When you’re saving for retirement, it can be difficult to know whether you’re saving enough. Even if you think you’ve got it covered, there’s little accounting for how much you’ll actually spend in retirement or how long your retirement will be.
That’s where annuities come in. These unique combinations of insurance and investment features help investors save for retirement and offer assurance they won’t outlive their hard-earned assets.
Learn more about annuities below and what you’ll want to take into consideration before you add them to your portfolio.
What is an annuity?
An annuity is an investment you buy in exchange for periodic payouts, typically during retirement. You can make a single premium payment or a series of payments, and choose whether your annuity payouts are made in a lump sum or over time.
How do annuities work?
A modern-day annuity is a contract between you and an insurance company. In order to get an annuity, you’ll need to pay a premium – usually a large lump sum – and then the insurer invests it. Afterward, the insurer provides you with a stream of payouts for a predetermined number of years or even the remainder of your lifetime.
An annuity has two phases: the accumulation phase and the annuitization phase. The accumulation phase of an annuity is the period of time when you’re making payments. Those funds may be split among various investment options.
The annuitization phase is the period of time when you receive payouts from the annuity, much like a regular paycheck. This can last for a set amount of years or for the rest of your life. The payouts include the principal amount along with any investment gains.
Annuities provide a stable investment option for savers who worry about market volatility or outliving their retirement savings. Annuities are known for three main benefits.
Reliable income for a set amount of time. Once you’ve made your payments, you’re guaranteed to receive payouts for the rest of your life or someone else’s life, like your spouse.
Death benefits. You may also designate a beneficiary on your annuity. This beneficiary will receive the payouts if you die beforehand.
Tax-deferred savings. Before you start receiving payouts, annuity income and investment gains grow tax free. “Annuities complement other retirement plans in that they provide opportunities to grow without heavy taxation,” says Rob Williams, managing director of financial planning, retirement income, and wealth management at Charles Schwab. You pay taxes on annuity income when you receive its payouts.
What are the different types of annuities?
Different types of annuities vary in how your money is invested.
Fixed annuities place your money in a general account of the insurance provider which promises a minimum rate of interest and fixed amount of periodic payouts. Check with your state insurance commission to confirm your insurance broker is registered to sell fixed annuities.
Variable annuities place your money in various investments, like mutual funds, much like a 401(k). The payouts from variable annuities will vary depending on how much money you pay, the rate of return on your investments, and any expenses of those investments as well as the annuity. Variable annuities are regulated by the Securities and Exchange Commission (SEC).
Indexed annuities provide the positive investment potential that variable annuities offer. The return of an index annuity is based on a stock market index, like the S&P 500. Like fixed annuities, these are regulated by state insurance commissioners.
Pros and cons of annuities
At their core, annuities are full of advantages:
Regular payments. They provide a guaranteed source of income throughout your retirement.
Low-risk returns. Annuities are generally a more stable investment, unless you have a variable annuity.
Tax-deferred growth. Earnings in your annuity are untaxed as they grow over time.
Unfortunately, there are major drawbacks to consider as well:
Big fees. Annuities typically have high fees and commissions which can really cut back on the long-term earning potential. Because of this, annuities aren’t a great place to grow money, but fixed immediate annuities take a smaller fee hit while generating a lifetime income stream.
Illiquidity. Variable annuities don’t offer access to your money until after several years, typically six to eight years but sometimes longer. If you do withdraw funds or cancel your annuity contract before that surrender period ends, you incur a surrender fee that can initially reach as high as 10% of your contributed funds, decreasing by one percentage point each consecutive year. Once your payouts start, it’s next to impossible to change them or access more of your principal.
Taxable income and tax penalties. Annuities aren’t totally tax free. As a source of income, annuity payouts are subject to income tax as you receive them. If you withdraw from your annuity before you’re 59 ½, you’ll face a 10% penalty on top of your ordinary income tax as well.
Guaranteed retirement income
Payouts last through your lifetime
Typically high fees
No short-term access to variable annuity funds
Tax penalties on early withdrawal
The financial takeaway
Annuities are a great addition to your retirement savings plan if you’re always maxing out your 401(k) contributions and if you can afford the fees. They provide steady income throughout your retirement, they grow tax-free, and your beneficiaries can benefit from the payouts, too.
Since annuities aren’t free, however, be sure to weigh their costs against their promised benefits to determine whether it’s the right choice for you.
Few crypto-trading platforms are as popular as Coinbase. But like all other trading and investing platforms, it has its risks. Case in point: At least 6,000 Coinbase users were hacked and had funds stolen from their accounts earlier this year, the platform disclosed to customers in early October.
Instances like this serve to shake users’ confidence in platforms like Coinbase, which leads to an obvious question for many: Is Coinbase safe? For most users, the answer is “yes.” But as always, there are some things users should know in order to gauge the risk for themselves.
Is Coinbase safe?
In a general sense, Coinbase is safe to use – or, at least as safe as any other crypto-trading platform, says Roman Faithfull, a photon cyber threat intelligence analyst with Digital Shadows, a company specializing in digital risk protection. “It [entails] the same risk as investing,” he says.
Related Article Module: Coinbase review: Crypto investing for individuals and institutions
To create an account on Coinbase, users need to supply some basic information, much as they would if they were opening a brokerage or bank account. For prospective users, that includes your full legal name, an email address, a password, a phone number, and a valid government-issued photo ID, which includes your date of birth, address, and the last four digits of your Social Security number, too.
Again, fairly standard stuff for opening an account of almost any type.
As for the rules and regulations that Coinbase abides by, it depends on the jurisdiction, according to the company. But in the US, Coinbase complies with the Bank Secrecy Act, the USA Patriot Act, and local state laws and regulations. “Aside from security protocols, cryptocurrency exchanges in the US and the UK must abide by anti-money laundering (AML) and know your customer (KYC) policies,” says Faithfull. This requires financial service providers to try and verify the identity of users.
The risks of using Coinbase to buy, sell, and trade crypto
As with any trading platform, there are risks associated with using Coinbase. Here are a handful of them:
Cybersecurity threats: From losing your credentials in a phishing scam to a cyber security breach, there’s always a chance that users could end up having their information, or holdings, exposed to an unauthorized third-party.
Questions abound regarding regulation: In the US, regulation regarding cryptocurrency is still up in the air. But at some point, new rules are likely to land, and depending on what shape and form those rules take, it could have big implications for crypto investors.
Getting in over your head: While Coinbase does provide educational materials to users, it can be easy to get in over your head with little or no experience. For new users, or crypto newbies, take the time to learn the lay of the land, or consult a professional before making an investment.
There are risks associated with cryptocurrencies: Crypto is inherently risky, speculative, and volatile. There’s a chance that your purchase today could plunge in value tomorrow. That’s an important thing to remember, especially for budding crypto investors.
Can you get scammed on Coinbase?
Yes, you can get scammed on Coinbase – and almost any other platform, too. That’s something to keep in mind: You’re almost always assuming some level of risk when using an investing platform, whether it’s concerning cryptocurrencies or stocks. But aside from that, experts say there aren’t necessarily special risks associated with using Coinbase.
“There’s no inherent risk” to using the platform, Faithfull says, adding that much of the risk users do assume mostly “depends on the credentials you use.”
A phishing scam involves tricking unsuspecting users into supplying their usernames and passwords to a hacker, often using an email or text message that appears to be from a platform on which they have an account. While often not very sophisticated, it’s a common scam, and with a user’s username and password, a third-party can, in many cases, defeat the two-factor authentication system and access a user’s account.
From there, a hacker can change the account’s credentials or transfer the account’s holdings. And phishing is, of course, just one possible course for scammers. Faithfull says that using an authenticator app, along with two-factor authentication, could “significantly increase users’ security.” But even that wouldn’t be invulnerable, he adds.
The best and perhaps easiest thing to do to keep your account safe, Faithfull says, is to create a new email address – one that you don’t use for anything else – and a password you’ve never used before, anywhere. Also, he says don’t broadcast that you have crypto holdings. “It’s similar to bragging about having cash in your wallet,” he says, and could attract unwanted attention.
Coinbase is one of the biggest and most popular crypto-trading platforms out there, and in terms of safety, using it puts users at no more risk than using most, if not any other platforms. Users can take security into their own hands, too, by creating hard-to-crack passwords and using novel email addresses.
And while there’s always risks associated with investing (especially when investing in cryptocurrency), Coinbase users and prospective users would do well to research what they’re getting into before opening an account.
A margin call occurs when the value of your brokerage account falls below a certain level. This level is known as the margin requirement and means that the investor is required to deposit more money into the account, sell off some of the investments, or add more marginable assets if reached. “The best way to describe a margin call is that you owe your investment platform or brokerage money,” says Robert Farrington, founder of The College Investor.
Within the context of investing, margin is the practice of taking a loan from the brokerage firm for the purpose of buying stocks and other assets. Margin can increase the buying power for an investor by allowing them to make larger investments and higher potential profits. “Margin is an incredible tool to provide investors with access to additional capital,” says Dr. Hans Boateng, founder of The Investing Tutor. “It works wonders in an upward market. It becomes dangerous in a downward market if you don’t have savings in the event of a margin call.”
How margin calls work
There are different types of margin calls and requirements based on what type of account you have and the type of asset that you may be trading. Regardless of the account type or what you may be investing in, once a margin call has occurred, you’ll be required to bring the account back to the minimum through the methods mentioned previously. If the margin call is not met quickly enough (usually between 2 to 5 business days) then your brokerage may sell out of your positions, which could result in a taxable event.
There are three main types of margin calls: maintenance margin calls, Regulation T calls, and minimum equity calls. Each of these margin calls can be triggered for different reasons. Here’s a breakdown of each below.
Maintenance margin call: A maintenance margin call refers to the margin requirement to stay in a position. Once you have met the initial margin requirement of 50%, the Financial Industry Regulatory Authority (FINRA) requires that brokerages set a maintenance requirement of at least 25% for the remainder of the trade and allow brokerages to be even more restrictive. This is sometimes known as the “house requirement” and most brokerages set their maintenance requirements between 30 to 40%.
Let’s use an example where you have $10,000 invested in company ABC: If your brokerage sets the maintenance margin requirement at 25%, it means that the equity in your account must not fall below $2,500.
Remember, a margin account will consist of the equity, which is the amount of cash you have plus the amount that was loaned to you. Therefore, the total account balance would have to be $7,500 to receive a margin call ($5,000 margin loan + $2,500 remaining equity) because the value of the loan has not changed.
Here are a few scenarios using a 25% maintenance margin requirement with $5,000 in equity and $5,000 in margin.
If account value drops 10% down to $9,000 = No maintenance margin call
Equity = $4,000
Margin balance = $5,000
If the account value drops 30% down to $7,000 = Maintenance margin call
Equity = $2,000
Margin balance = $5,000
You must now add at least $500 to the account
If the account value drops 40% down to $6,000 = Maintenance margin call
Equity = $1,000
Margin balance = $5,000
You must now add at least $1,500
Regulation T call: This type of call refers to the requirements needed to begin a margin trade and can occur when an investor makes a transaction in a margin account without meeting the initial 50% minimum equity requirement. This is sometimes referred to as a Fed Call.
Minimum equity call: This is the lowest amount needed to open and maintain a margin account. This call – sometimes known as an exchange call – occurs when the account balance falls below $2,000 in equity. If you’re classified as a pattern day trader, this requirement is $25,000.
How to avoid margin calls
You’re not required to have a margin account, and you could easily avoid margin calls by only trading with cash. “The best way to avoid a margin call is to simply not use all your margin limit,” says Farrington. Margin is not needed to achieve solid, consistent returns over time, but for those that choose to use it, here are a few things you can do to avoid a margin call:
Keep cash on hand. One of the easiest ways to address a margin call is by adding cash to the account. However, if you do not keep enough cash on hand, this may be difficult.
Stop loss orders. Entering a stop loss order can help limit losses and, depending on the volatility that day, it could prevent the stock from falling far enough to trigger a margin call.
Stay informed. It is a best practice not to check on your investing account on a daily basis; however, this changes with a margin account due to the higher levels of risk. Investors may want to consider adding alerts should the price fall within a certain range.
Use your margin limits wisely. Just because you’re given the ability to take out a large margin loan doesn’t mean that you have to. If you’re using margin, consider using less than the maximum amount – this would give you a larger share of equity and a bigger cushion to avoid a margin call.
The financial takeaway
Using margin in an investing account can help increase gains, but it can also magnify losses. It’s important to make sure you’re properly managing your risk. “There are really few reasons to use margin,” adds Farrington. “It should only be used by experienced investors who have a specific plan and purpose for doing it. Maybe you’re investing today while waiting for that ACH deposit next week. Or maybe you’re executing a certain options strategy. But you need to have a specific plan.”
Robinhood is one of the most popular trading platforms for young investors, but not all users are happy. If you want to switch from Robinhood to one of Insider’s top-ranked investment apps, you can either directly transfer securities out of Robinhood into your new brokerage account, or you can sell your stocks and crypto and transfer the money into your bank account.
It’s easy to withdraw money from Robinhood on your iOS or Android mobile device – or by using their website. If you can, it’s best to withdraw your cash into the same bank account you used to fund your account. Otherwise, Robinhood may ask you for extra documents to prove that you own the bank accounts in question.
Before you withdraw your funds
Robinhood users should look out for a few rules that limit how and when they can withdraw their cash from their accounts.
You may be required to wait up to five business days after depositing funds. Robinhood has an “Instant Deposits” policy, which means some customers can start trading as soon as they’ve moved cash into their Robinhood account from their checking or savings account. But there’s a catch: even though you might be able to buy and sell stock with your “instant deposits,” you won’t be able to transfer your cash back out of Robinhood right away. Once you’ve moved money into your Robinhood account, you’re typically required to wait up to five business days before you can move that money out.
After selling stock, you must wait for the trade to settle. When you buy or sell stocks, ETFs, or options in the United States, it takes three business days for those trades to “settle,” which means the trade is officially complete. If you’re a Robinhood Gold or a Robinhood Instant user, you may be eligible for instant settlement, which means you can withdraw any proceeds right after you sell stocks, ETFs, or, options.
You can make only five withdrawals per business day. If you’ve already hit that limit, you’ll have to wait until the next business day to make any additional transfers.
You can withdraw only $50,000 per business day. If you have a large balance that exceeds that amount, you will have to withdraw money in lump sums.
You have to wait 30 days to withdraw funds from selling free stock. You know that free stock you received from Robinhood’s Referral program? Robinhood will let you sell that stock right away if you want, but you have to keep the cash value of that stock in your account for 30 days before you can withdraw it.
You’ll face special rules if you’re switching bank accounts. Watch out if you funded your Robinhood account with one bank account, and want to move your money into a different bank account. That can look suspicious, and Robinhood has some special rules that apply in that situation. They may ask you to send some documents to prove you’re really the owner of both bank accounts, like sending pictures of your photo ID or bank statements. To avoid the hassle, it’s best if you can withdraw your cash into the same bank account that funded your Robinhood account.
You may not be able to withdraw money while your account is restricted. Robinhood sometimes restricts users’ accounts. That can happen if the user has a negative balance, had a bank account transaction reversed, if the user is suspected of fraud, or for a few other reasons. If your account is restricted, you may not be able to withdraw any money until you’ve contacted Robinhood to clear things up.
The financial takeaway
You can easily transfer money out of Robinhood into your bank account. But there’s a few catches. Most importantly, you can’t take money out until five business days after you’ve transferred that money into Robinhood. You’ll also need to wait three business days after selling stocks, ETFs, or options before you can withdraw the proceeds.
On the iOS or Android app, get started by tapping the “Account” button in the bottom right of the screen, which looks like a cartoon person. From your browser window, get started by clicking “Account” in the top right, and then click “Transfers.”
As Jennifer Stein, director of client engagement at Priebe Wealth, explains, “Robinhood has made headlines for misleading inexperienced investors and allowing them to make far riskier trades than they are comfortable taking on. Robinhood also does not offer retirement accounts, trust accounts, or many other investment vehicles outside of a standard brokerage investment account.”
Whether you want to delete your account for the above reasons or for some other purpose, this guide will show you how.
Before you can close your Robinhood account
Prior to deleting your account, you’ll first need to choose what to do with your holdings:
Transfer all money out of your account to bring your balance to $0
Just keep in mind: If you sell for less than you purchased the stock, you may lose money. You may also owe capital gains taxes by doing so, so a transfer is typically the better option. “This will allow investors to keep their investment but switch brokerages,” Stein says. “They can then determine the best strategy for selling the shares and diversifying if that is their ultimate goal.”
Frequently asked questions
How much does it cost to close a Robinhood account?
If you sell your holdings and simply transfer the funds to your bank, closing your account is free. If you choose to transfer your holdings via ACATS, there is a $75 fee.
How do I transfer assets to another brokerage?
You’ll need to initiate an ACATS transfer through your new brokerage. They will need your account number, which you can find under “Account Information” in the main menu. A quick note: Crypto holdings cannot be transferred to other brokerages. They will be liquidated, and your cash proceeds can then be transferred to your new account.
What happens to my account records?
For regulatory purposes, Robinhood will hold onto records of your account – including statements, trade confirmations, and tax documents – even after you’ve closed it. You can continue to access them through the app. (Don’t worry, re-downloading the app will not reactive your closed account.)
How long does it take to close a Robinhood account?
Once you’ve liquidated or transferred your holdings, zeroed out your account balance, and requested the deactivation, Robinhood estimates it takes anywhere from three to five business days.
The financial takeaway
There may come a time when you’re ready to delete your Robinhood account. Before doing so, you’ll need to sell your holdings or transfer them to another brokerage. You should take into account possible capital gains taxes, as well as Robinhood’s $75 fee for transfers, before deciding which route to take.
If you have questions about closing your account, reach out to Robinhood customer support directly. They can help guide you through the process.
If you’ve already begun your investing journey, the stock market is a familiar place. But if you’re looking to expand your portfolio and see how else you can strengthen your portfolio, there’s foreign exchange, or forex.
Forex involves trading one currency for another. For example, a person could exchange the US dollar for the Japanese Yen. Forex offers deep liquidity and 24/7 trading, so investors have ample opportunities to get involved.
The forex market is a global electronic network of banks, brokers, hedge funds, and other traders. This market is where one currency is traded against the other in an effort to turn a profit.
Central banks are also involved in the forex market, where they’re responsible for maintaining the value of their countries’ currency. This value is represented as the exchange rate by which it will trade on the open market.
Market participants can trade in the spot market and also buy and sell derivatives. As a result, they can trade futures, forwards, and swaps.
Investors trade forex in pairs, which list the base currency first and the quote currency second. For example, if someone trades the JPY/USD, the Japanese Yen is the base currency, and the US dollar is the quote currency.
Investors who are interested in forex have the ability to trade several different currency pairs: major pairs, minor pairs, exotic pairs, and regional pairs.
The major pairs involve the US dollar, and include USD/JPY, EUR/USD, USD/CHF, and EUR/USD. These four currency pairs account for 80% – a strong majority – of forex trading, according to figures provided by IG.
The minor pairs, which consist of other major currencies, include GBP/JPY, EUR/GBP, and EUR/CHF.
There are exotic pairs, which involve a major currency combined with a minor currency, such as EUR/CZK, USD/PLN, and GBP/MXN.
Then there are regional pairs, which are named for different geographic regions, for example Australasia or Scandinavia. AUD/SGD, EUR/NOK, and AUD/NZD all count as regional pairs.
The world’s most-traded currency, by far, is the US dollar; it experiences more than $5 trillion worth of trading volume per day, according to figures from the Bank for International Settlement (BIS). The data from BIS also reveals the Euro as a not-so-close second, with more than $2.1 trillion in daily trading volume, and the Japanese Yen and pound sterling are the third- and fourth-largest currencies by average daily trading volume, at $1.1 trillion and $844 billion, respectively.
The forex market
This global market has two tiers: the interbank market and the over-the-counter (OTC) market. The interbank market involves institutions that exchange currencies with each other and have the ability to set exchange rates because of the magnitude of their trades.
The OTC market is different in that it involves transactions that are made electronically instead of going through a third party like a broker or exchange.
How forex trading works
Forex trading involves trading currency pairs in an effort to hedge or speculate. For retail investors, the process of forex trading involves opening a brokerage account, funding it, and then trading.
Once set up, if an investor thinks that the US dollar will rise compared to the Japanese Yen, they could buy the US dollar and sell the Yen. However, if that same investor thinks the Euro will decline relative to the US dollar, they can sell the EUR/USD by opening a sell position for one lot of that pair.
Either way, if their bet is accurate, they will make a profit. However, if their prediction isn’t accurate, they will suffer a loss.
Investors trade currencies in lots, which are simply the number of units of those currencies. There are standard, mini, micro, and nano lots, which consist of 100,000, 10,000, 1,000, and 100 currency units, respectively.
Traders frequently aim to capitalize on small fluctuations in exchange rates, which are measured in pips, which represent one one-hundredth of 1 percentage point.
Hedge funds also use brokers. “[They] generally use institutional brokers, but they often also use the same brokers as retail investors – although they will almost always negotiate volume discounts/better terms,” says Tim Enneking, managing director of hedge fund manager Digital Capital Management.
The pros and cons of forex trading
Forex offers many pros, including deep liquidity, 24-hour-a-day access, and access to leverage, which can help provide stronger returns. Further, some forex brokers advertise themselves as offering no-commission trading.
Another major draw of trading forex is the small amount of capital a person needs to get started. “You can easily trade using leverage which means that you need relatively little capital to be able to trade forex,” says Julius de Kempenaer, senior technical analyst at StockCharts.com.
“It is no problem to day trade or scalp as the forex market is a lot less regulated than the stock/bond market.” Scalping refers to making trades that profit from small changes in the value of forex pairs.
But there are drawbacks as well – such as leverage, which can be a double-edged sword in that it can amplify both gains and losses. Further, Enneking notes that the forex market has low volatility. “Without leverage, it’s a difficult market to make real money in,” Enneking says.
Retail traders can face substantial risks because of easy access to leverage and lack of understanding of how it all works.
The financial takeaway
The forex market provides ample opportunities for traders, allowing them significant access to leverage, the ability to trade 24/7, and the possibility of getting started with a small capital outlay. There are plenty of online brokers they can use, providing them with a wealth of options.
However, they should keep in mind that while there is the potential for gains, there are also significant risks involved. For starters, leverage can amplify losses, and many retail traders who want to take part will find themselves competing with professional traders working for financial institutions.
“Neophytes have their work cut out for them,” says Enneking. “There are a plethora of long-time, highly skilled, very knowledgeable players in the space. You have a long learning curve to climb to feel comfortable and become successful in the sector.”
Whether we want to think about it or not, retirement will come for us all at some point in our lives. When it’s your turn, will you have enough money to sustain you for the rest of your life? That’s the question every adult has to answer for themselves and the reason so many of us choose to participate in some kind of retirement savings program.
The two most common are the 403(b) and 401(k) plans. These are savings programs offered by employers that enable you to allocate some of the money you earn into a special account where it will be invested and possibly matched by contributions from your employer. Here is a closer look at how both of these plans work and in which situations you might want to consider enrolling in one.
403(b) vs. 401(k): At a glance
Both 403(b) and 401(k) are employer-sponsored retirement plans aimed at helping workers invest their earnings and see them grow into a pot of money they can live on once they retire. There are some differences between the two that make each appropriate for different kinds of investors.
403(b) plans are tax-sheltered annuity plans offered by nonprofits and other tax-exempt employers.
401(k) plans are qualified profit-sharing plans offered by for-profit companies to enable employees to save for retirement.
What is a 403(b) plan?
A 403(b) plan is a type of retirement plan that can only be offered by qualifying tax-exempt employers. It’s also known as a tax-sheltered annuity, though money can be invested into both annuities and mutual funds. These plans enable employees to contribute pre-tax money from their earnings directly to their plan. That money is then invested in annuities or mutual funds that are likely to gain in value over time.
Earnings grow tax-deferred until you start taking dispersals. You need to be at least 59 ½ to begin to withdraw funds from a 403(b) without paying a penalty, unless you qualify for a special circumstance, such as financial hardship or disability.
403(b) plans are only offered by tax-exempt employers, such as 501(c)(3) nonprofits, public schools, cooperative hospitals, and some religious organizations. The employer is the 403(b) plan sponsor and usually hires a provider to develop the options it will offer employees and to administer the plan itself.
Every plan is different and tailored to what the employer chooses to provide, such as the ability to take out loans or contribute after-tax dollars. You are generally eligible to participate in a 403(b) when your employment begins, though some employers set their own rules for eligibility and may opt to automatically enroll you in a plan.
Employees usually get to choose how much to contribute to the plan and employers may or may not provide additional contributions. Depending on what options your employer offers with its 403(b) plan, you may also be able to add post-tax dollars to your account. Because you’ve already paid taxes on this money, you won’t have to do so again when you collect dispersals of these funds once eligible.
In 2021, you can contribute up to $19,500 in salary to a 403(b) if you are under age 50 and up to $26,000 if you are older than age 50. The most both an employee and employer can contribute this year is the lesser of $58,000 or an employee’s total includible compensation for their most recent year of service.
403(b) plans can also offer special provisions for employees to catch up on their retirement savings. This is one of the main advantages they have over 401(k) plans. If you’ve worked for a qualified organization for at least 15 years and meet specific requirements, you could add up to a maximum of $15,000 in contributions to your 403(b) over the course of five years. Otherwise, the 403(b) is very similar to the 401(k).
Tax-deferred retirement investments that may have employer contributions
Option to add up to $15,000 in catch-up contributions if you meet qualifications
Lower taxable income while contributing to the fund
Money is constantly growing
May be able to add post-tax dollars
May be allowed to take a loan
Have to pay taxes on disbursements
Have to pay a 10% penalty and taxes on early withdrawal of money
Funds can only be invested in annuities and mutual funds
Can only use employer-approved service providers, which often come with high fees
What is a 401(k)?
A 401(k) is a retirement plan offered by many private employers that allow participants to divert pre-tax money from their pay into an investment account. Employers often provide additional funds to 401(k) plans in addition to what employees contribute. There are three kinds of 401(k) plans:
1. Traditional 401(k): This plan enables employees to designate how much of their pay is added to the fund per pay period and employers to provide matching funds as well as set up a vesting schedule. These plans must pass nondiscrimination testing that proves company contributions don’t favor highly compensated employees. Companies of any size can offer this kind of plan and they can be offered in addition to other retirement plans.
2. Safe harbor 401(k): This plan is similar to the Traditional 401(k), but requires employer contributions to be 100% vested. Safe harbor 401(k)s are not subject to nondiscrimination testing. However, they do have rules about notifying employees about their rights and obligations regarding the plans. Companies of any size can offer this kind of plan and they can be offered in addition to other retirement plans.
3. SIMPLE 401(k): This type of plan is aimed at enabling small businesses with fewer than 100 employees to offer retirement benefits and maintain cost efficiency. Employer contributions have to be fully vested, but the plans don’t have to meet annual nondiscrimination testing.
You may be automatically enrolled into a 401(k) or have to contact the appropriate person in your company to participate. It all depends on what your employer’s policies are regarding eligibility and participation.
Employers can also decide what kinds of benefits they choose to offer with their 401(k) plans, companies to administer the plan, and types of products you can invest in. Options may include shares of company stock, individual stocks, bonds, or securities, variable annuities, or mutual funds.
401(k) plans have an income limit. In 2021, no more than $290,000 of an employee’s income can be considered when calculating contributions based on a percentage of compensation.
The same individual contribution limits for 403(b) plans apply to traditional and safe harbor 401(k) plans in 2021: $19,500 if you are under age 50 and up to $26,000 if you are older than age 50. For SIMPLE 401(k) plans, the limit is $13,500 if you are younger than 50 and $16,500 if you are older than 50.
401(k) contributions are pre-tax, thereby lowering your taxable income in the years contributions are made. Taxes are paid upon withdrawal of funds once you reach an eligible age, have a special circumstance that allows penalty-free withdrawals, or opt to withdraw funds early and pay a 10% penalty. A plan may also have provisions that allow after-tax contributions, which will not be subject to taxation upon withdrawal. All taxes on 401(k) withdrawals are calculated as regular income tax.
“Sometimes, employers will permit loans on 401(k) plan balances,” says Cassandra Kirby, a Certified Financial Planner and wealth advisor with Braun-Bostich & Associates. “This allows up to 50% of the vested balance to be loaned up to a maximum of $50,000. You must repay the loan within five years. There are some exceptions to this rule if the loan is for a first-time homebuyer. ”
Though most people don’t have a choice between a 401(k) and 403(b), the former generally offers participants more flexibility for choosing how your money is invested than you get with 403(b) plans. Many employers offer 401(k)s as a way of providing profit sharing to employees, which isn’t possible with a nonprofit that offers a 403(b). Fees may also be less with a 401(k) than with a 403(b), but fees are common in general.
“Unfortunately, historically the 401(k) and the 403(b) plan markets have been dominated by higher fee providers,” says Katharine Earhart, partner and co-founder of Fairlight Advisors. “It’s important to understand and know the fees for your plan, including the fees associated with the investments inside your plan. Plan sponsors (typically the employer) should be sending an annual participant fee disclosure document which clearly and transparently displays the fees for the funds.”
Tax-deferred retirement investments
Employer contributions are common
Lower taxable income while contributing to the fund
Money is constantly growing
May be able to add post-tax dollars
May be allowed to take a loan
May have flexibility in choosing investments
Have to pay taxes on disbursements
Have to pay a 10% penalty and taxes on early withdrawal of money
May have to wait for employer contributions to be fully vested
May be subject to high fees
The financial takeaway
Both 403(b) and 401(k) plans are vehicles offered by employers to help employees save for retirement. Because one is only for nonprofit organizations, you will likely not have the option to choose one over the other. However, they are very similar in how they work, each offering some advantages over the other.
It’s always a good idea to consult with a financial advisor if you’re considering participating in a retirement plan such as these. And any opportunity to save for the future will be beneficial, especially if your employer offers matching contributions. That’s free money that will grow in a plan like a 401(k) or 403(b). Either way, they’re both worth considering if they’re available options to you.
Investing your money can help you turn one dollar into many more, giving you the ability to build wealth without having to work harder. Thanks to compound interest and a variety of investment vehicles, you can decide where to put your money.
One type of investment vehicle that can help diversify your money is a mutual fund, which gets money from investors and pools it together into a fund. These funds invest in various securities like stocks, bonds, and short-term debt. Mutual funds are often actively managed, but not always.
Here’s how to get started investing in mutual funds.
Step 1: Look at your finances and goals
Before you get started with investing in mutual funds, it’s important to first review your current income, expenses, monthly debt obligations, and net worth to see where you’re at financially.
You wouldn’t build a house without laying a proper foundation – and the same goes with your finances. Having an emergency fund and manageable debt are important if you want to invest. Why? Because investing is risky, no matter how you look at it. There are ways to minimize your risk by figuring out your risk tolerance, but it’s crucial you have that financial foundation and safety net set up.
Knowing where your finances are at now can inform how much you can afford to invest and what your asset allocation should be based on your risk tolerance.
On top of that, consider your short- and long-term goals when investing, too. Will this be used for a down payment in five years? Or for your retirement in 30 years? Knowing your goals and having a rough timeline can ensure that you stay on track and know why you’re investing in the first place.
Step 2: Research types of mutual funds
According to the Securities and Exchange Commission (SEC), a mutual fund is an open-end investment company that is registered with the SEC and gathers money together from various investors to put into asset classes like stocks, bonds, and more.
When you invest in mutual funds, you end up purchasing shares of the mutual fund that reflects partial ownership of the total portfolio.
“Mutual funds are baskets of various stocks with a common theme behind them, such as ‘US Equities Growth Fund’ or ‘Sustainable Developed Markets Fund.’ They usually have a net asset value, which is determined once per day, unlike stock prices that fluctuate during the day in the markets,” explains Gary Grewal, a Certified Financial Planner and author of “Financial Fives: The Top 325 Ways to Save, Earn, and Thrive to Retire Before 65.”
There are many different types of mutual funds that you can invest in:
Stock funds: These invest in a company’s stock. There are some nuances within stock funds, including those that focus on investing in a company’s stock, growth-focused stocks based on financial returns, income-focused stocks that produce dividend payouts, stock funds based on certain sectors, as well as index funds that track specific indexes and seek to produce similar results.
Bond funds: This is a type of investment company that’s focused investing in bonds and debt securities. The risk related to bonds can differ depending on the bond. As an investor, the SEC recommends that you consider the credit risk if the bond issuer fails to pay back debt, how interest rate fluctuations will affect the value of a bond fund, as well as prepayment risk and what will happen if the bond issuer pays back the bond earlier than anticipated.
Money market funds: These have the least risk and invest only in particular investments that are issued by the US government or corporations.
Target-date funds: These contain a combination of stocks and bonds that aim to help you retire by a certain date, called target-date funds. They can also be referred to as lifecycle funds as well. The asset allocation will shift over time depending on the overall goal.
In many cases, mutual funds are actively managed by an investment professional. But it’s possible to invest passively in mutual funds as well, typically called an index fund. Also: mutual funds can be index funds – and vice versa.
Actively managed mutual funds work with a professional manager whose main goal is to help you beat the market. They do much of the heavy lifting when it comes to choosing securities to invest in and review the performance.
Passively managed funds like index funds have an objective to match the results of a particular index and don’t have a professional manager. As such, it’s a passive way to invest as there’s no outside help. No outside help typically means lowers costs.
In order to diversify your investments, you’ll want to invest in various types of mutual funds and not just one type in a specific sector.
Step 3: Choose a passive or active strategy
After researching the various types of mutual funds out there, you want to be clear about whether you want to have a passive or active strategy.
Actively managed mutual funds are costlier, as they are rife with fees, can take a chunk out of your investments, and may also lead to tax events.
For example, there may be mutual fund distributions that you need to report and pay taxes on. When you invest in mutual funds, you can get capital gains distributions as well as dividend payments. This could be a good thing, but there may also be tax implications.
Depending on what your mutual fund manager does, it could lead to higher taxes because of the difference in holdings.
When you sell an asset, you’re expected to pay capital gains taxes if you hold the asset for longer than a year and there is an increase in value. If you hold it less than that, you’ll be taxed at the ordinary income rate, which is higher (which can be up to 37% compared to 20%).
Passively managed mutual funds, such as index funds, seek to replicate market returns of a particular index, such as the ever-popular S&P 500. They are more affordable for investors since there are lower fees as there’s not an entity that is managing the investment, as you’re managing it yourself.
“Active funds typically come with higher expense ratios and may even come with a sales charge. Active means there are human portfolio managers whose job is to manage the investments within the mutual fund to try and beat the market,” explains Grewal.
“Multiple studies have shown over time it’s very hard to beat the market, so passive funds such as those that track the S&P 500 Index may be a better choice for those concerned about fees, as passive funds have expense ratios that are typically much lower than their active counterparts,” says Grewal.
After researching types of mutual funds and choosing a strategy, you want to get started investing in mutual funds.
“One can easily invest in mutual funds via their workplace retirement plan, IRA, or opening a brokerage account through Fidelity, Schwab, and Vanguard,” notes Grewal.
When you invest in mutual funds, you purchase shares from a brokerage or from the actual fund. How much you end up paying will vary based on the sales charge or sales load as well as the fund’s net asset value per share. You may be able to invest in mutual funds that don’t have a sales load associated with them as well.
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To get started, choose a brokerage or company to invest in mutual funds. You can check out some popular options such as Fidelity, Vanguard, Charles Schwab, and Etrade. Before opening an account, be sure to review the prospectus and any fine print and also consider:
Any account minimums required
Usability of website and mobile app options
Funds that are available
Total costs such as sales load and expense ratio
After you open an account with a brokerage, deposit money into the account and then select the mutual fund you want to buy and purchase shares. Create a plan to add funds on a regular basis, such as each month, and review your performance as you go to see if any changes should be made.
The financial takeaway
If you want to get started investing in mutual funds, the main things to be aware of are active versus passive strategies and the costs that can come with each choice. Your choice will determine how much you pay and also if you take a hands-on or hands-off approach.
Investing in mutual funds can be an easy way to diversify your portfolio and also offer a straightforward redemption process if you want to redeem your shares.
Much of the investing landscape is based on how an investor feels about the economic landscape and the ways in which that investor can profit or protect themselves. If you believe in a company’s ability to succeed, perhaps you might buy the stock or a call option.
If you’re pessimistic about a company’s outlook, you may consider put options. A futures contract is another financial tool that traders can use to speculate on the price swings of assets like oil, gold and other commodities.
But what exactly are futures, how do they work, and what sets them apart from options?
What are futures?
Futures are contracts where the buyer agrees to buy a commodity or financial instrument a particular the quantity, price, and date at a later point in time – and the seller agrees to sell or deliver the asset. Futures are derivatives, which means that their value is derived from an underlying asset. For example, a futures contract on crude oil will be heavily influenced by the price fluctuations of the oil market.
Futures contracts can be critical for businesses that depend on certain input goods to operate. The airline industry is well-known for this, because of the fluctuating prices for jet fuel, and uses futures contracts to lock in prices and protect against unexpected costs.
While futures contracts based on commodities like corn, oil, and wheat are the most common, there are several other asset types that a futures contract can derive its value from. Here’s a short list:
Commodity futures: Commodities are tangible assets, agricultural products, and natural resources used in commerce and trade. A short list of futures in this category would include soybeans, corn, wheat, crude oil, and natural gas.
Precious metal futures: Gold and silver are the most common metals that fall into this category. Investors who purchase futures contracts on gold or silver are usually looking to hedge against global financial uncertainty, inflation, or geopolitical events.
Stock index futures: Futures contracts can also derive their value from an index like the S&P 500, Nasdaq, Russell 2000, or Dow Jones. Investors use stock index futures to capitalize on anticipated movements in an index and can be sensitive to events like data releases, such as the US jobs report or statements by the Federal Reserve.
Currency futures: These types of futures contracts can be based on the exchange rates between countries. Some of the most popular currency futures contracts include the Canadian dollar, British Pound, Japanese Yen, and Euro.
US Treasury futures: The interest rates on Treasury bonds have a significant impact on a large part of the financial markets. US Treasury Futures allow investors to speculate on the potential changes in interest rates.
Understanding how futures work
There are five key parts to every futures contract, also known as standard contract specifications.
Trading hours: Unlike the US stock market, which is open from 9:30 a.m. to 4 p.m. ET, futures trade almost 24 hours a day, six days a week, starting on Sunday at 6 p.m. ET. The closing time varies between 5 p.m. and 6:45 p.m. ET on Friday, depending on the type of contract you’re trading.
Contract size: Each type of contract has a predetermined size. One contract of gold will always equal 1,000 troy ounces – a unit of measure used for weighing precious metals – while one contract of S&P 500 futures will be $50 times the S&P 500 index. (So, for example, if the S&P 500 is trading at 2,300, the value of the contract would be $115,000 [$50 x 2,300]).
Contract value: The contract value is the current price of the contract. If gold is trading at $1,500 per ounce today, then the contract value would be $150,000.
Tick size: This is the smallest denomination that a contract can fluctuate and varies depending on the type of contract.
Delivery method: Futures contracts can be financially settled or physically settled. From the investor’s perspective, these are usually financially settled, whereas businesses may choose physically settled contracts.
Futures contracts can be purchased on margin, meaning that an investor only needs to put in a small amount of money to control a much larger sum in the market. The minimum amount of money required to enter into a futures contract is known as the initial margin requirement.
These requirements are set by the futures exchange and are subject to change. Generally, the margin requirement for futures contracts is between 3%-12%. This means, depending on the price of the contract, an investor could spend $5,000 of their own cash to control a $100,000 investment, which represents only 5%.
This amount of leverage can present serious risks if the investment does not go as planned and in some cases could cause an investor to lose more than the initial amount invested.
Pros and cons of futures
As with any investment vehicle, there are pros and cons that you should be aware of. These are some of the major advantages and disadvantages.
May qualify for special tax treatment
Generally low margin requirements
Longer investing hours compared to the stock market
Highly leveraged, meaning the investor could lose more than their initial investment
Highly speculative with the potential for significant losses
Futures vs. options
Futures and stock options have many similarities – both are contracts between two parties and can allow an investor to hedge and protect their portfolio – but there are some key differences that you should be aware of.
Buyer has the obligation to purchase, while the seller has the obligation to sell the underlying asset
Cannot be purchased on individual stocks, only certain stock indexes
Can lock in the prices for physical goods and financial instruments
Buyer has the right, not the obligation, to buy or sell shares at the specified price
Can be purchased on nearly any individual stock or ETF
Options can only lock in prices for financial instruments, not physical goods
The financial takeaway
Investing with futures can be a way to diversify your portfolio in ways that the more traditional stock and bond investor can’t. This additional exposure comes with a few trade offs which include higher rates of volatility, longer trading hours, and special tax advantages.
“Futures tend to be a more complex or advanced financial instrument,” adds Henderson. While the potential for large profits may be tempting, carefully consider the risks before entering into futures trading. It may also be wise to consult a Certified Financial Planner to ensure that a negative move in the futures market does not threaten your overall financial security.
The major mandate of the Federal Reserve – the central bank of the US – is to keep the nation’s financial system solvent and manage its money supply (the amount of cash and readily available funds in circulation). It does this through a balancing act involving interest rates – specifically one called the federal funds rate.
The federal funds rate (“fed funds rate,” for short) is only used between banks; it’s not an interest rate an individual can apply for or a financial account will earn.
But it’s a key benchmark.
After the Fed sets it, the federal funds rate becomes the basis for interest charged on loans and credit card purchases, and the return offered by fixed-income investments, like bonds and annuities. The level of interest rates – how cheap or expensive it is to borrow money – affects business and consumer spending. So, through the federal funds rate, the Fed tries to keep the entire economy on course.
Here’s how it works, and the ways it can affect you.
What is the federal funds rate?
The federal funds rate, also known as the overnight rate, is the interest commercial banks charge when they lend money to one another for extremely short-term periods – literally, overnight.
The Fed mandates this activity between banks to ensure they meet their reserve requirements. That is, it requires that each bank must maintain enough cash on hand, plus a reserve balance with the central bank, to cover a certain percentage of its deposits and other liabilities on every business day.
These regulations are to make sure that a bank’s account-holders always have ready access to their money. If banks are short on funds to maintain their reserve requirement, they borrow from another – at (or very close to) the fed funds rate.
There are two types of federal funds rates:
The federal funds effective rate is the weighted average of all the interest rates banks pay when they borrow from other banks in the country.
The federal funds target rate is the rate set by the Federal Open Market Committee (FOMC), the monetary policy-making body of the Federal Reserve, to serve as the guidepost by which banks charge each other. Made up of the Fed’s Board of Governors and five regional Federal Reserve Bank presidents, the FOMC meets at least eight times a year to decide the federal funds rate based on prevailing economic conditions.
When people refer to the Fed “slashing the interest rate” or “raising interest rates,” they usual mean the federal funds target rate.
What is the current federal funds rate?
On September 22, 2021, the Federal Reserve maintained the federal funds rate at a range of 0% to 0.25%. This remains unchanged from the first time the Fed lowered the benchmark rate to almost 0% on March 15, 2020 in response to the COVID-19 pandemic. The fed funds rate averaged 5.59% from 1971 until 2020.
How does the federal funds rate affect the economy?
During its eight meetings a year, the FOMC can raise, lower, or keep the fed funds rate the same. But what motivates the committee to periodically change it? How does the Fed use it as an economy-adjusting tool?
When it needs to stimulate economic growth – production, spending, expansion – the Fed lowers the fed funds rate. This move makes it cheaper for banks to borrow money and maintain their reserves. So these banks can then lend out their extra funds at lower financing costs, encouraging companies and individuals to take out loans to expand, invest, and buy things. It increases the money supply in the system, in technical terms.
In contrast, when the Fed needs to slow down the economy – say, because prices are climbing too fast, causing rampant inflation – it raises the fed funds rate. To prevent their required reserve balance from going into the red, member banks have to pay more interest. They then raise their interest rates to clients, which tends to slow down any form of borrowing activity. When banks don’t finance as much, the money supply contracts, and economic growth goes back to more sustainable levels.
How does the federal funds rate affect you?
The federal funds rate is an interbank interest rate. But it has a ripple effect throughout people’s financial lives, the interest they pay, and the money they earn. Among its effects:
Prime rate: How the fed funds rate moves influences the movement of a number of interest rates, one of the most significant being the prime rate. The prime rate is the rate a bank can offer its best corporate or high-net-worth individual clients.
Consumer loans and accounts: A shift in the prime rate influences consumer interest rates as well. When the prime rate rises or drops, you can expect a corresponding adjustment on the monthly charges of your personal loans, credit cards, and adjustable-rate mortgages. If they pay fluctuating interest, your bank accounts and CDs also earn more or less.
US Treasuries and other bonds: Changes in the fed funds rate can be paralleled in the interest rates paid by newly issued Treasury notes and bonds. These in turn serve as a benchmark for corporate bond rates.
Stocks: A decrease in the feds fund rate can send markets soaring, while an increase can push the markets to decline.
Employment: When interest rates go down, it encourages consumers to buy more goods and services. In turn, this propels businesses to meet the demand by expanding production, hiring more workers, and raising wages.
The financial takeaway
The federal funds rate is an important tool – the tool, some would say – the Federal Reserve uses to stimulate or slow down the economy. Not to mention, maintain the solvency and reliability of the nation’s banks.
Financial institutions, corporations, and individuals are all affected by the federal funds rate one way or another. There’s not much you can do to alter the Fed’s moves or even anticipate them, but it’s good to understand how it can influence your daily life and finances.