by Pete McAllister | News, Retirement, Tax, Tax Planning - Individual
Financial advisors commonly advise their clients to seek investments with high returns in order to maximize their retirement funds, but most investors don’t realize that high fees are eating into those earnings.
While fund fees have steadily declined in recent years, many investors don’t realize how much they’re paying in fees to begin with or how much these expenses and other investment costs are eating into their retirement savings. Remember that as your investment returns compound over time, so do the fees, which means your payments could accumulate to 2% or more.
Below are some of those hidden fees and what you can do to avoid them.
Expense Ratios
This refers to the annual fees charged by all mutual funds, index funds, and exchange-traded funds as a percentage of your investment in the fund. Expense ratios apply to all types of retirement funds, such as your 401(k), individual retirement account, or brokerage account, and they cut a percentage of your investment in the fund depending on its annual yield.
Mutual Fund Transaction Fees
This is a fee you pay a broker to buy and sell some mutual funds on your behalf, similar to a “trade commission” that a broker would charge to buy or sell stock.
Sales Load
These fees surface when a broker successfully sells a fund to you that has a sales charge or commission.
Administrative Fees
These fees are associated with maintaining your portfolio or brokerage account.
Brokerage Account Inactivity Fees
If your account allows you to buy and trade at any time, you could face an unexpected inactivity charge if you don’t trade for a few months.
To determine whether your retirement fees are too high, check the fee disclosure and look at the expense ratios on the mutual funds you are invested in. Likewise, check these fees before you invest in a mutual fund you are interested in.
To help balance your investment accounts and minimize your retirement fees, take advantage of lower-fee mutual funds if your 401(k) plan already has an expense ratio of over 1%.
Finally, be aware that fees may also be related to how much advice you’re getting and where that advice is coming from. Human advisors are more expensive than robo-advisors, and an actively managed fund will cost more than an index fund or an exchange-traded fund (ETF).
by Jean Miller | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual
What, or who, is a “Millennial”? Numerous individuals who find themselves in this generation do not like the connotations the word ascribes, but if you were born in the 80s or 90s, then you fit into what most researchers would call the Millennial generation. Many at this stage of life think that they’ve just barely entered adulthood, but it’s never too early to start considering “adult” things like investing for your future. And for those at this age and stage of life, a Roth IRA may be just the investment to consider.
What exactly is a Roth IRA?
A Roth IRA is an Individual Retirement Account where you set aside after-tax income up to a set amount each year.
How is it different from a traditional IRA?
One major difference is that funds put into the account are after-tax income, meaning, when you withdraw money from a Roth, taxes have already been paid. In a traditional IRA, you are taxed when money is withdrawn from the account, however, funds placed in the account may be fully or partially deducted at the time of placement. Therefore, a traditional IRA may seem enticing to Millennials initially because of the deductions, but a Roth is more financially viable since you do not pay taxes later in life. And, more likely than not, you will be paying less taxes earlier in your career (due to lower income). Eventually, you could even reach a point where you make more than allowed to invest in a Roth (eligibility phases out at $118,00 for individuals and $186,000 for a household).
Another big reason why Millennials should consider a Roth, is that you are not taxed or penalized on money withdraw at any time, even if you haven’t retired yet. So, for example, if you have been trying to establish an emergency fund (as many advisors suggest you do), but your monthly bill and loan payments make it nearly unattainable to save three months worth of expenses and maintain it only for emergencies. Having a Roth, however, could essentially serve as both a retirement and emergency fund because, in a Roth IRA, you can withdraw money in an emergency without penalization. Can is the operative word here because while it is possible, removing funds from a Roth is certainly not advised if you are really trying to save for retirement. Nevertheless, the funds are more accessible if needed.
While investing in your future is advised no matter what sort of account, for a generation who leans toward early retirement, but is less likely to have a 401(k) (due to being self-employed or working for a start-up/small business that does not offer one), a Roth IRA may be the best long-term alternative.
