Investing 102

[FatfreeGTO]

Ok phew finally after a few nights of going through this thread I finally finished reading it!

There is definitely a great deal of good info in here but there has also been some missed opportunities for the very basic info. What I am going to say has been mildly addressed by others but no discussions were ever made about it and it really should have been.

The very first and most important thing for anyone looking to take control of their financial future should be to set up their 401k/403b etc that their workplace offers. You simply want to invest the maximum it takes to get the "match" from your employer. Talk to your "HR" person or whomever runs the plan at your work to find out what the limits are. This money comes out of your account using "pre-tax dollars" so you are already getting the tax break at the end of the year because it lowers your "gross taxable income" Additionally and this is the most important part, that employer "match" is an instant 100% gain on the money you invested in the account. Where else can you get a guaranteed 100% gain on your investment... Just make sure you look into what your funding options are in your 401k and do your homework. If you don't elect where the money will be invested it won't do anything for you because it will probably end up in some stable asset fund which is the same as cash so to speak.

The next most important step is setting up a Roth IRA and put the maximum amount in every year. I have had many people ask me where do I buy a Roth IRA?? The general public doesn't understand what one is they believe it is something similar to a mutual fund. It is nothing more then an account you setup through a brokerage firm that you put your take home pay (after tax dollars) into to fund the account. You use this account to buy stocks, mutual funds, bonds, etf's, commodities etc. This money can grow to any amount and when you turn 59 1/2 you are entitled to start taking the money out and not have to pay taxes on any of it! Another bonus is at any time you can take out your money that you put in without touching the profits you have made and it is tax free. Please don't do this though because it is for your retirement.

Key points to consider with a Roth IRA are:
- Under age 50 you can contribute $5000 per year (that is $417 per month)
- Over age 50 you can contribute $6000 per year
- Single person can contribute if they make less then $107k per year, from $107-$122k per year the amount you can contribute goes down with no contributions being allowed if you make over $122k per year.
- Married couples filing jointly can each put in the maximum allowed. This is important because most people think that they are limited to $5k if they are married but really you and your spouse can both have a Roth account and be putting in $5k each or more if you are over 50... Again your combined income has to be less than $169K per year to qualify and no more then $179k before you can't contribute anything.

Anyone on here that has mentioned that they have $10k etc to invest right now absolutely should open up a Roth IRA before tax day if you qualify. You can then put half of your money into the account now and get the full contribution limit for 2011 and after April 15th put the other $5k in and get 2012 fully funded. Then go nuts and buy all the dividend stocks or whatever else it is that excites you that has been discussed in this thread.

Obviously don't do any of this if you have credit card debt. Pay off that debt first. If you do the above steps and you have a chunk of change that you have stashed away for those "emergency moments" consider yourself very lucky because you are farther ahead then the vast majority of people.

Investing is so very important even though it seems like you can't possibly amass any wealth investing only $2,3,4,5K etc per year, I'm here to tell you yes you can! You can absolutely do it! I'm only 30 and have been investing in one form or another ever since I got my first job at Mcd's (gotta love that stock!!) 15 years ago. The amount you invest doesn't matter just so long as you start doing it today, not tomorrow! One day you open up your account and all of a sudden you see your saving starting to pay off because you just gained more in your account from "paper profits" in one day then you normally contribute all year... There are days where you "lose" the same amount but that is all part of the game.

Good luck
BJ

[GregWeld]

Great first post BJ!!

ROTH accounts are really an amazing gift from our government. Sadly I was never allowed to have one.... (the good news is I never needed one either!) but it is really going to benefit anyone that can and does!

[Bucketlist2012]

BJ,

Well said..

True before people can invest ,they need to clear all consumer debt..Such a simple way to make money...STOP spending what you don't have and then charging it at 18 to 28% interest.. Car loans ?? 6 to 9%. Madness..

Paying those off gives you 6% to 28% gains....

Then you talk of 401K..For sure if you have a Company that matches, and you don't participate to the maximum , you need to read this thread over, and do some additional research..If they match up to 10%..Match them..But not company stocks unless it is a stellar company, and even then, diversify. i did 15% for years, and they matched 10%....free money..i like FREE money.

Then you have the ROTH, That would be the next step.. I don't have one, but i too don't really need it, But i should have put money into it. others should put into one..then they have the diversification of the ROTH, and the 401K.

Then finally you get to the good stuff, A Schwab type taxable account..

What some of you say ??? I thought that is where we are at now...

You might be, but i have some questions before we continue....

Hmmm...Only again if you have ZERO consumer debt ? and you are matching a 401K plan at work ? and you have a cushion of emergency devalued dead presidents ? .How much ? 3 months, six months, 1 year ??

What you can afford and makes you comfortable..Even if it is 500 or 1000 dollars. If you have credit card debt and no emergency fund, you are double screwed....Back off the investing and clear these problems up..

Then the real money making begins...

[GregWeld]

Since we're talking about 401's.... (not ROTHS here)

Some of the stocks we've been discussing are "tricky". Master Limited Partnerships (Kinder Morgan Partners - KMP) is one of these...

Although you can technically hold MLP units in an IRA and other tax-exempt investment vehicles, don’t do it.

Placing investments that are already tax-advantaged in a tax-sheltered account isn’t the most efficient allocation of resources; hold MLP units in brokerage accounts and keep your IRAs and 401(k) plans for more traditional fare.

MLP's pass thru 80 to 90% of their "income" to the unit holder (share holder) and as such are not taxed (Federally) so the unit holder is the partner that gets hit with the tax... There are rules about this and income levels etc -- so if you get a sizable dividend from MLPS you should discuss this with a CPA...
You're not taxed on this until the "return of capital" (which is what it is - it's not a "dividend") is above your cost basis... So let's say you have $10,000 worth of "units" -- you'll have no tax until you've gotten $10,000 in "return of capital/dividends"... There are other rules - but just be aware of them if you're buying bigger amounts because they can affect your income tax return.


I own an apartment complex inside an IRA... and I have to file an income tax and pay a tax on it each year even though it's inside the IRA -- because it get hit with UBIT (Unrelated Business Income Tax)... It's not a big tax but still costs me to have the paperwork done and I have to have the IRA pay the tax etc - so it's a hassle. I wanted to BUY the investment out of the IRA --- in other words I'd pay the IRA the amount of the investment and take it out of there -- but that would cause even more tax issues. UGH!

[Bucketlist2012]

Originally Posted by GregWeld

Since we're talking about 401's.... (not ROTHS here)

Some of the stocks we've been discussing are "tricky". Master Limited Partnerships (Kinder Morgan Partners - KMP) is one of these...

Although you can technically hold MLP units in an IRA and other tax-exempt investment vehicles, don’t do it.

Placing investments that are already tax-advantaged in a tax-sheltered account isn’t the most efficient allocation of resources; hold MLP units in brokerage accounts and keep your IRAs and 401(k) plans for more traditional fare.

MLP's pass thru80 to 90% of their "income" to the unit holder (share holder) and as such are not taxed (Federally) so the unit holder is the partner that gets hit with the tax... There are rules about this and income levels etc -- so if you get a sizable dividend from MLPS you should discuss this with a CPA...
You're not taxed on this until the "return of capital" (which is what it is - it's not a "dividend" is above you cost basis)... So let's say you have $10,000 worth of "units" -- you'll have no tax until you've gotten $10,000 in "dividends"... There are other rules - but just be aware of them if you're buying bigger amounts because they can affect your income tax return.


I own an apartment complex inside an IRA... and I have to file an income tax and pay a tax on it each year even though it's inside the IRA -- because it get hit with UBIT (Unrelated Business Income Tax)... It's not a big tax but still costs me to have the paperwork done and I have to have the IRA pay the tax etc - so it's a hassle. I wanted to BUY the investment out of the IRA --- in other words I'd pay the IRA the amount of the investment and take it out of there -- but that would cause even more tax issues. UGH!

Wow... Great info as usual... You sound like your own CPA... I do have a CPA and we discuss this, and my assets are in the right place, But this helps me understand it more. I have more studying to do.

Do you think that a pop quiz sometime would sharpen the troops minds ??

I am not saying that even I could pass it, but it may be a fun way to shake us up..Just a thought.

But again, you money crazy man, thanks for all your tips..

I always hated discussing taxes and Money....That is why I never had any money. I learned that I needed to learn this stuff to secure MY future.

Thanks for the tax tips.

[GregWeld]

Well... as usual I have to write for EVERYONE reading this thread. I have no idea who that might be - and someone out there might be buying half a million bucks worth of KMP...

STILL -- This is INVESTING 102 -- and I doubt the above statement... and even then - they'd have no tax due until they had gotten all their investment back...

But --- What I'm really saying is that IF people are going to invest -- then they need to discuss this stuff... and they should be discussing it with a CPA not some friggin' forum!

Most of this stuff doesn't affect anyones taxes in a big way... it's just stuff to be "aware" of... awareness of various issues -- not really knowing the exact details - is what people need to know.

It's like a torque spec --- I don't need to know the torque spec of every single fastener in a motor -- I just need to know that there are specs and I should look them up if I'm working on something!

[FatfreeGTO]

That is interesting about owning the apartment complex with your IRA. I always thought someone could purchase something like that with one I just have never personally heard of anyone doing it.

I personally do not have a Traditional IRA simply because I don't make enough to start another account. Any extra that I do feel like playing with I have a Scotttrade account for because of the low commission per trade. I used that account to pay for my LS swap last year which was pretty awesome! Caught a double with Apple and made some good gains with a couple other stocks. I didn't like the way the market was looking in Feb/March of 2011 so I sold it all off took my profits and finally had some fun with the money. Investing doesn't just have to be for retirement...

I should note that my Roth is with Etrade not Scottrade. Scottrade does not offer a DRIP (dividend reinvestment) so make sure where ever you set up your account that they have that option.

[GregWeld]

BJ ---

Owning the apartment complex in the IRA has been a total PITA since day one.

#1 - Brokerages don't hold "private paper"..... a term used for these kinds of investments since they're not liquid and have no "market" (NASDAQ or NYSE etc). Wells Fargo has a 'unit' that will hold this kind of stuff so I had it set up with them.

To make it just a bit more complicated - when I get a check - which is INTEREST - I deposit it in an 401/IRA I own in Fidelity. A couple of years I paid an extra tax on that because they thought it was a "contribution" and that "contribution" was MORE THAN I was allowed to make... UGH!

Now that I caught that -- I make sure to tell them it's a DIVIDEND/INTEREST payment from an investment already held in an IRA.

Trust me when I tell you all -- stuff like that is just a PITA because I have enough stuff going on that to have to remember all these stupid little details is ridiculous. That's why they just need to simplify the tax code. Just get rid of all this crap - have/let people make money -- and pay the tax due as a flat tax. We'd all be better off.

[FatfreeGTO]

Another good item to talk about for people is what to do if they actually have a little bit of a nest egg... Most people just assume that if they die their spouse, kids etc will get the money. Well that is not true, I'm not an estate planner but there are some basics that I'm aware of.

-Most common way someone could potentially die? Car accident probably. Who is usually sitting right next to you in the car? Spouse. Who is usually the beneficiary? Spouse... Well now we have a problem... Your both dead who do you think will get the money? Kids... WRONG!! Minors cannot be the beneficiary. Your money will get tied up in a huge legal battle where the children will be the biggest loser.

You need to setup some sort of a Living Revocable Trust. Minors can inherit that money and take control of it at a time that you laid out in the details. Since this is a "living" trust you can modify it at anytime while you are alive. It really is something that should be thought about and discussed with a pro, well I'm sure Greg can add some insight to this subject

[FatfreeGTO]

Originally Posted by GregWeld

Trust me when I tell you all -- stuff like that is just a PITA because I have enough stuff going on that to have to remember all these stupid little details is ridiculous. That's why they just need to simplify the tax code. Just get rid of all this crap - have/let people make money -- and pay the tax due as a flat tax. We'd all be better off.

That's the truth, although your problems aren't exactly bad ones to have I agree though it needs to be simplified, but then what about all the CPAs and other tax pros they sure don't want to see that happen