Wink Tax Services
IN THIS ISSUE . . .
Mutual fund investing has grown dramatically in recent years, making it important to know theanswers to some common questions regarding mutual funds.
WHAT ARE MUTUAL FUNDS AND HOW DO YOU INVEST IN THEM?
A mutual fund is a pool of money, drawn from thousands of investors, that is invested in securities by professional managers. Mutual funds invest in a wide array of investment vehicles, including stocks, bonds, commercial paper, Treasury securities, real estate, gold, silver, etc., depending on the investment objectives of the fund. Mutual funds can be purchased through stock brokers or directly from investment companies.
HOW MUCH DO YOU NEED TO INVEST IN A MUTUAL FUND?
One of the many benefits of mutual funds is the small amount of money needed to invest. Most funds require an initial investment of no more than $2,000, with subsequent investments of as little as $100. IRA accounts can generally be started with even smaller amounts.
WHAT TYPES OF MUTUAL FUNDS EXIST?
There are a wide variety of funds to choose from. They are generally grouped by investment objectives and include aggressive growth, growth, growth and income, balanced, total return, income, bond, money market, overseas, index, and sector funds. The mutual fund right for you will depend on your individual situation and investment objectives.
WHO SELECTS THE INVESTMENTS FOR THE MUTUAL FUND?
Full-time professional managers watch the fundís portfolio, making all buy, sell, and hold decisions. These investment decisions must be made within the confines of the fundís objectives and investment parameters.
WHERE CAN YOU GET INFORMATION ABOUT THE FUNDíS GOALS, INVESTMENT OBJECTIVES, SERVICES, AND COSTS?
The fund prospectus provides a host of information about the fund, including investment objectives and policies, risk factors, fees, financial results, the portfolio turnover rate, and a description of shareholder services.
WHERE WILL YOU FIND A CURRENT LISTING OF THE STOCKS AND BONDS OWNED BY THE MUTUAL FUND?
Part B of the prospectus, called the Statement of Additional Information, contains a listing of the stocks and bonds owned by the fund. You must specifically request this portion of the prospectus. Make sure you are reviewing a recent listing since many funds change their portfolio frequently.
HOW DO YOU MEASURE THE PERFORMANCE OF A MUTUAL FUND?
There are generally three measures of a mutual fundís performance: 1) the change in its net asset value, 2) the yield, which is the amount of income distributed, and 3) total return, which factors in income, gains or losses, and expenses. The net asset value of a fund is calculated every day and equals the current market value of the fundís investment portfolio, minus operating expenses, divided by the number of outstanding shares.
WHAT TYPES OF EXPENSES DOES A MUTUAL FUND CHARGE?
Mutual funds can charge a variety of fees, including: front-end loads, which are up-front commissions paid to sales people; deferred sales loads, or exit fees, charged if you sell before a certain time period; redemption fees, which are exit fees charged regardless of how long you hold the fund shares; 12b-1 fees, which are annual fees for marketing expenses; and annual management fees. These fees will be detailed in the prospectus.
WHAT IS A FAMILY OF FUNDS?
Many mutual fund companies operate a variety of different mutual funds with differing objectives. In order to make their services more convenient to their investors, they allow you to switch money from one fund to another within the family of funds. Although a major convenience if you want to change investment objectives or time the market, keep in mind that you are selling one fund and purchasing another when you switch, which may result in a taxable transaction.
WHAT OTHER SERVICES ARE OFFERED BY MUTUAL FUNDS?
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS ó Dividends paid by stocks, interest from bonds, and capital gains from selling securities can be automatically converted to additional shares.
RECORD KEEPING ó Mutual funds regularly send statements detailing activity in your account. At year-end, the fund will send you a statement with information required for your tax return.
REDEMPTIONS ó Mutual funds generally make it easy to redeem your money Ė you can have a certain amount automatically transferred to your checking account every month, you can write checks over a minimum amount against your fund, you can have funds wire transferred to your bank account, or you can sell fund shares over the telephone. Mutual funds are redeemed at their then current asset value, which may be worth more or less than their original cost.
With popularity comes diversity. As mutual funds have become more popular, the choices and options have become more extensive. Feel free to call us at (248) 816-1240 if you need help with your mutual fund decisions.
Planning for retirement is a difficult process, made even more difficult by the large number of myths surrounding retirement:
To plan successfully for retirement, you must forget the myths and remember the realities.
Although selecting a mutual fund from the scores of funds available may seem like the most difficult decision you have to make regarding mutual funds, many investors have much more difficulty trying to decide when to sell a mutual fund. Some factors that may indicate it is time to sell your mutual fund include:
None of these factors is conclusive evidence that you should sell a mutual fund. Like all investments, however, you must periodically evaluate your mutual fund investments to ensure that they remain appropriate for your portfolio.
The age 59 Ĺ carries special significance. Withdrawals made before that age from individual retirement accounts (IRAs), simplified employee pensions (SEPs), Keogh plans, or employer saving plans require a 10% tax penalty, unless you qualify for certain limited expectations. The age limit for a 10% tax penalty also applies to investment earnings on annuities. Additionally, lump-sum pension distributions received before age 59 Ĺ cannot use forward averaging.
Why did Congress select age 59 Ĺ as the age for all of these events? When creating Keogh plans in 1962, Congress chose 59 Ĺ as the age participants could start withdrawing money without paying penalties. That age was selected as compromise between the typical corporate early retirement age of 55 and the age for receiving full Social Security benefits (65). Although you might have expected them to select the mid-point of age 60, Congress followed actuarial tradition, which deems that age 60 begins when you turn 59 Ĺ since you have lived more than six months of your 60th year.
Just keep reminding yourself of these facts as you write those large tuition checks.
WHAT HAPPENS TO YOUR INDIVIDUAL RETIREMENT ACCOUNT (IRA) WHEN YOU DIE?
After your death, your beneficiary will have several choices for receiving the proceeds from your IRA. The 10% penalty tax does not apply to these distributions, regardless of your age or your beneficiaryís age. The distributions are subject, however, to income taxes, except for amounts that represent a return of nondeductible contributions. Thus, how your beneficiary receives the proceeds can have a significant effect on their tax bill.
If you had started taking required distributions because you were over age 70 Ĺ, your beneficiary can continue to take periodic distributions on the same schedule. In the event that distributions had not begun, the relationship of the beneficiary to the owner will determine how the funds can be withdrawn.
The greatest number of options are available to surviving spouses. Your spouse can cash in all or part of the IRA without paying the 10% penalty. Alternatively, your spouse can rollover the IRA to his/her own IRA, making the money subject to the same rules as their own IRA. Thus, he/she would pay a 10% penalty tax if funds were withdrawn before the age of 59 Ĺ and withdrawals must start by age
70 Ĺ. Another option is to allow the funds to remain in your IRA. The funds can remain in your IRA until the year you would have turned 70 Ĺ, at which time your spouse would have to start taking distributions based on his/her life expectancy.
If your beneficiary is not your spouse, he/she has two basic options. All funds can be withdrawn from the IRA within five years or the beneficiary can start to take withdrawals within one year of your death, based on his/her life expectancy.
It is important that you name a beneficiary for your IRA in order to make these options available to your heirs. If you donít and someone inherits your IRA under a will, their only option is to cash in the entire balance in the IRA within five years.
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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Wink Tax Services / Wink Inc.