorney prevent this?
    A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. However, many financial institutions won’t honor one unless it’s on their form. And, if accepted, it may work too well, giving someone a “blank check” to do whatever he/she wants with your assets. It can be very effective when used with a Living Trust, but risky when used alone.
  • What is a Living Trust?
    A Living Trust is a legal document that, just like a Will, contains your instructions for what you want to happen to your assets when you die. But, unlike a Will, a Living Trust avoids probate at death, can control all of your assets, and prevents the court from controlling your assets at incapacity.
  • Should I consider a corporate trustee?
    You may decide to be the trustee of your Trust. However, some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don’t have the time, ability or desire to manage their trusts, or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable.
  • If something happens to me, who has control?
    If you and your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee,your hand picked successor trustee will step in. If a corporate trustee is already your trustee or co-trustee, they will continue to manage your Trust for you.
  • What does a successor trustee do?
    If you become incapacitated, your successor trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you automatically resume control. When you die, your successor trustee pays your debts and distributes your assets. All this is done quickly and privately, according to instructions in your Trust, without court interference.
  • Who can be successor trustees?
    Successor trustees can be an individual (adult children, other relatives, or trusted friends) and/or a corporate trustee. If you choose an individual, you should name more than one in case your first choice is unable to act.
  • Does my Trust end when I die?
    Unlike a Wilt, a Trust doesn’t have to die with you. Assets can stay in your Trust, managed by the person or corporate trustee you have chosen-until your beneficiaries (including minor children) reach the age(s) you want them to inherit, or to provide for a loved one with special needs.
  • How can a Living Trust save on estate taxes?
    If you die and the net value of your estate is more than $5,000,000, federal estate taxes must be paid. If married, your Living Trust can include a provision that will let you and your spouse leave up to $10 million estate tax-free.
  • Doesn’t a Trust in a Will do the same thing?
    Not quite, A Will can contain wording to create a Testamentary Trust to save estate taxes, care for minors, etc. But, because it’s part of your Will, this Trust cannot go into effect until after you die and the Will is probated. So it does not avoid probate and provides no protection at incapacity.
  • Is a Living Trust expensive?
    Not when compared to all the costs of court interference at incapacity and death. How much you pay will depend on how complicated your plan is. Be sure to get an estimate.
  • How long does it take to get a Living Trust?
    It should only take a few weeks to prepare the legal documents after you make the basic decisions.
  • Should I have an attorney do my Trust?
    Yes, but you need the right one. An attorney with considerable experience in Living Trusts can provide valuable guidance and peace of mind that yours is prepared properly.
  • If I have a Living Trust, do I still need a Will?
    Yes, you need a “pam-over” Will that acts as a safety net if you forget to transfer an asset to your Trust. When you die, the Will “catches” the forgotten asset and sends it into your Trust. The asset may have to go through probate first, but it can then be distributed as pan of your Living Trust plan.
  • Is a “Living Will” the same as a Living Trust?
    No, a Living Trust is for financial affairs. A Living Will is for medical affairs-it lets others know how you feel about life support in terminal situations.
  • Are Living Trusts new?
    No, they’ve been used successfully for hundreds of years.
  • Who should have a Living Trust?
    Age, marital status and wealth don’t really matter. If you own titled assets and want your loved ones (spouse, children or parents) to avoid court interference at your death or incapacity, consider a Living Trust. You may also want to encourage other family members to have one so you won’t have to deal with the courts at their incapacities or deaths.
  • How does a Living Trust avoid probate and prevent court control of assets at Incapacity?
    When you set up a Living Trust, you transfer assets from your name to the name of your Trust, which you control– such as from John and Mary Smith to Jolin and Mary TTEES of the Smith Revocable Living Trust UAD 11/15/2013. Legally you no longer own anything (don’t panic: everything now belongs to your Trust), so there is nothing for the courts to control when you die or become incapacitated. The concept is very simple, but this is what keeps you and your family out of the courts.
  • Do I lose control of the assets in my Trust?
    Absolutely not. You keep full control. As trustee of your Trust, you can do anything you could do before-buy/sell assets, change or even cancel your Trust (that’s why it’s calJed a Revocable Living Trust). You even file the same tax returns. Nothing changes but the names on the titles.

Go Top