SEP IRA

Archive for June, 2010

Question: What should I invest in besides an IRA?

I already have a Roth IRA with mutual funds between American Balanced Fund and Vanguard Star (balanced) Fund with about 15K between the two. Next year I am no longer going to contribute to the American Fund because of the loads and instead put that $$ into Vanguard’s 2035 Target Retirement Fund, which is more stock oriented rather than balanced. I am 36 years old.

What is another thing I should be investing in for the long term (not an IRA unless a SEP-IRA) that would be “tax friendly”? Maybe a tax-managed fund? I don’t have the option of a 401k. Part of my income comes from self employment, that’s why I was considering a SEP-IRA. Any specifics regarding a good tax-managed fund though? Thanks

Answer: You should first choose a tax sheltered option such as a SEP-IRA and maximize your Contribution to that account. Because your investment grows tax deferred, you need not worry about tax efficiency and simply focus on lower costs. Vanguard 2035 Target Retirement Fund sounds good because of its low cost structure and it automatically rebalances as you approach your retirement age.

Beyond that, if you want to save in a non-tax sheltered account (i.e. taxable account), then there are tax managed separate accounts, but those are expensive and would make sense only for high-networth individuals. So, I would recommend low cost index mutual funds or ETFs. ETFs are more tax efficient than mutual funds. You could also include some municipal bond funds in your portfolio as the interest income is tax free. If you invest in munis from your state, you also get shelter from state taxes.

Question: Simple tax question about Stocks and Roth IRA’s.?

A simple question but I can’t find the answer. If I get some stocks/efts or a Roth IRA and don’t sell any shares, what taxes do I pay?

What if I don’t reinvest dividends, if I just hold on to the stocks. Do I only pay when I sell?

Answer: Yes, you pay when you sell, except in the case of some mutual funds, where you may incur a tax liability before redeeming shares. Some ETF’s also have different tax treatment- the gold and silver funds, where they actually hold bullion work differently than stock ETF’s.

You will get end of year statements from your Broker.

Also, it depends how long you held the investments- some may be considered short term capital gains…

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