About Investing for Beginners

SIMPLE IRA Contribution Limits

2010-02-04T23:48:09Z

If you own, or work for, a small business with fewer than 100 employees, it's highly likely that you have a SIMPLE IRA as a retirement account instead of a traditional 401(k) or Roth 401(k). These plans typically require minimal paperwork for business owners, and let them start with as little as 2% of payroll or dollar-for-dollar matching on 3% of salary for employees, making them affordable.

To help you understand the SIMPLE IRA contribution limits, I put together this short explanation of how much you can contribute to your account, plus the different catch-up contributions that apply to workers 50 and older can make.

More Information on SIMPLE IRA Contribution Limits and Other Retirement Account Contribution Limits

For more information on SIMPLE IRA contribution limits, read our Guide to Retirement Account Contribution Limits.

SIMPLE IRA Contribution Limits originally appeared on About.com Investing for Beginners on Thursday, February 4th, 2010 at 23:48:09.

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SEP-IRA Contribution Limits

2010-02-02T23:16:41Z

If you are a small business owner or a highly successful independent contractor, such as a sales rep or consultant, you may have a SEP-IRA.� This special type of retirement account has far higher contribution limits than many other types of retirement accounts, making them great for those who want to put aside a lot of money to grow beyond the reach of taxes for years, if not decades.� You can open a SEP-IRA with virtually any stock broker and you can use it to invest in shares of stock, bonds, mutual funds, real estate investment trusts, and more.� Any dividends or capital gains you receive will continue to stay in the account to grow for you tax-deferred until you withdraw the money at retirement.� That means that issues such as the dividend tax won't matter to you for a long, long time.

This short and simple guide to SEP-IRA contribution limits was designed to tell you how the SEP-IRA contribution limits are calculated, the maximum amount you can put into an account each year, the total salary you can consider when calculating your maximum contribution, and specific limitation levels for both fiscal 2009 and fiscal 2010.

Combining Your SEP-IRA Contribution Limits with Roth IRA or Traditional IRA Contribution Limits

One real benefit of using a SEP-IRA often isn't discussed.� If you have a SEP-IRA account, your SEP-IRA contribution limits are in addition to any money you contribute to a Roth IRA or a Traditional IRA!� That means even more cash for retirement.� That's because a SEP-IRA is considered a replacement for someone who isn't covered by a retirement plan, such as a 401(k) or Roth 401(k) at work.

More Information on Investing through a SEP-IRA Retirement Plan

If you are interested in more than just SEP-IRA contribution limits and want to know how the plans work and whether they may be right for your retirement, take a few moments to read our explanation of the SEP-IRA.

More Information on Other Retirement Account Contribution Limits

For more information on contribution limits other than a SEP-IRA, read our Guide to Retirement Account Contribution Limits.

SEP-IRA Contribution Limits originally appeared on About.com Investing for Beginners on Tuesday, February 2nd, 2010 at 23:16:41.

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Capital Gains Tax Guide for Investors

2010-01-31T15:21:13Z

Over the past few days, I've put together a collection of capital gains tax guides that includes a basic explanation of capital gains and how they are calculated, a step-by-step guide to capital gains tax rates, information on capital gains tax holding periods, information on the dreaded wash sale rule, and much more.� I'm getting it to you long before April 15th, or tax day as it is known here in the United States, so you can do you research before facing a looming deadline.

Why It's Important to Study and Know Capital Gains Tax Rates and Rules

As investors, I've taught you about the time value of money.� Even small differences in the return you earn adds up to huge amounts of cash over time.� Take 50 years.� The difference between an investor that earns 12% and 15% is 3x the wealth!� That is, if someone earning 12% ends up with $10 million, someone who made 15% over the same period would end up with $30 million.� I don't know about you, but triple the money seems statistically significant to me.

One of the best ways to keep your rate of return attractive without taking on too much risk is to focus on capital gains taxes and capital gains tax rates.� By learning how to minimize your capital gains taxes, you leave more money in your pocket.� That is additional money that can compound for you.� It's one of the reasons that investors who use tax-sheltered accounts such as a Traditional IRA or Roth IRA to hold their investments are able to grow their money faster than cash invested through a regular brokerage accounts.

Using Gold and Silver as a Capital Gains Tax Rate Example

A perfect example of the importance of understanding capital gains taxes and capital gains tax rates is how the IRS treats gold and silver.� Most investors assume that their gold and silver holdings will be treated as investments under the capital gains tax rules.� Unfortunately, they would be incorrect.� Precious metals are treated as collectibles for capital gains tax purposes, meaning you will get hammered for up to 28% of your profits, not the 0% to 15% capital gains tax rate in effect for stocks, bonds, and mutual funds.� Precious metals don't have any of the sort of benefits such as the real estate capital gains tax deductions that are sometimes available (e.g., the $250,000 to $500,000 allowance for your primary residence).

The Best Way to Lower or Avoid Capital Gains Taxes

The best way to lower or avoid capital gains taxes on your investments is to hold your positions through a tax-advantaged account such as a Roth IRA, Traditional IRA, SEP-IRA, Simple IRA, 401(k), Roth 401(k), or 403(b).� The profits earned from selling investments are untouched, meaning you can pour every penny back into new investments.� That's more money working for you.� Factor in the employer match you can sometimes earn by investing through these types of accounts and it's quickly evident that you can mint a lot of money by changing your holding method to fit the tax characteristic of a particular investment.� This tax technique is known as asset placement.

The Biggest Potential Changes to the Capital Gains Tax Rate Structure

In 2011 and beyond, the capital gains tax rates that went into effect in 2003 are set to sunset.� This means that long-term capital gains tax rates might be going back up substantially in the coming years.� For investors who hold assets that have appreciated substantially, perhaps by purchasing an apartment building or shares of stock several decades ago, might find themselves owing far more than they anticipated simply because they sold on January 1st, 2011 instead of December 31st, 2010.� You might want to consider the real possibility of a capital gains tax rate increase in purchase and disposition decisions.

This obviously won't affect assets held in the special tax-advantaged accounts that we already discussed because they aren't subject to capital gains taxes.� The practical implication of this is that you shouldn't be concerned about the mutual funds, stocks, bonds, or other assets you hold in them.

Capital Gains Tax Guide for Investors originally appeared on About.com Investing for Beginners on Sunday, January 31st, 2010 at 15:21:13.

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How the Dividend Tax Works and the Dividend Tax Rates

2010-01-29T22:34:08Z

Depending upon how long you hold your stocks, you may qualify for a special dividend tax rate that is lower than your ordinary income tax rate.� For new investors, the dividend tax rules can seem overwhelming and complicated.� That's why I put together this simple, straight-forward article to help you understand the difference between so-called "qualified" dividends and non-qualified dividends.� I also explain the looming threat for income investors that is approaching on January 1st, 2011 when the dividend tax threatens to skyrocket.

The Controversy Surrounding the Dividend Tax

In political circles, there are few issues that ignite the same degree of passion as the dividend tax and, specifically, dividend tax rates.� The United States has one of the highest combined corporate taxation and dividend tax rates in the developed world, often leading wealthy individuals and companies to move their money abroad, exasperating job losses and using American dollars to grow the economies of other nations.

Additionally, I believe there is considerable evidence that one of the reasons executives have been made so rich off stock options and are more willing to expand the corporate empire than serve investors is that dividend taxes are not tax-deductible at the corporate level.� If they were, CEO's and members of the Board of Directors would have an extremely difficult time justifying to Wall Street, pension funds, and retirement plans, any penny they hung on to for acquisitions or higher compensation instead of sending it off to the stockholders (and if you own a 401(k) or mutual fund, this includes you).

More Information About Dividends, Dividend Investing, and the Dividend Tax

This piece on dividend tax rates was designed as a supplement to the Ultimate Guide to Dividends and Dividend Investing special I had published for you several months ago (if you don't have time to go through the whole special, then you'll definitely want to read Dividends 101 - The Beginner's Guide to Dividends to get all of the basics.� If it's tax rates you're interested in learning, you may want to read The Beginner's Guide to Capital Gains Taxes.

How the Dividend Tax Works and the Dividend Tax Rates originally appeared on About.com Investing for Beginners on Friday, January 29th, 2010 at 22:34:08.

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Complete Beginner's Guide to Investing in Mutual Funds

2010-01-24T21:57:58Z

As part of my research into mutual funds over the past few months, I began putting together a special resource for you called The Complete Beginner's Guide to Investing in Mutual Funds.� I'm working to fill it with great information on mutual fund investing, index funds, exchange traded funds (also known as ETFs), and more.

Why the recent shift in focus from individual stocks for new investors to mutual funds?� Two reasons:

1.) For most new investors, the odds are good that you won't own individual stocks, but rather hold mutual funds through a 401(k), Roth IRA, or other retirement account, and

2.) I want to provide a broad base of education for you to begin your investing journey.� I have talked a lot more about individual stocks than I have about mutual funds and so I want to make sure that we cover all of the bases in the fund category.

From hidden mutual fund taxes that could take a big bite out of your wallet to big expense ratios, which eat away at your wealth, there are certainly some pitfalls when it comes to mutual fund investing.� The rewards, however, can be more than worth the effort.� A good collection of mutual fund investments left to grow in value over the years can provide a comfortable retirement.

Complete Beginner's Guide to Investing in Mutual Funds originally appeared on About.com Investing for Beginners on Sunday, January 24th, 2010 at 21:57:58.

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Does the Kraft Foods CEO Have a Career Death Wish or Is She Just Stupid?

2010-01-20T05:48:57Z

Berkshire Hathaway, the company that Warren Buffett controls, owns nearly 10% of Kraft Foods.� That's a large investment worth many billions of dollars.� For some time, Kraft has been repurchasing its own stock for $33+/- because it believes it is undervalued (Buffett has publicly stated he agrees).

The CEO of Kraft asked the shareholders to give her a blank check to pursue an acquisition of British chocolate maker Cadbury.� For the first time in Berkshire Hathaway's history (or at least, the first time in many, many decades that anyone can remember), Warren Buffett publicly rebuked a fellow CEO by voting "no" on the proposed authorization pointing out that, at the time, Kraft's shares were at $27 per share.� By issuing stock to pay for the deal, management would be "selling" part of the existing Kraft business for $27 after it spent years buying shares at $33, supposedly because it believed they were cheap at $33.� In other words, by paying in stock, Kraft management was giving away dollar bills for less than their true value.

Instead of backing down, the CEO of Kraft has now structured a deal where she will dilute existing stockholders by 18%, issuing shares and using some cash to pay for the transaction.� Why 18%?� By law, she won't have to put anything under 20% dilution to a vote of the stockholders.� It would seem that the CEO of Kraft just effectively gave Warren Buffett, the most respected investor in history and her largest shareholder, the middle finger.

My family, including my parents, siblings, and businesses, have a lot of our money in Berkshire.� The CEO of Kraft basically said she's willing to give away part of the business we already own, which makes everything from Oreos to Cinnamon Rolls, for less than it is worth in order to expand the empire. To boot, it was just announced that the rating agencies are downgrading Kraft's debt to the lowest level above junk to reflect the stress the transaction will have on the balance sheet.� That means that interest expense is going to rise.

There is still the possibility that because Kraft's share price has increased by roughly 10% since the original Buffett "no" vote that the Oracle may be inclined to let the deal happen.� That's far from a sure thing, though.� Either way, unless we're going to get a surprise announcement that Warren is behind the economics tomorrow, I have to wonder about the judgment of someone who would basically tell her largest stockholder, for whom she runs the business, to go screw themselves.� If Buffett decided to do something about it, it would be like an elephant swatting a gnat.

Does the Kraft Foods CEO Have a Career Death Wish or Is She Just Stupid? originally appeared on About.com Investing for Beginners on Wednesday, January 20th, 2010 at 05:48:57.

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Wall Street vs. Main Street

2010-01-19T05:05:38Z

I have so much great information to share with you about your investments this year, from changes in the gift tax laws to a new special on everything new investors need to know about mutual funds, that I'm really excited.� I'm still editing most of the material, though, because for the past few months, my life has been completely consumed by a project at a company called Chenille Appeal, LLC.� (Most of the long-term readers of the site know this is the business that my parents started in a tiny, 200 square foot garage when I was a kid.� They grew it into one of the country's largest manufacturers of wholesale chenille awards such as varsity letters worn on a letterman jacket and now serve some of the nation's biggest and most respected sporting goods stores.� The business model is unique because they are entirely American owned, with American employees, refusing to outsource the labor just to make more money.� This is a core principle to which they've adhered for more than 15 years.� I think I've used it as an example multiple times to explain concepts such as gross profit margin and asset turnover.)

Anyway, up until a few days ago, the wholesale chenille orders were still received by fax at the factory and entered by hand into an enterprise accounting system.� This task was enormous.� We began planning a huge initiative that would cost a lot of money, and move the entire ordering system online behind a password protected site, so dealers could access all of their information, place orders, track package status, etc.� We launched 48 hours ago and it was a great success!

This whole experience has made me remember one of the reasons I love investing so much.� Running a business is exhausting.� Managing money wisely, however, doesn't require a lot of 20+ hour days because the power of compound interest will do all of the hard work.

In a few days, I'll slip back into the cashmere sweaters, pour the gourmet coffee, and sit down to stacks of annual reports, 10K's, and proxy statements with a fountain pen in one hand and a highlighter in the other, bringing you a robust collection of great new content.� It's going to be nice to get back to Wall Street.� Right now, main street is tough!

The only bad thing is that it's 4:08 a.m. and I'm just about to go to bed, meaning that I'm not going to make it up to Omaha tomorrow for the special shareholder meeting of Berkshire Hathaway regarding the stock split of the Class B shares.� Although that's disappointing, this was more important.� It made my parents' lives easier, their extensive network of dealers happier, and the employees' jobs less stressful.� All around, it was worth it for me to take the time to do it.� It did confirm my hunch that within a year, I'm going to wrap all of the businesses up into a single holding company, turn over day-to-day management to the employees, and launch a mutual fund, contributing virtually all of my liquid net worth to it.� It would also provide a vehicle to explain much more about the way Wall Street works because I could use real life examples of trades made at the fund from the annual reports we would need to file with the SEC.

Wall Street vs. Main Street originally appeared on About.com Investing for Beginners on Tuesday, January 19th, 2010 at 05:05:38.

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My Part of the Conan O'Brien $40 Million Settlement

2010-01-18T05:39:29Z

You know how I've been telling you for years to think of stocks as businesses?� Today's announcement that NBC will settle with Conan O'Brien by paying him $40,000,000 in cash is the perfect way to illustrate this concept.� (I'm a proud member of Team Coco.)

General Electric, the parent company of NBC (for now anyway - there is a Comcast merger in the works), has roughly 10,500,000,000 shares of stock outstanding.� That means the company is divided into 10.5 billion pieces, each with an equal "share" of the profits or losses.� The last time I checked, one of my family's businesses had exposure to roughly 30,000 shares of General Electric.� Taking Conan O'Brien's settlement of $40 million and dividing it by the shares of GE outstanding, you get 0.0038 cents per share.� My estimate is that before the tax deduction for the loss, we personally just wrote Conan a check for $114.29 out of our own pocket via our position in General Electric.� When you factor in the lost revenue and profit as a result of the idiotic decision to shakeup the late night lineup, along with the utter destruction of the NBC brand over the past few years, and my guess is it's cost us somewhere around $300 to $600.� I'm seriously considering mailing an invoice to Jeff Zucker for our share of the loss.� It's obviously not a lot of money, but more the principle of the thing.

Think of it this way: If someone broke into your house and stole $300 or $600 in cash out of your purse or wallet, how would you feel?� Well, that's basically what just happened due to the stupidity of a handful of network execs over at the now-defunct Peacock.� Ultimately, the value of your investments will come down to 1.) the price you paid for your share, and 2.) the total earnings that your shares will generate from now until doomsday, discounted back to today.

Put simply, if we owned a plumbing business and we had to write a check to an employee, we'd think of that as an expense.� Just because we own a smaller part of a much larger company, the financial implications for us are just as real when General Electric wrote Conan O'Brien his check.� That money came from us, the shareholders.� As a result, our GE shares are worth a bit less now than they would have otherwise been.� We cannot yet measure the true cost as animosity toward Jay Leno among Conan's fans causes them to stop watching, hurting another formerly valuable NBC asset.

If you still have trouble understanding the reality of this concept, this may help: Imagine you owned 100% of General Electric.� Had this mess not happened, you could have used that $40,000,000 to pay cash dividends to yourself.

My Part of the Conan O'Brien $40 Million Settlement originally appeared on About.com Investing for Beginners on Monday, January 18th, 2010 at 05:39:29.

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Long-Term Treasury Bonds Will, at Some Point, Crash

2010-01-11T02:49:23Z

I'm reading the news in my study and just came across a story about an investor - an older gentleman who ran a roofing company - that lost $350,000 in the dot-com bubble, $350,000 in this recent bubble, and now, finally having enough, moved all of his money into bonds.� Listening to him speak was like, quite literally, hearing someone read a parody of every mistake you could possibly make in investing.� (You can normally spot people who are truly terrible when it comes to handling their investments because they'll call everyone working on Wall Street a "crook" and blame them for their failure.)

As I'm reading it, all I could think about was how grateful I wrote Should You Manage Your Own Investments? several years ago for all of you so you didn't have to make the same mistakes.� We are living through a bubble in United States Treasury Bonds right now.� In fact, in the most recent Berkshire Hathaway shareholder letter, Warren Buffett point-blank said it could be one of the biggest bubbles in history.

The reasons are fairly straightforward: When interest rates rise, long-term bonds fall.� When interest rates fall, long-term bonds rise.� Right now, bonds values are being held up because the Federal Reserve is doing everything in its power to artificially keep interest rates low.� That way, banks can pay almost nothing on their deposits, increasing profits to fill the holes left in the balance sheet by declining home values.� It also keeps homes more affordable as inventory is liquidated, avoiding the risk of the recovery getting smothered.� The reality of the situation, however, is that at some point investors will just stop buying Treasury bonds at present prices.� They will demand more interest income to offset the risk of the higher debt levels on the balance sheet of the United States of America.� (To learn how the Federal Reserve sets interest rates, read The Federal Reserve and Interest Rates.)

When that happens, interest rates are going to rise.� Frankly, I don't see a way it can be avoided.� The only question will be the severity of the move and the rapidity with which rates increase.� The result, however, will be the same: Bond values, especially 20 year and 30 year United States Treasury bonds, are going to fall, perhaps substantially.� That means someone who holds $500,000 or $1,000,000 in what they consider "safe" bonds is going to watch another couple hundred thousand dollars in loses start draining his principal.

If you are interested in how this works, check out this great article on Bond Duration.

Long-Term Treasury Bonds Will, at Some Point, Crash originally appeared on About.com Investing for Beginners on Monday, January 11th, 2010 at 02:49:23.

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Another Example of the Complete and Utter Stupidity of the Financial Press

2010-01-07T02:50:21Z

I expect more from The Wall Street Journal.� In a piece entitled Adjusted for Inflation, Dow's Gains Are Puny, the paper illustrates that on an inflation-adjusted basis, the Dow Jones Industrial Average has returned only 1% per annum over the past 80 years.

Everyone who has any financial background at all is fully aware of the remarkable research performed by Dr. Jeremy Siegel that proved that 99% of investor's real, inflation-adjusted rates of return come from reinvested dividends over several decades and that, furthermore, as a result of this "reinvested dividend power", stocks were the single best long-term investment in the history of the world despite experiencing bad decades from time to time.

The piece triumphantly proclaims that over the past 80 years, the Dow Jones Industrial Average is only 2x its inflation-adjusted value, thus effectively turning a $100,000 investment into $200,000 in purchasing power.� Historically, however, the Dow's dividend yield has fluctuated between 3.2% during market highs (e.g., 1929) and 8% during crashes (e.g., 1933 and 1973-1974).� Over the past 10 years, the market as a whole has been expensive, so dividend yield has fallen to 2% or less which, historically, is an aberration.� Since our hypothetical investor parked his money 80 years ago, though, let's split the difference between the 1929 high and the 1933 low (5.6%) and say that's what he locked in when he bought his shares.� The story completely ignores this $5,600 annual cash dividend income for the investor acting, as it were, as if it were Monopoly money that had no value! Moreover, it ignores Siegel's work, which show that most of his gain in real net worth would come by pouring that money back into stocks each year to get more dividends in the future.

This was, in my opinion, a total epic FAIL on the part of the paper.� Why does it upset me?� Because some honest, hardworking family is going to read this tripe and not realize that the long-term power of compounding, combined with the tax benefits of various retirement accounts, the risk-free employer matching funds offered by most companies, and reinvested dividends make equity investing their best chance at achieving financial independence.� For that reason, it is utterly infuriating that this sort of financial malpractice is allowed to see the light of day.

Another Example of the Complete and Utter Stupidity of the Financial Press originally appeared on About.com Investing for Beginners on Thursday, January 7th, 2010 at 02:50:21.

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