Different Types of Bank Investments

Published on March 2017 | Categories: Documents | Downloads: 19 | Comments: 0 | Views: 224
of 10
Download PDF   Embed   Report

Comments

Content

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

Personal Finance Hub by PFhub.com | News | Advice | Loans | Investing Personal finance and news resource.
Search this website… Search

Home Finances »

Hot Deals » News » Top Ten » Tutorials » You are here: Home / Tutorials / Beginner Investing / Different Types of Bank Investments

Different Types of Bank Investments
In the wake of the recent recession, the American people have become disillusioned with several market related investment options. Many previously ‘sound’ investments have spiraled down to touch all time lows, wiping out the life time savings of many. For instance the houses, which were traditionally considered good assets, got heavily devalued during the crash and are yet to catch up with their pre-recession values. With fears of a second recession lurking in the wings, the dynamics of the investment scenario have significantly changed.

1
tweet

retweet
Share

0 The economic downturn has also changed the investment and savings perspective dramatically across the US. While confidence in investments is returning, investors are also more cautious than ever before with their money. Safety seems to be the key concern while investing rather than yield. Given this, the investment options which are backed by the FDIC or which are safe instruments are finding increased favor. Here is an overview of some such safe and rewarding investment options.
Navigation of Bank Investments 1 Money Market Accounts 2 Certificate of Deposit 3 IRA - 3.1 Traditional IRA - 3.2 Roth IRA - 3.3 Self directed IRA - 3.4 SEP IRA - 3.5 Simple IRA 4 401k Plans
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 1 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

5 Bonds - 5.1 Zero Coupon Bonds - 5.2 Government Backed Bonds - 5.3 Government Savings Bonds - 5.4 Municipal Bonds 6 Fixed Income Investing - 6.1 Annuity - 6.2 Bank Loan Funds ♥ More Beginner Investing Tutorials 1. Money Market Accounts A money market account is a type of savings or deposit account, which earns better interest on the money deposited and has higher minimum balance requirement. There is also a limitation on the number of withdrawals you can make from the account in a month. Banks and credit unions offer money market accounts (MMAs) as they earn interest on the funds parked in them. When you deposit funds in a money market account, it is used for investments in government and corporate securities. This is why such accounts are also called money market deposit accounts. The interest your money earns in a MMA is usually calculated daily with the total amount shown in your account once a month. You can deposit money today into a MMA and withdraw tomorrow without much hassle. As is evident, the longer your money stays in a MMA the more the interest it accumulates. A MMA is a good savings option because of the higher interest rate that it offers compared to a typical savings account with a bank. However, the higher yield brings its own set of restrictions on the account. You may be limited to making only 6 withdrawals a month of which just 3 can be made by check. In addition, a MMA usually comes with a higher minimum balance requirement than a savings accounts. The aim of a MMA is to encourage investment rather than spending, and the conditions are designed towards this goal. In spite of these limitations, a MMA is a sound investment because of its risk free nature. While the Federal Deposit Insurance Corp. insures the MMAs offered by banks, the National Credit Union Administration insures credit union MMAs. During periods of economic uncertainty, many investors choose MMAs as a safe haven for their funds because of the government backing that these accounts enjoy. Investors in MMAs should however be aware of high fees that may be imposed on them if the withdrawal limits are exceeded. Also, it is necessary to factor in the income tax payable on the interest earned from these accounts to arrive at the net yield, when comparing them to other investment options. 2. Certificate of Deposit (CD) The Certificate of Deposit or CD, as it is more popularly known, is a money market investment option very similar to a MMA in many respects. Both are offered by banks and credit unions, and both promise higher interest rates than traditional savings accounts. Similar to a MMA, a CD is one of the safest investments in money market instruments because of the FDIC or NCUA guarantee backing it.

http://www.pfhub.com/bank-investments-for-smart-investors/

Page 2 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

But a CD is less liquid than a money market account. Usually a CD comes with a specific lock in period say, three to six months or 1 to 5 years. If the investor wants to pull out before this period is up, he or she will have to pay a premature withdrawal penalty. The penalty is informed about at the time of opening the account and it is put in place to dissuade withdrawals and encourage investment. CDs are good options when prevailing interest rates are high. Your interest is insulated against market fluctuations until the end of the investment lock in period. However, some institutions do offer variable rate CDs too. These can be of many types. One of the common types is the CD linked to the market index. The final interest amount that you earn on such CDs depends on the initial and final index value. One critical difference between a CD and a MMA is that, for higher deposit values, a CD is likely to offer higher interest rates. Before you start looking for CDs that yield the best rates, it is necessary to understand the annual percentage yield that you would derive from each option. This yield shows the rate of return you will stand to get, after the compounding of the interest is taken into consideration. The APY (annual percentage yield) of the CDs you are considering should give you a good idea of how beneficial they are when compared to others. 3. IRA The Employee Retirement Income Security Act (ERISA) enacted in 1974 brought the Individual Retirement Account or IRA into being. With the IRA, employees have the option of making structured payments into this account for the purpose of retirement planning. Tax benefits on the IRA payments make them doubly attractive. Employers can match the employee contributions into the IRA, boosting the individual’s savings for the future. This also serves as an incentive for the employee of the company. Every tax paying American citizen under the age of 70 ½ can create an IRA and contribute to it. The FDIC insures IRAs, which makes them safe investment options. There are several types of IRAs, which offer some unique features and benefits to the account holders. 3.1 Traditional IRA A traditional IRA is for anyone who can make and maintain minimum contributions. It is maintained at an institution such as a bank and the funds may be invested in instruments that are approved by the government. Typically, only those investments, which are considered safe are approved for the IRAs, because the money from the account is aimed at retirement planning. Traditional IRAs offer significant tax benefits. The taxation applies only at the time of withdrawal. Considering that you are likely to require the IRA funds only post retirement when your lack of salaried income puts you in a lower tax slab, this is a huge advantage. The contributions are deducted from your gross income before you calculate the total tax you need to pay on your income. Net result is that you pay taxes on a lower income. This feature makes the traditional IRA the most favored IRA account in the US. Investors can withdraw funds from the traditional IRA after the age of 59 ½. This is subject to the stipulation that the IRA has been in operation for at least 5 years. Else you will have to wait for the 5 years to be completed. Other than in a few exceptional cases, any withdrawal before the age of 59 ½ will draw a 10% penalty in addition to the normal income taxes on the funds.
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 3 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

3.2 Roth IRA The working of the Roth IRA is very similar to its traditional cousin. One main difference is that contributions to the Roth IRA are not tax deductible. However, the withdrawals are tax free if the IRA holder fulfills the necessary stipulation of age and the IRA has been in existence for the minimum 5 year period. It is easier to pull out cash from a Roth IRA than a traditional IRA. It is also important to know that there are no mandatory withdrawals beyond the age of 70 ½ with Roth IRAs. You can continue to contribute to the Roth IRA well beyond this age and until you wish to do so. This means that the Roth is a safe and lucrative investment program during retirement years too, especially for those who do not really depend on the savings from their IRA account to manage living expenses. Another significant advantage with the Roth IRA is that the funds parked in this investment account can be left to heirs after the account holder’s death. The best part is that this legacy accumulates value tax free. Minimum distribution (withdrawal) rules will be applicable on the heirs though. This feature comes in very handy especially with huge estates where tax would otherwise take a huge bite out of the estate’s total value. Traditional IRAs can be converted to Roths, but you will have to pay off taxes on the investment being converted. You can also opt for part conversion of your traditional IRA into Roth to control the amount of taxes you will need to pay during the conversion. 3.3 Self directed IRA As the name suggests, this IRA is primarily managed by you, the owner. However, according to IRS regulations, a custodian is required to be in charge of managing the account and ensuring that all regulations are conformed with. This custodian may also provide you, the IRA owner with advice and help on investing and aid in understanding the government provisions pertaining to these investment options. Interested investors can open a self directed IRA with a brokerage. Most of them allow you to open this kind of account online with detailed instructions on the process to help you. You can either create a new self directed IRA in this manner or ask for company sponsored retirement funds to be directly credited into this IRA account to avoid taxes when you change jobs or retire. Self directed IRAs offer much more options in terms of the kind of investments you can undertake with the funds parked here. Although these are also called real estate IRAs by some, property is not the only kind of investment you can make with these funds. You can truly diversify your retirement saving funds by investing in real estate, mortgages, company equity, stocks and many other investment avenues using this account. There are some restrictions on the kind of investments that can be made. For instance, insurance contracts and collectibles are not approved investments for self directed IRA funds. 3.4 SEP IRA A Simplified Employee Pension IRA (SEP IRA) is a kind of savings plan sponsored by the employer. Here the employer makes contributions to the IRA for the benefit of his or her employees. This kind of IRA account can either be opened by the employer for an employee or the employer can contribute to an existing employee IRA. The SEP IRA is also a good option for self employed individuals, who can save with this low cost, low maintenance investment option.
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 4 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

The SEP IRA is subject to the same rules and regulations as the traditional one. This is because most institutions ask for the employee to have a traditional IRA or for one to be opened in the employee’s name, and use this as a SEP account before any contributions can be deposited. Some institutions also insist that the IRA be named a SEP IRA for this purpose. The employer gets tax benefits from the contribution he makes to this IRA. The funds in the SEP IRA are only taxed at the time of withdrawal by the beneficiary. The contributions schedule is quite flexible and allows employers to maintain more discretion in how frequently they make deposits into this account. However, regulations do require that all employees are treated equally by means of matching contributions to their individual SEPs. 3.5 Simple IRA The Savings Incentive Match Plan for Employees is more commonly known as the SIMPLE IRA. As the name suggests, this is an uncomplicated and hassle free retirement fund that allows employers to provide funds for retirement planning of employees. The SIMPLE IRA is for small businesses, which have less than 100 employees. The administration of the SIMPLE IRA is easy and economical when compared to other retirement plans, which makes it a good option for small businesses. Contributions can be deducted from the salary of the employee. This means that the employer gains a significant tax advantage when he makes contributions to the employee’s IRA account. Contributions to SIMPLE accounts are also lower than other kinds of IRA accounts. The employer is required to match the employee contribution or make non elective contributions every year. However, the employee is allowed much more flexibility in deciding his contribution schedule and amount. The funds are taxed at the time of withdrawal only. Premature withdrawals or roll overs may draw a penalty. Another advantage for employees with a SIMPLE IRA account is that they can choose the institution where the account is held. The investment options for the IRA funds depend largely on the institution where the account exists. Normally there is a wide range of options to choose from. There are also self directed SIMPLE IRAs, which allow market savvy employees to manage their own investment portfolio with the funds parked in the account. 4. 401k Plans 401ks are also employee retirement benefit plans, which allow individuals to save for retirement. This kind of employer sponsored plan lets the individual save substantial amounts with help from his employer’s contribution to the plan. Typically, employers match the employee contribution to the 401k plan. 401ks are easy to open, operate and manage. The employee can arrange for his or her contribution to be credited directly into the account. This enables him or her to maintain a consistent savings schedule. In addition, the employee also gains the advantage of tax savings. In fact, many Americans use the 401k as a tax planning tool. The contributions are not taxable when they are deposited into the account, because taxes apply only at the time of withdrawal. In a Roth 401k, the contributions are taxed at the time of deposit into the account. When withdrawn, the funds in a Roth 401k are tax free. The contributions to the 401ks are on the increase with successive governments steadily raising the bar on
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 5 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

how much you can put into your 401k periodically. Higher allowable limits for contributions translate into lower taxes at present and greater savings accumulation for the future. The range of investments available with your 401k plan may be restricted when compared to a self directed IRA or SEP IRA. Your employer may also have a significant influence on where your 401k funds get invested. In spite of this limitation, the 401k is definitely a plan you should participate in to take advantage of the many benefits it offers. You should start saving early with a 401k. The earlier you start making deposits into the plan, the more time the money will have to grow and the more the number of contributions you can get from your employer. A change of jobs does not affect your 401k’s value. Under such circumstances, you can continue to maintain status quo, although employer contributions from your previous employer will no longer be forthcoming. You can also roll it over into another 401k, or withdraw the cash. The last option is the least advised, as the many advantages of 401ks will no longer apply on the funds you pull out. 5. Bonds Bonds are loans given by the investor to the issuer. Given this, the bond is redeemed when the issuer pays back the loan at the end of a pre specified period. Government treasury bonds or bonds issued by long standing established companies are sound investments as these lenders are safe and not likely to default on the repayment. The interest yield on the bond is clearly mentioned at the time of purchase. Even if the markets tank, your interest is insulated if you have a bond purchased earlier. This is the main reason why bonds typically yield better returns when share prices are falling to dismal levels or the economy is in recession. There are many types of bonds: 5.1 Zero Coupon Bonds These are bonds sold at huge discounts from the face value. The interest payments are accumulated until the maturity of the bond and paid up along with the redemption amount. If you expect a large future expense, then a zero coupon bond is your ideal investment option. However, a quirk in the taxation rules requires that you pay taxes on the receivable interest annually even if it is not actually disbursed to you. Because of this a zero coupon bond makes a perfect IRA investment. 5.2 Government Backed Bonds These are highly secure investments and include treasury bonds and bills. The interest yield is slightly lower than other bonds because of the complete safety guaranteed with these instruments. Other agencies and federal institutions also issue similar bonds. While these may not have the full backing of the government, they are considered just as safe for investment purposes. The degree of government backing determines the interest rates payable on these bonds. 5.3 Government Savings Bonds These are completely safe bonds, which are also free from state and local taxes. Many parents opt for
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 6 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

purchasing these bonds in the minor’s name to take advantage of his or her zero federal tax status to avoid tax completely with these bonds. 5.4 Municipal Bonds These are bonds issued by cities, towns, counties, districts, municipal bodies et al. These bonds are federal income tax free and also, for most part free from state taxes. The tax free feature sets off any loss from the lower interest rate that these instruments usually carry. 6. Fixed Income Investing These are investments which afford a regular and pre determined yield. While bonds are also fixed income investments, there are many others that can be categorized under this heading. Permanent insurance products that combine savings with the basic insurance goals are a type of popular fixed income investments. These products allow you to invest in the form of premiums and allow your money to grow tax deferred. Loans are also allowed against the existing value of your policy. Universal, variable and whole life plans offer different benefits, varied repayment terms and also differ in the way the underlying investments affect your total policy value. 6.1 Annuity The annuity offers a regular income stream during retirement. It is basically a contract with an insurance company and duplicates a pension plan in its repayments. These are complex instruments and a thorough understanding is necessary before you buy them. Remember that these instruments do not offer much in the way of tax benefits as the earnings are taxed at repayment time as ordinary income. The high fee also puts off many investors. However, an annuity can give you great flexibility with respect to managing your portfolio without costs. The freedom to make contributions without age restrictions lets you add to your savings on a continuous basis. 6.2 Bank Loan Funds Bank loan funds are another fixed income option with yields higher than other such instruments. The higher yield can be attributed to the short term nature of the underlying loans that make up the loan fund. The fact that they are more risky than the other fixed income investments is a primary reason for the higher interest they yield. Many investors choose these products in spite of the absence of FDIC backing. They believe that any risk is set off by the assets of the company, which are put up as collateral for the original loans. While safety in investment is a critical factor to consider while creating your portfolio, it also has to be balanced with adequate returns and liquidity. The investment options discussed above offer some good solutions to achieving this objective.

http://www.pfhub.com/bank-investments-for-smart-investors/

Page 7 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

Related posts: 1. 2. 3. 4. 5. IRA Rollover Chapter 3: Types of Money Market Investments IRA/Keogh Accounts Chapter 2: How to Invest in Money Market Accounts Chapter 1: Beginner Money Market Investing Strategies and Concepts

Filed Under: Beginner Investing Tagged With: 401K, bank investments, Bonds, CD, certificate of deposit, IRA, MMA, money market accounts, municipal bonds, Roth IRA, savings bonds, Traditional IRA

Speak Your Mind
Name Email Website

Post Comment

Get Email Updates of New Posts
Enter your email address... Go

Tutorials Active Forex Trading ADR Investing Advanced Bond Investing Bank Investing Bond Investing Futures Investing Margin Investing Money Market Investing Mutual Fund Investing
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 8 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

Options Investing Short Selling Stock Investing Popular Top 10 Political Scandals in the United States Performance Attribution Analysis Interest Rate Swap ESOP- Employee Stock Ownership Plan Top 9 Political Scandals in the United Kingdom New Chapter 2: How Do ADR Work Chapter 4: Investing in ADR Chapter 3: Types of ADR Chapter 3: Types of Money Market Investments Chapter 2: How to Invest in Money Market Accounts Chapter 2: Margin Trading Terminology Chapter 3: When to Use Margin Trading Chapter 4: Risks Associated with Margin Trading Customs Union D Archives October 2010 September 2010 August 2010 July 2010 June 2010 How To File Bankruptcy Form LLC Categories Finances Economy Personal Finance Saving Money Taxes
http://www.pfhub.com/bank-investments-for-smart-investors/ Page 9 of 10

Different Types of Bank Investments | MMA | CD | IRA | Bonds | 401K

10-10-13 9:33 AM

Hot Deals CD Rates Checking Account Savings Account News Banking Credit Card Economy Housing Market Taxes Top Ten Finance Political Tutorials Beginner Investing Market Research Advance Investing Basics Bankruptcy Business Glossary # O P Q R S T U V W Y Z Return to top of page about · contact · privacy policy · sitemap · terms of service · Copyright © 2010 PFhub TM

http://www.pfhub.com/bank-investments-for-smart-investors/

Page 10 of 10

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close