Xæna Financial

What are Equity Funds?

2010-12-31T13:16:00.006-05:00

Equity funds are a type of mutual fund that invests primarily in stocks. Often referred to as “stock funds,” this type of mutual fund is categorized based on a number of factors, such as whether it is based on international or domestic investments. For example, some funds may be based on investments from a single country, while others may focus on a broader or even narrower market. There are also stock funds that focus on specific business sectors. Equity funds are also categorized based on the overall investment style of the fund’s holdings or the company size, which is why they are often referred to as small, mid or high cap funds. Because of the focus on stock investments, equity funds provide a greater amount of risk as compared to safer investments such as bonds. As such, they are a good choice for some investors, while being a bit too risky for others.
Understanding Equity Funds
An equity fund will usually mirror the ups and downs of the overall stock market. Of course, the overall profitability of the fund will depend on the performance of the actual stocks included in the fund, but during an overall “down” market, you can expect loses. The stock mix is important when investing in an equity fund. A fund that includes a broad diversity of stocks is usually considered to be less risky than those which contain stocks from a narrower market. It’s also important to factor your entire portfolio into the decision to invest in equity funds. For example, if your investment portfolio also includes other safe investments such as bonds, you might want to increase your profit-making potential by investing in a higher-risk equity fund. However, if your investment portfolio is less diverse, you will probably want to stick with equity funds that are designed to produce only a medium level of risk factor. Overall, equity funds are a good way of maximizing investment profit potential, while still experiencing less risk than investing in an individual company’s stock. Different equity funds also have different risk management strategies. A fund with an aggressive risk management strategy may experience less of a loss during a down market as compared to the overall market. However, in most cases, equity funds have only a moderate amount of risk management, which means they will closely mirror the ups and downs of the overall market.
Choosing the Right Equity Fund
Although there probably isn’t an absolute “right” or “wrong” equity fund, there are those which may be more advantageous for your individual investment strategy. An equity fund that invests in smaller companies that use their earnings for growth instead of dividends tends to be more risky. These funds are usually referred to as “aggressive growth” or “Small Cap” funds. There are also equity funds which invest in companies which are expected to grow at a steadier and slower pace, which are referred to as “long-term growth” or “High Cap” funds. Depending on your investment needs and the rest of your portfolio, you’ll need to evaluate the potential for larger returns against the inherent risk factors.

What are Global and International Funds?

2010-12-31T13:16:00.003-05:00

Global and international funds are mutual funds that focus on investments in other countries. These funds can offer more diversity than those which focus only on the investment opportunities in one’s own country. However, along with the additional opportunities, there is also additional risk in the form of economic instability, political issues, and fluctuations in currency. There is often some confusion about the differences between a global and an international fund. Basically, an international fund does not include investments from the investor’s own country, while a global fund does.
Understanding Global Funds
Global funds include investments such as stocks or bonds from throughout the world. These include investments from the investor’s own country. Many investors feel that these funds provide more opportunity for returns, since they can provide an additional level of diversity to a portfolio. However, before investing in a global fund, it is important to understand the additional volatility that these funds can be subject to, because of changes in the economic, political and social climates within any of the countries represented in the fund. The commonly held belief that a global fund is inherently riskier than a domestic fund in every circumstance is not true. Risks exist in any investment, so when choosing a global fund, it’s important to look for one with a reasonable level of risk. However, this is also the case with domestic funds. If you are looking for a fund that provides a good mix of investment opportunities, including those from your own country, a carefully selected global fund could be a good addition to your portfolio.
Understanding International Funds
The term “international fund” is used to describe mutual funds that do not include investments from the investor’s own country. These funds invest in a variety of companies from throughout the world. However, in the case of an investor located in the United States, there would not be any United States companies in the mix. An international fund is a good way of getting some investment exposure to the global market. If your portfolio focuses only on investments from your own country, an international fund can provide some beneficial diversity. However, there are other factors to take into consideration when choosing international funds, such as the economic, social and political situation other countries. Additionally, not all countries have the same level of control standards and supervision as the United States does. As a result, some people feel that it is more difficult to choose good investments in other countries as compared to their own. However, international funds are a good opportunity to invest in emerging markets in developing economies, which can offer significant opportunities for growth.
Currency Risk
Currency risk can be of particular concern, because companies usually pay capital gains and dividends in their own local currency. If a foreign currency is stronger than the investor’s home currency, the investor will benefit. However, if the home currency is stronger than the foreign currency, the investor’s returns will be negatively impacted. For this reason, it’s important to take the currency exchange rates into consideration when choosing international funds.

How to Pick a Mutual Fund

2010-12-31T13:16:00.000-05:00

If you’re interested in buying a mutual fund, there are several ways to go about it. In some cases, you can purchase these funds by directly contacting a fund company. In other cases, you’ll need to go through a bank, insurance agent, broker or financial planner to make your purchase. There are also programs that offer a variety of different funds, offered from many different companies, offering a “no transaction fee” method of purchase. Before making a purchase, it’s important to understand the processes that are involved, and what your options are.

Taking the First Step

Just as with many other things in life, the biggest step you’ll take with mutual funds is actually purchasing the first one. Investing is one of those things that can be easy to put off. Although you should take care to make the best possible decision when investing, almost any mutual fund investment would be a better option than making no investments at all. So, don’t put off your purchase just because you feel a bit unsure of yourself.

Investing in Your First Mutual Fund

Low cost and a good level of diversification are two important factors to consider, especially if you are investing in your first mutual fund. Many first-time investors find that they feel most comfortable with an S&P 500 index fund. These funds have low costs and a wide amount of diversification, both of which are good things. Investing in a mutual fund that actually owns other funds is another popular method, especially for first-time investors. These funds consist of a mix of bond funds and stock funds, both foreign and domestic. Based on the number of years you have until your retirement, you simply pick the appropriate fund. Although this can be a very easy method of investing, the ease also translates into a lack of control and options in regards to the funds. However, this is often a good thing for the inexperienced investor. The most important thing is to understand your personal financial goals, so that you are able to find a fund that is a good solution. For example, a short-term goal such as paying for a child’s college education might be a good match for a money market fund, while a long-term goal such as retirement may be better suited to stocks funds. If you are primarily concerned about the costs associated with investing, then an index fund could be a good choice. It’s also important to know your own risk tolerance, so that you can choose between a conservative or riskier approach.

What to Look for in a Mutual Fund

If want to start investing in mutual funds, you can always start small. In many cases, you can invest as little as a hundred dollars just to get started. Look for funds that allow you to minimize loads and commissions, which are basically sales charges. A front-end load is a charge for buying a fund, while a back-end load, redemption fee or deferred sale is a charge for selling the fund. It’s also wise to find a fund that has a low expense ratio, which ideally should be 1% or less on an annual basis. This ratio represents the annual fees charged by the mutual fund, such as the administrative costs, management fees, and distribution fees. A mutual fund with a low turnover rate, ideally less than 50%, is preferred. It’s also a good idea to look for a fund that has produced good returns in the past, as well as one that is being handled by an experienced manager. If you’re not sure which mutual fund is right for you, consult a financial planner or investment advisor. Finally, always make sure you review your mutual fund on a regular basis, to make sure it is still on track to meet your financial goals.

What are Index Funds?

2010-12-31T13:15:00.002-05:00

Index funds are an investment that strives to duplicate the index of a specific financial market. They are often chosen by investors because of their low portfolio turnover, low operating expenses, and broad market exposure. The portfolio of an index fund is designed to match that of a specific market index, such as the Standard & Poor’s 500 Index. These funds are often popular with investors because in many cases they outperform other kinds of mutual funds, even those which are actively managed. They are considered to be a form of passive investing. As such, the management expense ratio is often quite attractive for an index mutual fund.
Understanding Index Funds
Index funds are designed to get the same overall results as the stock market. They can eliminate the hassle of choosing individual stocks or more specialized funds. These funds are generally seen as a good investment, because overall the market has appreciated over the years, in spite of the natural peaks and valleys. In theory, since the overall market continues to rise, a fund that simulates this same growth pattern will also appreciate over time. Investing in an index fund can be a very simple method of investing. These funds match one of the various stock market indexes. Popular choices include the NASDAQ Composite Index, the Dow Jones Industrial Index, or the S&P 500. In order to match the overall growth of the index, each share of the fund consists of a proportional amount of stock from each company within the overall index. The proportions are determined by the index itself, instead of being managed. In many cases, an index fund will actually outperform a carefully managed mutual fund.
Factors to Consider about Index Funds
It’s important to understand that these are not completely foolproof. If the overall market is down, an index fund will also go down in a proportional fashion. Also, even though it is estimated that an index fund generally outperforms a managed fund about 80% of the time, that still leaves 20% of the time that it does not. If the stock market as a whole has a good year, investors in index funds will also have a good year. However, if the market is in a downturn, returns on an index stock will also be down. However, overall they are a good choice for those who are looking for steady growth and lower risk, especially as compared to other more volatile investments such as specialty funds. Overall, the risks associated with an index fund match those that exist in the stock market overall. On the down side, an index fund will provide less investment flexibility as compared to a non-index fund. Because of how they are set up, they do not have the ability to react to security price declines, because they are based upon set proportions. However, some investors actually consider this to be an advantage, especially over the long run. Overall, an index fund can be a good addition to an investment portfolio, especially when combined with other types of funds to provide diversity.

Tax deal says we're deadbeats

2010-12-31T13:12:00.001-05:00

The world has a fair deal of experience in dealing with small countries that can't pay their bills. And the world is gaining more experience by the minute. Ireland can't pay its bills? (Or actually its banks' bills?) Put together a funding package at the price of domestic austerity and higher taxes. And when the small countries can't pay their bills again in a couple of years, go through the process over and then over again until creditors finally agree to take a haircut on their loans.
But what about a huge country, one that is at the center of the world's economic and financial system, one that can be described as the world's greatest power, one that controls the world's supply of money? What do you do with such a country, one that can pay its bills but shows no inclination to do so? And instead brazenly asks for more credit?

The world doesn't have a lot of experience working its way through problems like that. But I think that's the kind of problem that now confronts the world. to extend the Bush administration's tax cuts for an additional two years at the cost of adding $1 trillion to U.S. debt says to the world that we have no intention of paying our bills.And it pugnaciously adds, "So what ya gonna do about it?"

Another deadbeat nation

I've actually been able to find just one example in Western history that sheds any light on the situation the United States and the world finds itself facing -- the multiple bankruptcies of Spain in the 16th and 17th centuries.In the 16th century, the Spanish Empire stretched farther across the globe than any previous empire. Starting from an Iberian peninsula unified under Castile and Aragon only in 1492, the Spanish empire grew to encompass first the island then known as Hispaniola, then Cuba, Mexico, the bulk of South America except for Brazil, and the islands of Guam and the Philippines. In Europe, Spanish monarchs ruled the Netherlands, Belgium, much of Italy and parts of Africa.
And it was a fabulously rich empire. The great silver mines of Peru and Mexico began to deliver a river of precious metal -- supplemented by gold from conquest and mining -- as early as 1511. Spain imported 260,000 kilograms of silver and 5,000 kilograms of gold from 1511 to 1550. And that was just the beginning. From 1591 through 1610, the country imported 4.9 million kilograms of silver and 31,000 kilograms of gold. The flood of gold and silver into Europe, a region previously starved for precious metals, was so great that the supply depressed the price for both metals and set prices for goods and services climbing.
But less than half of this silver and gold remained in Spanish hands. About a third went to China to pay for Spanish imports of silk, porcelain and other luxury goods. The remainder went to pay for Spanish imports from the rest of Europe. The Spanish economy itself was an increasingly uncompetitive hulk. Spain lived beyond its means, supported on that wave of New World silver and gold.
And that included the Spanish monarchy. Silver and gold poured in, but running an empire is expensive when it includes almost constant war in Europe with a constellation of national enemies that included France and England, plus local rebellions in the Netherlands and Italy, plus more than a century of land and sea battles against an Ottoman Empire that moved relentlessly westward after its capture of Constantinople in 1453.

Borrowed prosperity

The kings of Spain found it much easier to borrow money -- after all, what lender could afford to say no to the most powerful kingdom in Europe? -- than to reform the Spanish economy. But the seemingly inexhaustible flow of treasure from the Western hemisphere encouraged Spanish kings to think they could borrow and repay any sum -- and what bank would have had the courage to question the creditworthiness of the most powerful kingdom in Europe? The result was bankruptcy in 1557 that left the Fugger bank in Augsburg holding the bag.The circumstances of that 1557 bankruptcy may sound familiar. The bank made the classic mistake of mismatching assets and liabilities: The Fugger bankers took out long-term loans in Augsburg in order to make short-term loans to the Spanish king. Payments on the long-term loans were to come from payments on the short-term Spanish loans. Then, in 1557, Phillip II of Spain decided that he had more use for two payments intended for the Fuggers than they did. In effect, Spain declared bankruptcy, and the bank renegotiated its loans with reduced interest payments and a longer payment schedule.
The same thing happened again in 1575 when Spain again stopped paying on its loans, and in 1596. That last Spanish bankruptcy ended the Fugger bank and gave lucky Genoese bankers the opportunity to finance Spain.
In a desperate attempt to satisfy its creditors, Spain debased its currency, replacing silver and gold in its coins with copper in 1599. That led to runaway inflation in the first half of the 17th century. From 1625 to 1650, prices climbed by 40%.
By the second half of the century, the Spanish economy was in rapid decline as high taxes on peasant producers -- just about the only class that would pay significant taxes -- led to a decline of food and wool production, and high inflation made Spanish exports uncompetitive against imports from England, France and the Netherlands.
And by 1675 Spain, once the greatest empire in the world, was ready to be picked apart by the France of Louis XIV.

5 people who peek at your credit

2010-12-31T13:11:00.000-05:00

How much do you know about your credit scores? Those three-digit numbers are tied to our financial lives, yet many young adults haven't given them the attention they deserve.
Your scores can play a role in your ability to rent an apartment, qualify for a loan or even get a job. They can also affect how much you'll pay on interest charges, insurance and even cell phone contracts.Make building stellar scores a priority while you're young and you could actually save hundreds or thousands of dollars over your lifetime. However, if you don't take your credit seriously, bad scores -- or even nonexistent scores -- will cost you.

Who's keeping score?

Your credit scores are basically used to predict the possibility that you won't pay your bills. Scores are compiled by Fair Isaac and are sometimes called FICO scores. The top possible number is 850, but topping 800 is probably unrealistic. A median score usually falls in the 720-to-725 range, meaning half of consumers fall above that point, half below. Even if you haven't given your FICO scores much thought, there are plenty of others who have or will, so you'll want to aim for the mid-700s to make the best impression on: 1. Lenders. This group is the one most people associate with their credit scores. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small-business loan if you've got that entrepreneurial spirit. Nonexistent scores can make it impossible for you to qualify for a loan or credit card.
2. Insurers. The majority of auto insurance companies use your credit scores when determining your rates, and the practice is also common among home insurers. A survey by Consumer Reports among eight popular auto insurers found that drivers with top scores pay up to 31% less on their premiums than if credit scoring wasn't factored in, while those with bad scores pay as much as 143% more. 3. Landlords. Increasingly, you may need good credit scores to rent an apartment. Landlords view your credit rating as a measure of your responsibility to pay bills on time. If your rating is below par or you don't have credit scores yet, you may have to find a friend or relative to co-sign your lease, or you could be required to pay a higher rent or security deposit.
4. Employers. When you're applying for a job, potential employers can pull your credit reports as long as they notify you first. And, in fact, about 35% of them do, according to the Society for Human Resource Management. Why? Bad credit can be a signal of irresponsibility, or employers might be worried you'll spend more time fretting about your financial woes than concentrating on the job.
5. Cell phone carriers. Even cell phone service providers may check your credit before signing you up for a plan. They want to make sure you're responsible and will pay your bill each month. Some utility providers may pull your reports as well. If you have credit issues, you may not qualify for the best plan rates, you could be required to pay a deposit, or you could get turned down.

True cost of your scores

So, how much do your credit scores affect your finances? Say we have two friends, Jim and Mark. Both took steps right out of college to start building a credit report by getting their first credit cards and an auto loan. Jim made all his payments on time, never maxed out his credit cards and often paid more than the minimum required. Mark, however, frequently paid late, overextended his cards and applied for new credit to bail him out of his mismanaged debts.Now both are ready to buy homes, and each applies for a $250,000 30-year mortgage. Through Jim's responsibility, he's been able to build scores of 750, qualifying him for a loan with a 4.58% interest rate. Mark's scores come in around 650, netting him a rate at 5.40% interest. Jim's monthly mortgage payment is $1,279 while Mark pays $1,404 -- a difference of $125 per month. If they both live in their homes for 10 years before selling or refinancing, Mark will pay $15,000 more in monthly payments than his friend. Ouch.
Mark also gets burned on a new auto loan -- paying $2,340 more over three years on a $20,000 loan than Jim. Plus, Mark probably paid much more for his car insurance than Jim.

Your 15-point tax-return checklist

2010-12-31T13:09:00.000-05:00

1. Get serious. Unless you're focused, you're going to see that receipt six times rather than the once you need. This is all mental now. Schedule a time to get to work and commit to that time. Then . . .
2. Get started. Remember that commitment to get to work? Keep it! This step requires action. Get your pencil and take the blank forms out of the envelope where you've been hiding them, praying that the tax fairies would make them go away. My father reminds me of the old Brooklyn proverb, "A trip of a thousand miles begins with a traffic jam." Get in that "jam," and your tax return will begin to jell. Now . . .
3. Get organized. Something has to go on those returns. Get your W-2s together to report wages, your 1099s to report interest and dividends, your 1099Bs for reporting stock and bond sales, and your 1098s for deducting your interest and taxes. The Internal Revenue Service and your accountant both want final numbers. It makes it easier for them and less painful financially for you. Bring either one a shopping bag full of receipts and you're going to feel the pain . . . especially in your wallet.

4. Get informed. Have you been following all the changes the U.S. tax code has seen in the past decade? How about the multiple new tax bills passed just this year? The adoption credit has been made refundable and extended. 2010 is the last year you can use your flexible spending money for nonprescription medications. Get them in while you can. Bush tax cut expiration anybody?Even better, have you looked at the new American Opportunity Tax Credit, which can give you as much as $2,500 in tax savings? If not, get educated! While you're getting enlightened, don't neglect the tax credits on energy-efficient improvements to your home. And if you're a new home-buyer (one who hasn't owned a principal residence for the last three years), you can get a refundable credit of 10% of the purchase price, up to $8,000, on a new principal residence. If you've been in your home for five of the last eight years, you can purchase a new principal residence and qualify for a 10% credit of up to $6,500. But to qualify for either home-buyer credit, you had to be under contract by April 30, 2010, and close by September 30, 2010.
If you're "tax simple," the IRS can actually do the return for you, or you can have your return done online -- sometimes even for free. Alternatively, if you're tax-savvy, do your own return after learning the new rules. A good place to start: the IRS' absolutely free Publication 17. It's hundreds of pages of everything you need to know about your 2010 tax return and your planning for 2011. If that's too much, go to a professional.
5. Get help. You might remove a splinter from your own finger, but you wouldn't perform heart surgery on yourself. A trip to a tax professional should at least tell you what you're missing. Don't hesitate to ask for help; it's deductible. But call for an appointment now! The later your accountant does your return, the more tired that tax preparer will be. You want your return done when she's at her best.
6. Get status. Decide how you're going to file. The lowest rates are with joint returns, but if there are potential high medical or miscellaneous deductions, married filing separate may yield a lower total tax. Do it both ways. Alternatively, a single mother may qualify for the head-of-household rates, which are better than the rates for filing as a single. Sometimes, when a joint return isn't practical, even a married person with a dependent child can qualify for head-of-household rates, which are much better than married filing separate. You need to know the rules.
7. Get adjusted. There are certain deductions that are allowed regardless of whether you itemize. Such deductions include IRA and qualified pension contributions, student loan interest, moving expenses, alimony, medical savings account deductions and, for the self-employed, the health insurance deduction and deduction for half the self-employment taxes paid. These are known as "above the line" deductions. The infamous "line" is your adjusted gross income -- line 37 on Form 1040.
8. Get itemized. Which is bigger -- your standard deduction or the sum of your itemized deductions? We're now "below the line." The chart to the left of line 40a on your 1040 form for 2010 lists your standard deduction. Compare this amount to your total allowable itemized deductions. That's the sum of your allowed medical expenses, taxes, interest, charitable contributions, casualty and theft losses, and miscellaneous itemized expenses. Always do it both ways . . . and, subject to the alternative minimum tax (and don't even try to get into that), always take the higher amount.

Keep an eye on gold, bonds in 2011

2010-12-31T13:08:00.000-05:00

First, on Dec. 13, Dennis Gartman shared some gold data that I think tells an important story.
Back in the early days of the gold bull market, I remember arguing with people that, in my view, gold prices would be driven by demand for the metal as an investment, not by interest in using it for jewelry.
That was a novel thought in those days, as "analysts" used to focus only on what jewelry buyers were likely to do. In those days, that was deemed to be all one really needed to know about gold.In the wake of the tech-stock bubble bursting, I knew that, once it became clear the Federal Reserve was going to try to print money as a way out of that mess, the dollar would have problems and gold would be a beneficiary.
Of course, as the real-estate bubble inflated, leading to an even larger disaster, there was no question that even more money-printing would follow. This bolstered the case for gold. Thus, my argument was always based on investors being the drivers of the gold bull market.

From baubles . . .

That, in fact, has been the case. But I was still surprised to see just how potent investment demand has become. According to Gartman (the data likely originated with the World Gold Council), in 2000, investment demand accounted for approximately 2% of demand for gold, while about 80% of demand came from the market for gold jewelry.By 2005, the jewelry share had declined to about 60%, while investment demand had risen to about 20%. Nowadays, jewelry usage is about 40% and investment demand is just over 40%. (Gold also has industrial and other uses, which accounts for the remainder of demand.)
As Gartman notes, "The ETFs are having their very real impact."

However, that is not quite accurate. The gold-based exchange-traded funds themselves aren't what made such an impact. It is the investment demand that has had the impact; the ETFs are merely the conduit by which much of that demand is expressed. What is really remarkable is that with investment demand at 40% of gold production, the number of gold bulls with any substantial allocation is still minute.
Perhaps by the time this bull market has run its course, investment demand will approach 100% of annual gold production, though we can never forget that nearly all the gold that has ever been produced (enough to fill just two Olympic-size swimming pools) is still in existence. So it's not just the gold that gets dug out of the ground each year that is available for sale, but potentially almost all the gold in the world. Of course, someone who has bought gold would need a reason to sell it, with some sort of financial prudence on the part of governments and central banks being the most likely catalyst. But as readers of my column (at least) should know, we are still millions of miles away from that.

It can't be bad news, so it must be good

As a lead-in to my second point, I wanted to comment a bit on Best Buy, which announced its results Dec. 14. Not only did the electronics retailer miss estimates, but it was also forced to lower guidance prospectively, as demand has not materialized the way the company had hoped. As a consequence, its stock price was smacked for 15%, although the market itself impressively fought off more rising bond interest rates to close about even (the Dow Jones Industrial Average ($INDU) closed with a 0.4% gain).
Normally, I would have expected the major indexes to take a bit of a licking on that news, as Best Buy has always been deemed to be a well-run retailer and a good barometer of business (especially at this time of year).
However, the denial currently runs so deep regarding what is next for the economy and the stock market that, apparently, the bulls were able to convince themselves that somehow Best Buy's results were company-specific. Thus, businesses associated with Best Buy, which in the past would also have been sold in sympathy, were given a pass. It is quite similar to the treatment we saw when Cisco Systems reported its results Nov. 10.
I mention those two companies because they, as well as others, illustrate a consequence of government money-printing. The additional liquidity goes where it goes (usually into stocks, since the Fed's low-interest-rate policies make more conservative alternatives less attractive), psychology gets deranged and nonsense passes for knowledge.
The net effect is to increase the riskiness of stocks generically, as "normal" market reactions become suppressed, creating an unhealthy environment.

Treasury misery loves company

A variation of that same theme seems to be what has stopped the bond-market rout from being regarded as bad news. Apparently, a school of thought has "evolved" that the decline in the bond market is not about the Fed losing control of the printing press, as I have maintained, but about economic activity surging. Thus, the weakness in bonds is (supposedly) good news.
How anyone can conclude that, given the data, I don't know. But even if you agree, you can't escape the reality of higher rates. So if you really think that bond weakness is linked to the economy catching fire, and you extend that argument out, then you should be expecting even higher rates and more inflation, though the latter is certainly not on the radar of any such Pollyannas.

10 ways to guard against ID theft

2010-12-31T13:05:00.000-05:00

Identity theft is often in the news, but there are a lot of misconceptions swirling around about how to best protect yourself.
While some identity thieves focus on getting your credit cards and maxing them out before you even realize they're missing, an increasing number are using one piece of information about you -- often a credit card number -- to steal your entire identity. Though many folks worry about keeping their credit card information secure when shopping online, the top methods that identity thieves use to steal personal data are still low-tech, according to Justin Yurek, the president of ID Watchdog, an identity theft-monitoring company. "Watch your personal documents, be careful to whom you give out your data over the phone, and be careful of mail theft," he says.
No one is immune to identity theft, but a little knowledge about how identity thieves operate -- and a little common sense -- can help you stay a step ahead of them.
1. Thieves don't need your credit card number in order to steal it. Conversely, they don't need your credit card in order to steal your identity. Identity thieves are crafty; sometimes all they need is one piece of information about you and they can easily gain access to the rest. As a result, says Heather Wells, recovery manager at ID Experts, an identity protection company, today it's crucial to lock up important documents at home. "Secure birth certificates, Social Security cards, passports, in a safe deposit box or in a safe hidden at home," she says. "And that includes credit cards when not in use."

2. The nonfinancial personal information you reveal online is often enough for a thief. Beware of seemingly innocent personal facts that a thief could use to steal your identity. For example, never list your full birth date on Facebook or any other social-networking website. And don't list your home address or telephone number on any website you use for personal or business reasons, including job-search sites. 3. Be careful with your snail mail. "Follow your billing cycles closely," says Lucy Duni, the vice president of consumer education at TrueCredit. "If a credit card or other bill hasn't arrived, it may mean that an identity thief has gotten hold of your account and changed your billing address." Al Marcella, professor at Webster University's School of Business and Technology in St. Louis, and an expert on identity theft, suggests when you order new checks, you pick them up at the bank instead of shipping them to your home. "Stolen checks can be altered and cashed by fraudsters," says Duni. And never place outgoing mail in your post office box or door slot for a carrier to pick up. Anyone can grab it and get your credit card numbers and other financial information. Take it to the post office yourself.
4. Review all bank and credit card statements each month, preferably once a week. Watch for charges of less than a dollar or two from unfamiliar companies or individuals. Thieves who are planning to purchase a block of stolen credit card numbers often first test to check that the accounts haven't been canceled by aware customers by sending a small charge through, sometimes for only a few pennies. If the first charge succeeds, they'll buy the stolen data and make a much larger charge or purchase. They're guessing -- often correctly -- that most cardholders won't notice such a tiny charge. In addition, many of the fraud alerts you can set on your accounts aren't triggered by small dollar amounts. Reviewing your credit report on a regular basis is also a good idea, although by the time a fraudulent transaction reaches your credit report, it's often too late.
5. If an ATM or store terminal looks funny, don't use it. "Make sure there is no device attached to any ATM card slot you use," says Wells. "As a general rule, the mouth of a card receptacle on an ATM machine should be flush with the machine or have only a very slight lip." If it looks or feels different when you swipe your card, or has an extra piece of plastic sticking out from the card slot, it may be a skimmer, an electronic device placed there by thieves that captures your credit card information when you swipe it. If you notice it after you've already inserted your card, you should alert your bank so they can watch for any fraudulent charges to your account.
6. Identity thieves love travelers and tourists. Scott Stevenson, the founder and CEO of Eliminate ID Theft, an ID-theft-protection company, cautions travelers to be alert to strangers hovering around whenever using a credit card at an ATM or phone, and to avoid public wireless Internet connections unless their laptops or PDAs have beefed-up security protection.

Best Vanguard funds for your 401k

2010-12-31T13:04:00.001-05:00

When it comes to investing for retirement through 401k's, investors have a lot of options. Investment management company Vanguard continues to use its heft and low costs to pick off competitors. It has been winning investors with new funds (up to 20 in 2010), free trading in Vanguard's exchange-traded funds, lower minimums for its low-cost Admiral shares and other consumer-friendly features.
Yet, while all this will help Vanguard gather assets and reduce costs for you and me, the longer the fund list grows, the more confusing it can be to separate the winners from the losers.
To make matters worse, the major drawback to investing in a 401k is that your options are limited to the funds made available by your plan's administrators. Typically, they choose middle-of-the-road funds deemed safe enough to keep employees from losing their shirts, and the administrators from losing their jobs.

So unless you use your 401k plan's brokerage option, you aren't likely to be able to invest in any Vanguard fund you like (and even the brokerage service may not have access to all Vanguard funds). In the case of Vanguard Precious Metals and Mining Fund (VGPMX), that's a good thing. The fund is incredibly volatile, with a maximum cumulative loss of 69.8% in the most recent bear market versus 50.9% for Vanguard Total Stock Market (VTSMX) and 51.0% for Vanguard 500 Index (VFINX). So much for gold funds being a safe haven.On the other hand, you also aren't likely to have access to some funds that you probably should have in your portfolio, such as the Vanguard Emerging Markets Index Fund (VEIEX), which I highly recommend for 401k investors (not for all of your money, of course, just a 5% portion).
In fact, I believe that as the global economy continues healing, having an allocation to emerging markets will become a virtual requirement for investors with long-range objectives, including retirement. That's why I'd suggest you ask your plan administrator to add this fund to the mix of choices your company includes in its 401k plan. (I'm also doubtful your 401k gives you access to the terrific Vanguard Health Care (VGHCX) fund, which offers investors exposure to the growing demand for medical products and services in emerging economies.)
Below are several additional Vanguard funds I'd like to see in your 401k portfolio. Use them if they're available to you. If they're not, request them. You might need to enlist your colleagues to persuade your benefits department to add them, but remember that what's at stake is your retirement. Your 401k plan should be serving you.
As a retirement savings vehicle, a 401k is inherently geared toward the long term. You don't want to just save your money, you also want to see it grow. Consider that even at a retirement age of 60 to 65, you could live at least an additional 30 years. Invest too conservatively and you could outlive your money.
To prevent this, my first recommendation is a trio of Vanguard funds run by the redoubtable team at Primecap Management: Vanguard Primecap (VPMCX), Vanguard Primecap Core (VPCCX) and Vanguard Capital Opportunity (VHCOX).
All three funds are closed to new investors outside of established 401k plans, but they may be available to you. If so, consider yourself lucky and place some of your money with this group of managers who take a value-oriented approach to growth stocks. Their funds are the largest single component of my retirement and nonretirement accounts, as well as those of my wife and kids.
If the Primecap funds are closed to you, Vanguard Wellington (VWELX) is an excellent choice as the core fund for your 401k. Since its inception in July 1929, it has aimed for strong relative returns in good and bad markets by focusing on one very important investment discipline: diversification.
It's a balanced fund, so approximately 60% to 70% of Wellington's assets is in high-quality blue-chip stocks and the remainder is in top-notch investment-grade government and corporate bonds. You can easily get the entire bond exposure you need in your 401k portfolio from this fund. Vanguard Wellington has the flexibility to invest as much as 20% of its equity assets in foreign securities, an important part of a diversified portfolio.

How to Protect Your Credit After Divorce

2010-12-30T12:58:00.000-05:00

The end of a marriage is often associated with heartbreak and emotional upheaval, but your former soul-mate could also be walking away with half of your assets and leave you in a bad credit situation.
However, there are many ways to protect and rebuild your credit after a divorce, several of which require little effort but help significantly. Here are a few tips to help you rebuild your credit score after divorce:

Review Your Credit Report
The first step to rebuilding your credit is to get a copy of your credit report and thoroughly review the report. You want to ensure that your ex’s debts are not showing up on your credit report. If any do, you should contact the creditor to have your name removed from the account so that the debt comes off of your credit report.
Cancel All Joint Cards and Accounts
The last thing you want after your divorce is for your ex-partner to go on a shopping spree with a credit card in your name. Therefore, make sure you cancel all joint credit card accounts after making sure that everything is paid off and cleared. While closing your account can lower your credit score it is a worthwhile trade-off. You want your credit and your ex’s credit to be as separated as possible.
Apply for a Low Limit Credit Card
If you don’t have any credit in your name because you shared most cards and loans with your spouse, apply for a credit card with a low limit. The low limit will help you avoid temptation to spend money you don’t have, while helping you to rebuild your credit. Begin by purchasing low cost items throughout the month and pay your balance in full and on-time at the end of each month to build good credit history.
Open a Checking Account in Your Name
Opening a checking account solely in your name is a smart decision to make while you are going through a divorce. You need an account to hold funds that your spouse does not have access to, plus it can also help you protect your credit by ensuring that you have funds available to make at least the minimum payments on credit card and other debts held in your name.
Make Timely Payments on Your Accounts
This might seem obvious, but many people forget how important it is to make your payments on time. A “slow pay” credit history (one where the payor habitually fails to pay the creditor on time) can dramatically lower your credit score. When you receive a bill, have a system in place to remind you to pay it by the due date.
If Necessary, Consider Bankruptcy
If you are so deep in debt after your divorce that you cannot keep up with monthly bill payments, then you may need to consult with a bankruptcy attorney. While bankruptcy is extremely damaging to your credit in the short-term, it can be used to deal with being the situation of being so far in debt that it will be nearly impossible to recover from. Once you have had your slate wiped clean after bankruptcy, you can work on rebuilding your credit and avoiding the problems that created the excessive debt you had in the first place.

While a divorce has the potential to significantly damage your credit, it is possible to emerge from a divorce with your credit rating intact. By following these suggestions, you will be on-track to rebuilding your credit after your divorce.

What Is A Secured Credit Card?

2010-12-30T12:56:00.002-05:00

Just like bank loans, where there is secured and unsecured borrowing by businesses, credit cards as a form of consumer debt can also be either secured or unsecured. Credit cards, as most of us know and use, are unsecured. The money is lent to card users without any collateral against it and it is up to consumers to pay back the account balance later and if not, the card issuer loses (well, they will go after you but there is no guarantee they get their money back). When the possibility of not paying back by a credit card holder becomes a serious concern, either because of the applicant’s bad credit in the past or no established credit at all, a card issuer would require certain amount of funds to be deposited as collateral before a credit line can be issued.

How A Secured Credit Card Works

The potential card holder must first open a savings account, also known as collateral account, with a card issuer for an initial amount from $300 or $500 up to $5,000 or $10,000. The credit line can be equal to the amount deposited or at a percentage of it. As purchases are made on the card, the funds are not deducted from the account and the funds will stay in the collateral account as long as the card holder makes monthly payments for at least the minimum amount. Some credit card issuers may pay interest on the deposits.
Like regular credit cards, purchases are billed every month and there will be interest charge on any outstanding balances after each grace period. Many secured credit cards may require an annual fee and one-time setup fee. A secured credit card functions like any other credit cards and there is no difference in the appearance of a secured credit card and a regular one.

Why Do Secured Credit Cards Exist?

Even though some consumers are cutting back on credit card use to reduce debt and are turning to debit cards or simply paying cash, credit cards cannot be replaced as long as current consumer credit reporting system remains in place. Consumer credit rating (your credit score) relies heavily on consumer credit card data that are submitted by credit card issuers and analyzed by the three credit card bureaus. Without credit cards and the data collected about how they are used, a consumer’s credit worthiness is much more difficult to be determined. Most will need to use a credit card if they wish to build a credit history or repair past credit. Credit cards, secured or unsecured, can be used for that simple reason. But for some people, a secured credit card is the only solution.

Who Needs a Secured Credit Card?

Starting with no credit history or a bad credit history makes it hard to apply for a regular, unsecured credit card (think about it, why would a credit company want to loan money to someone that hasn’t proven they can pay OR hasn’t paid in the past). However, applying for a secured credit card can be easy and fast when personal funds are used to guarantee the repayment of future credit card bills. Because a secured credit card works the same way as a regular credit card in terms of using it for purchases and paying monthly card bills, over time the card holder can establish a positive pattern of card uses by paying back on time. Ultimately, the data collected by the card issuer is reported to credit card bureaus and good credit will be reflected in the credit report (and in turn will raise your credit score). Moreover, after a certain period of time, such as a year, based on the card holder’s responsible use of the secured credit card, the card issuer may switch to issuing a regular, unsecured credit card.
A secured credit card certainly isn’t for everybody. But it can be a great tool to help establish credit or develop good credit habits. I’ve even wondered if it’s not one of the better ways for a person to first get a card. Think of it, if you know you’re money is on the line you will have a great incentive to develop good spending and paying habits. I can think of so many people who got their first credit card (unsecured) and went wild with their new credit, quickly using up their credit limit.
If you do decide to get a secured card (if you need one to build credit trust), remember the goal is to build up your credit quickly so you can move to an unsecured card and get your collateral deposit back. Also look into cards that have little or low fees, shop around for the lowest APR you can find, and make sure you understand the details of where your collateral money is going and what it takes to get it back.

12 New Rules for Your Money

2010-12-30T12:55:00.000-05:00

In this era of high unemployment, flat home prices and do-it-yourself retirement savings, some traditional rules of saving and investing are due for an overhaul.

Renting may beat buying. Buying wins hands down when home prices are rising. But when they're flat or falling, it makes sense only if you get a great deal, your monthly payment won't exceed rent on a comparable home by much, and you'll own the home long enough to recoup your costs for both buying and later selling your home.
Consider a Roth. Although the traditional rule of tax planning is never to pay a tax bill today that you can put off until tomorrow, Roth IRAs and Roth 401(k) plans stand that rule on its head. With a traditional IRA or work-based retirement plan, you get an upfront tax deduction, but every dime you withdraw in retirement is taxed at your ordinary income-tax rate. With a Roth, you forgo the upfront tax break, but all withdrawals -- including decades of earnings -- can be withdrawn tax-free. If income-tax rates rise, a pot of tax-free retirement income could be a financial lifesaver. To contribute to a Roth IRA, your income in 2010 can't top $120,000 if you're single or $177,000 if you're married. Anyone, regardless of income, can now convert a traditional IRA to a Roth IRA, but you'll owe taxes on the entire amount. There are no income-eligibility limits to contribute to a Roth 401(k), but not all employers offer them.

Focus on dividends. Invest in stocks that pay dividends. Your options should continue to expand -- more companies are paying dividends, and many of the elite dividend-paying members of Standard & Poor's 500- stock index are upping their payouts to shareholders. True, dividends do not guarantee that a stock will be a winner. Some failed big banks used to pay high dividends, while high-fliers Apple and Google don't pay a penny. But during periods of market volatility, when stock prices tend to bounce around in reaction to political and economic gyrations rather than accurately reflect corporate fundamentals, dividends can provide a predictable income stream. That's not going to make you rich, but it is a comfort when other traditional sources of income have slowed to a trickle
Personalize your emergency fund. The standard advice is to keep enough in savings to cover three to six months' worth of expenses. But a lot depends on the stability of your job and the predictability of your income. The greater the risk your income could drop, the larger your emergency fund should be. If you think your job is in jeopardy, aim to save at least a year's worth of expenses; ditto for individuals with erratic incomes, such as those who work on commission. Retirees should keep two to three years' worth of expenses in money-market funds, short-term CDs or other liquid investments. The goal is to keep enough cash on hand so that you don't have to sell stocks or rack up expensive credit-card debt if you have an emergency, but not so much that you miss out on the higher returns you can earn on longer-term investments.
Think McCottage, not McMansion. If you decide you're ready for home-ownership, stick with the traditional (and temporarily forgotten) rule of thumb that you can afford a mortgage equal to up to three times your annual gross income. Most lenders will limit your total monthly housing payment -- including principal, interest, insurance and taxes -- to 28% of your gross income (and your total debt load to 36%). With a down payment of 20% and a 30-year fixed rate of 5%, a couple with a $100,000 income can afford a mortgage of up to $300,000. (Federal Housing Administration mortgages require just 3.5% down, but the smaller your down payment, the bigger your mortgage and the less house you'll be able to afford.) Calculate your eligibility based on a 30-year fixed-rate mortgage. Then decide whether you would prefer a lower-cost adjustable-rate mortgage with an initial fixed rate geared to how long you plan to stay in the house.
Age 66 is the magic number. Although you can begin collecting Social Security benefits as early as age 62, your benefits will be reduced by 25% or more. Better to hold out for full benefits at your normal retirement age -- 66 if you were born between 1943 and 1954; older if you were born later. Once you reach your normal retirement age, you can continue to work while collecting benefits without fear of bumping up against the dreaded earnings cap, which trims $1 in benefits for every $2 you earn over the prescribed limit. In 2010, the earnings cap is $14,160. If you're willing to wait until age 70, you can collect the maximum retirement benefit for you and your surviving spouse.
Cut your credit-card debt, but not your cards. Minimizing credit-card debt is a great goal, but closing old accounts could hurt your credit score. About one-third of your FICO score (the credit score most lenders use) is based on your credit-utilization ratio, which is the total of your credit-card balances divided by the total of your credit-card limits. What counts is how much you've charged, regardless of whether you pay your balance in full each month. A good target is to use 20% -- or even less -- of your available credit. If your card company has raised your interest rate or imposed an annual fee, you might want to close the account and take a temporary hit to your score. But don't do it within three to six months of applying for a loan.
Lock in your retirement income. Without a pension, you're on your own to figure out how to make your savings last a lifetime. You can use a portion to buy an immediate annuity, which will guarantee monthly payments for the rest of your life. The older you are and the higher interest rates are, the bigger your annuity payout. But you might want to wait for rates to rise before locking up your money.
Think single-digit returns. Reality check: You should be happy to get 6% a year if you've dialed down risk in preparation for retirement and downright joyous if your overall investments earn 8% annually over the next ten years. Think of the past no-growth decade as a bridge from the unsustainable high returns of the 1980s and 1990s to an era of more-moderate performance. It's time to set a lower total-return target, not only for stocks but for your other investments, too. The performance of large-company U.S. stocks has been flat since 2000, and small-company stocks are losing steam. With interest rates near record lows and economic growth and inflation subdued, bonds and commodities aren't likely to post double-digit returns, either. Emerging economies, such as China and India, will continue to grow, but as their economies mature, investment returns will moderate.
Retire your mortgage when you do. A house is a long-term investment with attractive tax deductions for mortgage interest and property taxes. It's great during your highest-earning years, but a monthly mortgage payment represents a major portion of most household budgets. One of the best ways to reduce your costs in retirement is to pay off your mortgage by the time you retire. It's best to whittle away at your loan during your final years on the job, making extra payments if necessary. Unless you have a big chunk of savings to pay off your home loan, you could run low on cash and be forced to borrow for future expenses, such as buying a car or replacing a roof.
Spread your assets around. There's no good formula for the right percentage of stocks in your portfolio -- especially the old 100-minus-your-age rule. A fresh idea is to start with 50% and slide the percentage up or down based on your personal situation. If you're 30, you can tilt your long-term money heavily toward stocks but keep your short-term savings in easy-to-access accounts. If you're 60 and have a secure pension and little debt, you can angle for some growth with your long-term investments, perhaps putting 65% in foreign and domestic stocks. Cast a broad net. There are many high-powered alternatives to stocks -- such as emerging-markets bond funds, currency funds, commodities and exchange-traded funds -- that weren't common when the traditional advice was to invest heavily in blue chips.
Save early for retirement. Paying off debt should be a top priority, but don't let your single-mindedness get in the way of your long-term goals. If your employer offers a matching 401(k) contribution, save at least enough to capture the match. Otherwise, you're walking away from free money. Ideally, you should aim to save 15% of your gross income for retirement (include your employer match in that calculation). If your boss doesn't kick in some cash, that's an even better reason to save on your own, either through your employer-based plan or in an IRA. You can start small -- say, 3% of your gross pay -- and allocate a portion of future raises to retirement savings. As you eliminate your debt, you can save even more. The magic of compounding will do the rest.

529 College Savings Plans explained

2010-12-30T12:52:00.002-05:00

Section 529 plans have become a popular way to save and invest for your child’s college education. If you’re new to 529 plans, you might wonder how they work. These 10 common questions and answers will help get you up to speed.
1. How does a 529 college savings plan work?
Also known as a Qualified Tuition Program, a 529 college savings plan is a great way to save and invest for a child’s future college education.
2. What are the tax advantages of a 529 plan?
Any earnings in a 529 plan have the potential to grow free of federal income taxes. And when you withdraw funds for your child’s higher-education expenses, you generally won’t pay federal taxes, and you may not have to pay state taxes.¹
There’s no federal income tax deduction for contributions to a 529 savings plan. But many states offer state tax deductions for contributions.
3. Who can open a 529 plan? Who can contribute?
It’s not just parents who can open 529 plans—anyone can, like a relative or a family friend.
And even if you didn’t open the 529 plan, you can still contribute to it. For example, a grandparent can contribute to a 529 college savings plan set up by the child’s parents.
4. Who has access to the money in the plan?
The assets remain in the control of the person who opened the 529 college savings plan—for example, a parent. So decisions about how the funds are used are always in your hands.
5. What can the money in a 529 college savings plan be used for?
Funds can be used to pay for qualified higher-education expenses1, such as tuition, fees, books, as well as room and board at colleges, universities and vocational schools. For 2010, the costs of computers and certain computer technology have also been deemed as qualifying expenses.

College Savings Tip #2

If your child receives money as gifts on birthdays and holidays, make it a habit to deposit the cash in your child’s 529 college savings plan.

6. How should I invest the 529 college savings plan?
Most 529 plans offer a variety of investment options, including stock mutual funds, bond mutual funds and money market funds. Consult a financial advisor to determine your best investment choice. Please remember there’s always the potential of losing money when you invest in securities.
7. Are there contribution limits?
The total contribution limit depends on your plan, but most 529 college savings plans offer a contribution limit higher than $200,000.
You can contribute up to $65,000 ($130,000 for married couples) in a single five-year period without incurring gift taxes, as long as there are no other gifts made to the child in the same five-year period. ²
8. What if my child doesn’t go to college?
Every Section 529 college savings plan has a designated beneficiary. If that person doesn’t go to college, the account owner can change the beneficiary to another family member, like a sibling.³
You can also withdraw the money, but earnings will be taxable, and you’ll generally pay an extra 10% penalty tax on top. ²
9. What happens if the parents divorce or declare bankruptcy?
A 529 college savings plan is an asset of the account owner, often one of the parents. In a divorce settlement, the 529 plan will be treated as an asset—for example, in some states, it can be split into two separate 529 college savings plans.
What about bankruptcy? Depending on many factors, including which state your 529 college savings plan is in, it might not be protected from creditors.
10. Do I have to choose my own state’s 529 college savings plan?
No—you can compare the features of 529 plans offered by other states and choose the one that is most suitable for you.
Generally, a student can use a 529 college savings plan to attend college in any state. Qualified higher-education institutions include all accredited post-secondary institutions that are eligible to participate in Federal Student Assistance Programs. This broad list includes public universities, private colleges, graduate schools, vocational schools and even some foreign schools.

Tips for Managing Your Money

2010-12-30T12:51:00.002-05:00

Managing your money in college can be challenging. The key is learning what to do with the money you already have, and the money you earn.

Set Up a Budget

List your income sources (money from parents, working a part-time job, etc.); always use after-tax income in your calculations.
Figure your expenses.
Set aside 5% of your income for savings.
Subtract your expenses from your income and savings to see how much spending money you have.

Know Your Responsibilities

Learn the difference between gross vs. net income and budget to the latter.
Calculate expenses you'll have to pay once you're out on your own (rent, car, groceries, utilities, insurance, etc.).
Get student health insurance.
Get renters insurance, and protect yourself and the things you own for as little as $5 a month.¹
Use credit wisely! Bad credit will stick with you long after college, impacting you when making large purchases, such as a car.

Manage Your Checking Account

Determine how much cash you need weekly and limit your ATM trips to once a week or less.
Use your debit card whenever possible to avoid ATM fees.
Use online bill pay and online money transfers where you can.
Set up overdraft protection on your account.

Invest in Your Future

Have money deducted directly from your paycheck or checking account through electronic funds transfer.
Establish an emergency fund for car repairs and unexpected expenses.
Learn how mutual funds can help you compound your earnings over your lifetime
Invest a little each month with an automatic investment plan that takes funds directly from one of your accounts.

Your Yearly Money Guide

2010-12-30T12:50:00.000-05:00

JANUARY

See where you stand.

Start off the year with a financial checkup. USAA's free Financial Assessment takes only 10 minutes.
Calculate your net worth. Add up the value of everything you own, and subtract all your debts.
Take a look at what you bring home and what you spend each month. Set up a budget, and find some painless ways to save.

Check your credit.

Keeping a high credit score starts with making sure the reporting agencies have accurate information. By law, you're entitled to a free copy of your credit report every year. Request one from each of the three major agencies (Equifax^®, Experian^® and TransUnion^®) by visiting annualcreditreport.com.
Your actual credit score isn't free. Expect to pay the agencies around $15 for it. For easy, unlimited access to your credit score for a low monthly fee, sign up for USAA's CreditCheck^® Monitoring.

Consider a Roth conversion.

In 2010, it could be beneficial for many people to move money from a traditional IRA — and many employer plans — to a Roth IRA. The advantages? Qualified withdrawals from Roth IRAs are tax-free, and there are no required minimum distributions. However, withdrawals made before age 59½ may be subject to a 10% federal penalty and ordinary income taxes. Learn more about conversions.
You'll pay taxes on the amount you convert, but if you do it this year, Uncle Sam will let you split the converted amounts in half and not tax them until your 2011 and 2012 returns. Consult with your tax attorney for your specific situation.

FEBRUARY

Gather your tax papers.

It's time to get ready for tax season by gathering your W-2, 1099 and other tax forms.
If you want to file your taxes on your own, take advantage of a 25% USAA member discount and sign up for TurboTax¹. It's an easy, secure, web-based service. After you start, you can save your progress and come back to pick up where you left off at any time.

Attack your debt.

Carrying around a big debt burden can make it harder to pay the bills and diverts money that could be used to save for your future. Make 2010 the year you turn the corner on high-interest, non-deductible debt.
First, get smart about debt, then use USAA's Debt Analyzer to assess your situation and put together a customized plan of attack.

Check mortgage rates.

Some economists expect interest rates will rise as the economy recovers, which means now may be a good time to shift from an adjustable rate to a fixed-rate mortgage if you are planning to stay in your house for a while.
On the other hand, a fixed-to-fixed refinance might make sense if the new rate is at least 1% below your current rate and you plan on staying in your house for at least five years.

Don't squander your raise.

If you were lucky enough to get a raise this year, don't let that extra money get lost in the shuffle. Dedicate at least half of it to savings or paying down debt.
This is a great time to increase your contributions to your employer's retirement plan, or set up an automatic monthly transfer from your checking account to your savings account.

MARCH

Max out your IRA.

You have until April 15th to make an IRA contribution for the 2009 tax year. The maximum contribution is $5,000 per year if you were under age 50 or $6,000 if you were 50 and older at the end of last year.
It's hard for many people to scrape that much money together all at once. Make it easier to reach the 2010 max by setting up an automatic investment plan this month.²

Clean up your investment clutter.

If you have investment accounts, 401(k)s and mutual funds scattered across the financial world, simplify your life by consolidating them with one trusted provider.³

Get rid of the paper piles.

Switching from paper statements to electronic delivery will give you a cleaner desk and make your mailbox less attractive to thieves out to steal your identity. Update your USAA document preferences.
Save stamps: Pay bills easily and electronically with USAA Web BillPay^®.
Learn how to use USAA mobile to check balances, transfer funds, request an auto ID card, deposit checks⁴ and more.

APRIL

Adjust your withholding.

How did your tax return look?

If you got a big refund, don't celebrate — that only means you gave the government an interest-free loan during the year. On the other hand, if you ended up owing Uncle Sam too much, you may have been penalized for doing so.
Fine-tune your withholding to make sure you're closer to the target next time around.

Put your refund to work.

If you got a tax refund, do something strategic with it.

Pay down debt.
Build your emergency fund.
Consider an Individual Retirement Account.
Save it for college.

MAY

Get ready to move.

Summer is a popular season for moving. If you're buying a house, figure out how much you can afford to spend, then put yourself in a position to negotiate by getting pre-qualified for a mortgage.
Check out MoversAdvantage^®5. We'll help you through every step of the relocation process, from selling your current home to buying a new one using a USAA-preferred agent. Plus, you can receive up to $3,100 when you use the service.⁶

Start an emergency fund.

You should have a stash of cash big enough to cover three to six months of your regular expenses.
Use a conservative account you can access easily, like a savings account.

Re-think your insurance deductibles.

Take a look at your auto, property and health insurance deductibles. Consider increasing them to an amount you could cover on your own, which could lower your premiums significantly.

JUNE

Travel safely and smoothly.

Planning a summer road trip? Store the number for USAA roadside assistance in your cell phone: 1-800-531-8555.
If you have a USAA credit card, let us know when you'll be traveling. It will help protect your card from fraud and avoid unnecessary disruptions triggered by unusual transactions. Just enter "manage travel notifications" in the search box right here on usaa.com.

Take a look at long-term care.

$77,000: That's the average cost of a private room per year in a nursing home. If you're over 50, it's time to get educated about long-term care insurance.

JULY

Protect your assets.

Homeowners policies don't cover floods. Even if you don't live near water, consider a flood policy.
If you rent, your landlord's policy probably doesn't cover your possessions. Get a renters policy for as little as $10 a month.
Protect your high-value items — like jewelry, art, silverware, cameras and weapons — with valuable personal property insurance.
Homeowners, renters, auto and watercraft policies have liability coverage that protects you if you're responsible for harming others or their possessions. As a rule of thumb, each policy should have enough to cover your assets and future earnings. You can supplement this coverage with an umbrella policy.

Take inventory.

If your property's lost, damaged or stolen, you'll want a good record of what you owned. Make a list or capture images of all your possessions using a camera or video camcorder.
You can also download free inventory software from the Insurance Information Institute.
Store your inventory records in a safe and separate location, such as a safe-deposit box.

AUGUST

Boost your energy efficiency.

Lower your utility bills with a little help from the federal government. There's a 30% tax credit (max value $1,500) for energy-saving improvements like new doors, windows, insulation, air conditioners and heaters.
You can take another 30% credit — with no cap — for installing alternative energy equipment like wind turbines or solar water heaters. See the government's Energy Star site for details.

Take a hard look at your bank.

Your bank is at the center of your financial universe, so make sure it's giving you what you need.

SEPTEMBER

Review your investments.

Are you confident that you have the right mix of investments? The USAA Portfolio Planner can give you a personalized recommendation in a matter of minutes.

Conduct a back-to-school review.

Use USAA's Education Savings Planner to get started on saving for college or check your progress toward this goal.
A 529 college savings plan is a great way to save because there are no income limits on contributions and qualified withdrawals are tax free.⁷
OCTOBER
Make a (new) will.
Don't leave a mess for your family to clean up. Plan your estate by creating a health care power of attorney, a living will and a durable power of attorney.

Review your life insurance.

Make sure you have the right amount of coverage. Don't rely on employer coverage — it may not be enough, and you may not be able to take it with you when you leave.
To cover both short- and long-term needs, consider a combination of term and permanent insurance.

Set up Required Minimum Distributions.

If you're older than 70½, IRS rules require you to tap your IRA and employer retirement plan.
Last year, this requirement was suspended, but it's back in place for 2010. Review the rules and then make arrangements to avoid a harsh 50% tax penalty.

NOVEMBER

Set a holiday shopping budget.

Before you hit the stores or the web, set spending limits to make sure you don't get carried away with the spirit of giving. If you can't pay for it in the month you bought it, don't do it.
Check out USAA MemberShop for rewards of up to 20% when you buy online from hundreds of affiliated merchants⁸.
Some consumers desperate for cash during the holidays fall prey to payday lenders, pawn shops and rent-to-own stores. Don't be one of them: You'll pay sky-high interest rates and dig yourself a financial hole.

It's Medicare season.

Nov. 15 is an important date; it's the first day of Medicare's annual open enrollment period. You have until Dec. 31 to enroll in a Part D prescription drug plan or switch providers, and until March 31 to change your health coverage.

Have a heart-to-heart talk with your parents.

Use the holidays to set aside some time to ask your parents about their financial situation.
Make sure they have a sound retirement income plan, have addressed the potential need for long-term care the right estate planning documents. and have all

DECEMBER

Make your end-of-year tax moves.

Use these tips to lower your 2010 tax bill:

Pay deductible expenses early. This might include your January 2011 mortgage payment, property taxes or charitable contributions you've pledged for the coming year.
Defer income. People who are self-employed have the greatest ability to push off income into the next year: Simply wait till the beginning of the year to issue some of your invoices.

Before making a move, talk to a tax professional. If it looks like you'll end up in a higher tax bracket next year, you may actually want to reverse these tactics — accelerating income into this year's lower return, and pushing off deductions to the next year, when they'll be more valuable.

Track your donations.

December is a popular time for making charitable donations. Keep a record of what you donated and remember you'll need receipts for contributions of $250 or more, and an appraisal for non-cash contributions worth more than $5,000.

Debit or Credit?

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Don't know whether to use your credit or debit card? Use this guide to help you decide.

Pay with credit, when you want to:

Shop online. One of the biggest cardholder benefits is purchase protection. If, for example, an item never arrives, is damaged or you have a dispute with the merchant, you can ask your credit card company to withhold payment. With a debit card, the money is gone from your account until the matter is settled.
Buy something big. Some credit cards offer warranty protection beyond the manufacturer or store's coverage. For example, a home theater system may come with a one-year manufacturer's warranty. Buy it with a credit card, such as MasterCard^® or American Express^® and you get another year's protection automatically. Review the specifics with your credit card company before making the purchase.
Establish a credit history. Debit card activity doesn't translate to your credit report.
Rent a car. Some credit cards offer damage insurance, eliminating the need to pay for the add-on coverage rental agencies charge. Be sure to check your card's exact coverage and exclusions before you charge.
Stay at a hotel or travel in general. Using a credit card is usually easier, especially for hotel and airline reservations.

Pay with debit, when you want to:

Get cash fast. You can get cash from your bank's ATM without the fees and interest many credit cards charge for cash advances.
Avoid interest charges. You'll pay no interest on purchases and only buy what you truly can afford. Set up overdraft protection to avoid fees or penalties for spending more than your available funds.
Buy something inexpensive. Debit cards are great for purchases under $50. It's faster than writing checks and most merchants accept them. Make sure you keep track of your debits to avoid overspending.

Pay with debit or credit, when you want to:

Earn perks and points. Many credit cards offer frequent-flier mileage and points for hotels, restaurants and purchases from participating vendors. More and more debit cards now have cash-back bonuses similar to those offered by credit card companies. Review reward programs carefully — some may offer smaller bonuses for debit card transactions than credit card purchases.

5 Online Scams That Could Steal Your Joy

2010-12-30T12:44:00.000-05:00

Keep the jingle in your pocket and ward off fraudsters this holiday season.

Cyber criminals are always hard at work this time of year. They're corrupting e-cards with viruses, creating fake online auctions, imitating charity sites — all to take advantage of your holiday habits, says Alison Southwick of the Better Business Bureau.
Each year, scammers use the season of giving to devise new schemes — and relying on their tried-and-true tactics — to steal your money and personal information, warns Dave Marcus, director of security research for McAfee Inc., a leading security technology company.
Here are five major holiday scams to look out for this season and tips on protecting yourself.

1. Quizzes, Polls and Contests

The promise of something for nothing is a classic ploy of online crooks. One typical scam promises the first 20,000 responders will receive $1,000 gift cards to a popular electronics store if they "Like" the store on Facebook. Clicking the link takes you to a bogus page that asks for numerous personal details, which can be used for identity theft. And, of course, there are no gift cards.
To protect yourself: Ignore such offers or go directly to a company's Facebook page or website to verify if these offers are legit.

2. Auctions and Deals Too Good To Be True

Shopping on eBay and other auction sites can be a great way to save money, but the deals may be too good to be true — especially if the seller wants you to wire money in advance.

USAA's Security Guarantees
Here are five ways USAA works to protect your accounts and transactions. 1. Careful communication. You can easily recognize legitimate inquiries about your USAA accounts. "USAA will never — ever — ask for your account or personal information via text message, e-mail or phone call," says Tom Shaw, vice president of USAA's Enterprise Security Group. 2. Zero liability protection. You are never responsible for unauthorized charges on USAA cards. Notify us of loss or theft at a 1-800-531-USAA (8722). 3. Account monitoring. We proactively monitor accounts for fraudulent activity and alert members if anything is suspicious. 4. Payment protection. When using USAA's Web BillPay service, if we don't process bills and payments the way you specify, we'll pay up to $50 to cover your late fees or penalties. 5. Online account fraud protection. If your account is the victim of unauthorized access, we will reimburse your account and credit you for any fees charged due to the unauthorized transaction.

USAA's Security Guarantees

Here are five ways USAA works to protect your accounts and transactions.
1. Careful communication. You can easily recognize legitimate inquiries about your USAA accounts. "USAA will never — ever — ask for your account or personal information via text message, e-mail or phone call," says Tom Shaw, vice president of USAA's Enterprise Security Group.
2. Zero liability protection. You are never responsible for unauthorized charges on USAA cards. Notify us of loss or theft at a 1-800-531-USAA (8722).
3. Account monitoring. We proactively monitor accounts for fraudulent activity and alert members if anything is suspicious.
4. Payment protection. When using USAA's Web BillPay service, if we don't process bills and payments the way you specify, we'll pay up to $50 to cover your late fees or penalties.
5. Online account fraud protection. If your account is the victim of unauthorized access, we will reimburse your account and credit you for any fees charged due to the unauthorized transaction.

To protect yourself: Remember the old saying: "If the deal's too good to be true, it probably is." USAA members have made insurance claims on damaged jewelry and sent it in for repair, only to have USAA gemologists discover it's not what the member thought they owned. "We had one disappointed member learn that a semi-precious stone she had purchased was actually glass," says Russell Schulze, USAA claims replacement manager.
Before considering any deal, Southwick says, check the seller's ratings and reviews on the selling site. Be extra cautious: Some fraudulent sites may even imitate a Better Business Bureau seal to throw you off. You can verify BBB-approval at bbb.org. And whatever you do, never pay by wire transfer, a surefire indication of a fraudulent sale.

3. Phony Charities

Scammers take advantage of your good nature and generosity by asking for donations via a website or text message, particularly after a natural disaster (such as the earthquake in Haiti) or during the holidays.
To protect yourself: Check that a charity is legitimate at the BBB Wise Giving Alliance or the American Institute of Philanthropy. You can always donate directly via a charity's website, too.

4. Malware-ridden Holiday Cards and Programs

Animated greetings, seasonal screensavers and winter-themed games become popular this time of year. Sadly, many of these programs are accompanied by spyware and other malicious technology.
To protect yourself: A good anti-malware product — try McAfee, Norton, Kaspersky or Avira — will stop virtually all of this stuff in its tracks. But your best bet is simply to not open any e-mail — even from a loved one — that contains a forwarded greeting card or holiday game. Get extra protection by ensuring your computer software updates are downloaded and applied automatically.

5. Vacation Homes Not Really for Rent

This up-and-coming scam is surprisingly simple: Fraudsters set up a "vacation rental" site for a real home (complete with photos), and they rent it out for weekend and holiday getaways. The problem: The scammer doesn't own the house, and it's not actually for rent, much to the surprise of both owner and renter come arrival day.
To protect yourself: Use trusted travel sites and rental agencies when booking. Low-resolution photos of the home and super-low rental prices are also a giveaway that something is fishy.

A $50 Index Investment

2010-12-30T12:39:00.003-05:00

Many investors who are willing to put some time and energy in investing cannot do it due to the lack of the financial resources. There is good news for all of you, young or beginner investors, who lack the cash but own the intelligence and entrepreneur spirit.
Five companies have foresaw this niche and started to offer the opportunity of participating in an index fund without the investment of a substantial initial sum of money. These companies are American Century, T. Rowe Price, Strong, TIAA-CREF and Transamerica. They include investment in such funds as S&P 500 index funds, a Dow 30 fund and a Russell 3000 fund.

The main thing you should do is to allocate a specific amount of money every month. This sum is usually set at $50 and represents a profitable way of getting started on the financial markets. What is more, TIAA-CREF has set the monthly amount at $25 and in 2003 the company had waived part of its management fee.
The S&P 500 index funds include stocks of the top ten holdings where IBM, Microsoft and Exxon-Mobil represent a big portion of the investment portfolios. When you compare the performance records and the percentage of fund assets in certain stocks, you should take into consideration the date when the funds were established since most of them are relatively newly set.
According to Charles Carlson, the co-manager of the Strong Dow Value 30 fund, the potential investors, when analyzing performance records, should consider the fees that are charged by the company. Another extremely important factor is the managers' performance since a lot depends on the expertise of the manager and the implementation of his financial skills.
In order to exemplify the importance of the role of the manager, Carlson states the case of S&P 500 funds. Moreover, he claims that since most investors lack the big financial resources, the amount of the fee charged by the company plays a substantial role in decision making. As a result in these variations in the fee levels, different index funds offer different returns on the investment. Your decision on which index fund to invest in should also depend on your investment portfolio.

Indexing on a Shoestring: Successful?

According to Carlson, by as little as fifty bucks per month you can get in return a substantial return over the long run. Carlson explains that if an investor realizes this potential early enough, he can accumulate a reasonable amount for his retirement years. For example, if you start investing $50 monthly at the age of 21, at the age of 64 will end up with $319 000 if the return is 10% per year. On the other hand, if you start later, you will have to allocate a bigger amount to accumulate this sum.
According to Carlson, the whole beauty of this type of index funding is hidden in its infectious character. Once you have felt the positive effect of investing these fifty bucks, you start to allocate more and more, in order to get a greater advantage of this financial opportunity.
Index funds represent a beginner friendly way to embark on investment. Additionally, they are low cost with small tax implications. There are many real life examples in which index funds have outperformed actively managed funds, so it is up to you, young and small investors, to grab this opportunity and make a good use of your $50 dollars, which otherwise you will spend on something useless.

S&P 500 O-Strip Index

2010-12-30T12:39:00.000-05:00

S&P 500 O-Strip Index: A division of the S&P 500 index, S&P 500 O-Strip Index stocks are listed on NASDAQ and represent around 75 NASDAQ traded stocks.
S&P 500 O-Strip Index was launched on March, 2004. The fathers of the fund are Standard and Poor, who created the fund in the intention of presenting it as an alternative to NASDAQ 100. Additionally, they declared the fund as "an effective way to measure the performance of the subset of the S&P 500". They claimed that the fund provides a more proficient way of gaining S&P 500 components.

The NASDAQ part of the S&P 500 can be underweight or overweight through the application of o-strip in accordance with the chosen strategy. But this can only be accomplished when the NYSE-only strip version of the S&P 500 is released.
State Street Global Advisors is the first company to include ETF based on this strategy in their portfolio of services. Their ETF implements the tickers OOO.

Hedge Fund Industry Milestones

2010-12-30T12:38:00.000-05:00

The hedge fund industry enjoys high popularity among investors, which is shown by its estimated value of $1 trillion. There are around 8350 hedge funds that operate within it. Additionally, the hedge fund industry enjoys an approximate growth of 20% every year.
Different strategies can be applied in the hedge fund industry. Some of them include the so called leveraging and derivatives. However, not all of the hedge funds apply them, which leads to a more conservative approach toward investing. The use of derivatives and shorting of equities is commonly used in the industry for the purposes of reducing the potentially high levels of risk. Additionally, the applied hedge fund strategies success is independent of the movement of bond or equity markets. On the other hand, success is dependent on the amount of capital that can be used before the disappearance of returns. This leads to the imposition of limits on the amount of capital that can be incorporated.

The dependence on the services of professional managers or management teams is typical for hedge funds since most of them possess a high degree of specialization. A general characteristic of hedge fund managers is their high level of discipline needed for the field.
The history is full of examples of hedge funds outperforming traditional equity and bond indexes. Hedge funds have gained popularity among many endowments and pension funds.

Hedge Fund Advantages

2010-12-30T12:33:00.003-05:00

Hedge funds have gained an increasing popularity thanks to the many benefits they offer to their investors. They have managed to make positive returns under the conditions of both falling and rising equity and bond markets.
Hedge funds are a preferred investment tool for the purpose of decreasing the portfolio risk and volatility. They are also used as a means for enhancing returns.

Another benefit of hedge funds is their richness in terms of styles, which can be either related or not. As a result investors in hedge funds have the ability to select among them in order to better meet their investment goals. It has been proven by various researches that hedge funds generate higher levels of returns with lower levels of risk than traditional investment alternatives.
The estimations of when to enter or exit a position is eliminated through the investment in hedge funds, which leads to their significant usefulness regarding long term investing. Another benefit of hedge funds is their diversification provision to investment portfolios, which is significantly better than the diversification provided by other investment tools.
However, you should have in mind that one hedge fund may carry different characteristics that cannot be found in another hedge fund. They differ in the investment returns they generate for their investors as well as their volatility and risk levels. Thus, different investment strategies should be applied to the various hedge funds. If not linked to equity markets, some strategies tend to deliver a consistent stream of returns accompanied with lower levels of risk. On the other hand, some hedge funds may be as volatile or even more than some mutual funds.
Having this in mind, you should apply the appropriate strategy to meet the characteristics of the target hedge fund.

401k Investing Advice

2010-12-30T12:33:00.000-05:00

Today the importance of the setting of an efficient 401 (k) is widely recognized. The following are several advices that will prevent you from falling in the common investment pitfalls of creating a beneficial 401 (k) plan.

Diversify between various mutual funds! The most common characteristic of mutual funds is diversification. Never be satisfied by the inclusion of only one mutual fund in your plan. Be sure to diversify your investment by putting money into different types of mutual funds in order to take advantage of risk alleviation, which they provide.
Maneuver between your 401 (k) and non-401 (k) portfolio! Always have in mind the types of investments you have in your 401 (k). Take advantage of the fact that trading within your 401 (k) is not a taxable event. So whenever you encounter an investment opportunity you wish to grab do not hesitate to execute it through your 401 (k). This technique is especially useful when you want to embark on aggressive investment, which includes multiple trading transactions.
On the other hand, you should check whether your 401 (k) allows for frequent transactions. If this is not the case, use your non-401 (k) portfolio to make the desired investment.
Do not accumulate your company's shares! Purchasing stocks of the company they work for is viewed as an act of loyalty by many employees, but this action is not recommended since if the company goes bankrupt, you will lose both your money and your job. Hold a reasonably small number of your company stocks, advisably not more than 10%.
Be part of the globalization! Whatever country you live in, try to ignore your sense of patriotism and do not invest only within its confines. You may miss the opportunities that today's global economy presents. By expanding to the international markets, you build up another layer of diversification. Around 40% represents a reasonable percentage of capital to invest in international markets, always having in mind the specific structure of your plan.
Do not underestimate small company stocks! It is true that small company stocks do not significantly increase the value of your investment portfolio, but it has been proven that in the long run many small enterprises do better than their bigger counterparts. Big funds, such as S&P 500, do have their place in your plan, due to their positive indexes, but small company stocks deserve their fair place in your 401 (k) because of their favorable outcomes.
Check for any concealed fees! Always carefully verify whether your 401 (k) does not include any hidden fees. Check whether it is loaded mutual fund that charges fees for entering and exiting it. Whenever you are faced with the dilemma of choosing between a growth fund with 0.7% charge of internal expenses and other with 1.7% respectively, do not hesitate and embark on the first one. It is highly impossible for the second one to catch up with the first one and reduce its cost by 1% for a year.
Even though the expense ratio can be significantly minimized, you should pay it, whereas there is no need to redeem any of the loads. As a rule, the types of fees should be clearly stated in the fund's prospectus. Even if this is not done, or you want to verify the information provided for yourself, you can easily do this online. You should pay special attention to:
- Front-end sales load
- Back-end sales load
- Expense ratio
- 12b-1 fee

Keeping these advices in mind will reduce the possibility of losing money or less time in retirement.

Mutual Funds by American Association of Retired Persons (AARP)

2010-12-30T12:32:00.003-05:00

If you are reaching your retirement years or you have already experiencing them, the American Association of Retired Persons (AARP) is the institution which will be glad to offer you advice on whatever financial concerns you have. In 2006, AARP established its first mutual fund in response to the needs of these specific groups of investors.

AARP Fund Retrospection

AARP are not novices in the mutual fund field. For more than 20 years they have collaborated with Scudder Investments and have established more than 30 mutual funds. In 2006, AARP launches its first three mutual funds independently. Later, one of the subsidiaries of AARP (AARP Financial) enriches the portfolio of mutual funds offered by AARP by three index funds.

The initial AARP funds are presented in the following table:

Fund Name	US Stocks	US Bonds	International Stocks
AARP Conservative	20%	75%	5%
AARP Aggressive	60%	25%	15%
AARP Moderate	40%	50%	10%

Each of the portions imitates the behavior of a certain index:

International Stocks - MSCI EAFE Index
US Bonds - Lehman Brothers Aggregate Bond Index
US Stocks - MCSI U.S. Investable Market 2500 Index

Therefore, it can be concluded that surprisingly AARP offers mutual funds of the index type. This is quite an unusual tactic having in mind the target group of the funds (future and current retirees). Target date funds and lifecycle funds represent more logical choices, but these types have been ignored by the company.

AARP Fund Governance

The management functions of the AARP funds have been allocated to SSgA Funds Management. In the beginning, Alistare Lowe, Leilani Sanders Hall and Michael O. Martel constituted the team responsible for the management. The funds are being distributed through the networks of ALPS Distributors.

Required Minimums and Fees

The investors in an AARP mutual fund will not be hampered by any insurmountable hindrances to entry, but on the contrary. As little as $100 initial investment amount is enough to get you started in the AARP mutual fund. In addition to the $100, your subsequent investment can be the ridiculously low $25.
Furthermore, AARP keeps a low expense ratio compared to the common mutual fund. The 0.50% expense ratio is more like that of the index funds.
Unfortunately, AARP mutual funds are liable to 12b-1 fees, which amount to 0.20%.

Conclusion

Unfortunately, there is scarcity of information regarding AARP funds, such as exact ticker symbols. The introduction of this type of mutual funds is certainly a move on the part of AARP aiming at leveraging their brand name. Nevertheless, at this point it cannot be determined how well the offered mutual funds function.

Roth 401k

2010-12-30T12:32:00.000-05:00

The Roth 401k plan was introduced in 2006 and was initially involved with many misunderstandings common for every new introduction. This article provides general insights, which will help you determine whether this type of retirement plan is suitable for your financial needs.

Roth 401k Explained

The introduction of the Roth 401k was pushed by Senator William Roth Jr, where the name of the plan itself comes from. The Roth 401k from tax perspective is similar to the Roth IRA. Thus when opening a Roth 401k account your earnings will be treated regarding taxes the way resources are treated under a Roth IRA.

Generally, under a regular 401k a percentage of your salary is regularly allocated to your 401k account. After you have retired you are capable of retrieving the accumulated sum. The retrieved distributions are subject to the same taxes as a regular income.
The difference between a regular and a Roth 401k is that the employer pays the required taxes up front in order to avoid tax deductions from their current salary. The main difference is in the time period during which you choose to be subject to taxes - on your entrance of the 401k plan or on your exit.

Roth 401k Plan and Normal 401k Plan Comparison

Keep in mind that your employer may not have included the Roth 401k plan in your portfolio of options since it is a novelty that many employers are still confused of. Your choice between the two should generally depend on your current and expected financial situation.
You should choose a Roth 401k plan whenever:

The tax bracket you are in is a lower one You should choose Roth 401k plan whenever the tax rate you are currently subject to is lower than the one you expect to incur when you retire. In this way you will benefit from the lower tax rate by greatly reducing your financial burden.
A trend of continual tax rate increase is observed
You are making your first steps as an investor Remember that the more time you spend with a particular retirement plan, the greater sums will be accumulated due to compounding.
You have high salary and thus are blocked from Roth IRA. Roth IRAs have several tax limitations that are not observed in Roth 401k.
You seek tax diversification Since you are charged up front taxes in Roth 401k plans, you will gain the opportunity of withdrawing money from the account in accordance with your specific financial needs during retirement years.
You have included mutual funds that make you win high returns

Facts to beware of

If you have decided to invest in a Roth 401k five years before your retirement date, you may be subject to taxes. This is due to the unqualified distributions that will occur. Roth 401k doesn't provide the opportunity of matching, since by law such contributions are required to go to the traditional 401k plan.

Roth 401k Unclear Future

The legitimacy of Roth 401k and Roth IRAs expire in 2010, when the congress should vote for their renewal. If their existence is not confirmed, you will be deprived of your Roth 401k or Roth IRA and the accumulated sums will be transferred to another type of plan. You will not lose your money! They will be reallocated to the conventional retirement plans. When experiencing such transference, the money in your account will not be charged any taxes.
The good news is that the contribution limits to Roth 401k plans are the same as the ones of the conventional 401k plan.