Investment Accounts

An individual retirement account (IRA) is a tax-advantaged account that individuals use to save and invest for retirement. Think of the “IRA” label as being a “wrapper” around a regular savings account that you may have. When we say tax-advantaged, we mean that the government has incentivized tax payers to use these types of accounts to save for retirement, by allowing investments to grow and compound without having to pay yearly income taxes.

There are several types of IRAs: Rollover IRAs, Traditional IRAs, Roth IRAs, SEP IRAs, and Simple IRAs. Each has different rules regarding eligibility, taxation, and withdrawals. IRAs are the place to start for most people, whether just beginning to save for retirement or nearing the end of their careers. Please ask how we can use IRA’s to help you reach your retirement goals.

Think of a brokerage account as the same thing as an IRA, but without that tax-advantaged “wrapper”. Unfortunately, the government places limits on what we can contribute to an IRA; in fact, some people do not benefit from IRAs at all. The good news is we can still continue to save above and beyond the limitations of IRAs; we just won’t have the tax advantages of the IRA wrapper. The thing that differentiates a brokerage account from a savings account is that the “brokerage” label, or wrapper, is what allows you or your business to invest in securities (which are defined below), and other investments.

A college savings plan is a tax-exempt “wrapper” that allows tax payers to save specifically for future educational goals. Income inside the plan is not currently taxable, nor is it taxed when that income is withdrawn from the plan, as long as it is used to pay for qualified college expenses. The owner of the plan (donor) retains 100% control. College savings plans are among some of the best options for individuals who have the goal of higher education in mind for themselves or their children.

A Health Savings Account (or HSA) is a type of account “wrapper” similar to an IRA. Rather than helping you save for retirement, they help you save for medical expenses. You can use these funds during retirement, and/or before. One catch is you need to have a high-deductible health insurance plan in order to open an HSA. Once you have an HSA, the benefits are outstanding in that they are “triple tax advantaged”, meaning you receive a tax deduction off of your income taxes when you contribute to it, then you can invest the money in individual investments and securities (discussed below). As long as you use the funds for qualified medical expenses, you do not have to pay taxes when you withdraw money from it. Another added bonus is once you turn 65, you can withdraw money from the HSA for purposes other than medical expenses and only pay your ordinary income tax (similar to your IRA). One way some people use their HSA is to reimburse themselves for their Medicare Part B premium which is usually withdrawn straight from your social security check. We at Hollander Investments & Insurance are happy to help you learn more about how you could use an HSA.

A Donor Advised fund, also known as a charitable giving fund is a type of account “wrapper” which can help you take further advantage of charitable giving. If you are planning on giving any large amount to charity, establishing a Donor Advised fund can benefit you by providing a larger tax deduction in a year you may need it more; for example, in a year you’re planning on doing a large Roth IRA conversion to help offset some of your income tax liability. When you establish the fund, you can contribute a donation that impacts your current year tax return, invest the money to grow your donation over time, and contribute to your desired charity intermittently or however you see fit.

There are many types of trusts, from irrevocable trusts, to charitable remainder trusts; they all serve different purposes. Hollander Investments & Insurance would be happy to help you navigate this area which can be complex and confusing.

When it comes to investing, there are usually fees involved. Whether it be ticket charges, trading fees, distribution charges, or a number of other possible charges. A Managed Account allows you to simplify those fees by paying one simple fee which is a percentage of the assets managed, as opposed to being charged a fee for each individual action. We like to use Managed Accounts at Hollander Investments & Insurance Services, LLC because we prioritize taking an approach that does not restrict trading, or access to your money; however, there are other options available.

Commission accounts are better for individuals who do not plan to do a lot of trading, or other actions that would normally result in a fee. Someone who plans to “buy and hold” maybe just one individual security might benefit from using a commission account.

Structured products are securities (frequently issued by big banks) that are based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency. As the definition suggests, there are numerous types of structured products. Some structured products offer protection of the principal invested, backed by the issuer, whereas others offer limited or no protection of principal. Structured notes can be confusing, but are a good tool which we can consider using particularly during times of economic uncertainty.

A bond is a fixed income instrument representing a loan made by an investor to a borrower (typically corporate or governmental). A bond can be thought of as an I.O.U. between the lender (in this case, the investor) and borrower (the corporation or government) which includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debt holders, or creditors, of the issuer. Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes terms for variable or fixed interest payments made by the borrower.

Think of an ETF as a basket of stocks and/or bonds. An ETF can also track an INDEX, sector, commodity, or other asset, but allows investors to purchase or sell on a stock exchange the same way they could with a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities.

An advantage of using an ETF instead of an individual stock or bond is that by buying an ETF, the investor is diversifying their investment, instead of “placing all of their eggs in one basket”. An ETF usually uses a team of investment professionals to put together a diversified basket of securities that should generally be less risky than holding one individual stock. By spreading out your investment across more than one company, you are reducing the risk of one poorly preforming individual company or person from sabotaging your investment goals.

For example, say you hold company XYZ stock as the sole security in your IRA. If negative news were to come out that the CEO of XYZ was practicing fraudulent business activities, or something of that sort, company XYZ’s stock would react poorly, thus causing your IRA to lose value along with it. By holding stock of more than one company, you may reduce this risk.

You can think of a mutual fund pretty much the same way you think of a an ETF. In fact, most investment companies have a mutual fund version and an ETF version of the same basket of stocks and/or bonds. One difference between mutual funds and ETFs is that mutual funds do not trade on an exchange, essentially meaning they only change value once (at the end of the trading day) instead of throughout the trading day like an ETF.

Mutual funds generally have different “classes” which basically distinguish how they charge their fees or “sales charge.” Although most mutual funds do have a “class” designed for managed accounts (as discussed above), some investors who are looking to “buy and hold” use mutual funds inside of a commission account and take advantage of what are known as “break points.” Break points incentivize the investor to invest a greater amount with one mutual fund “family” in order to receive a lower overall sales charge.

An alternative investment is a financial asset that does not fall into one of the conventional equity/income/cash categories. Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.

Structured products are securities (frequently issued by big banks) that are based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency. As the definition suggests, there are numerous types of structured products. Some structured products offer protection of the principal invested, backed by the issuer, whereas others offer limited or no protection of principal. Structured notes can be confusing, but are a good tool which we can consider using particularly during times of economic uncertainty.

A CD is a bank product that is usually guaranteed by the issuing bank or credit union and therefore usually insured by the FDIC or NCUA up to their defined limits (typically $250,000). The bank will normally issue the investor a fixed interest rate on the balance on deposit in exchange for liquidity, or access to their money.

For example…

• You agree to leave your money with the bank for a time period of let’s say 36 months and the financial institution guarantees to pay you a fixed interest rate of 4%.
• The balance of your original investment, or principal, will not rise or fall.
• You usually cannot access your principal without “breaking” the CD and facing some kind of penalty such as the last 3 months’ interest returned.

CDs can be useful when we have a specific goal in the near term and do not want to risk losing any of our principal.

Annuities are contracts issued and distributed (or sold) by financial institutions, usually insurance companies. The funds may be invested with the goal of paying out a fixed income stream later on, or keeping pace with inflation. They are mainly used for retirement purposes and to help individuals address the risk of outliving their savings. Upon annuitization, the institution will issue a stream of payments. There are many types of annuities, such as fixed, fixed index, and variable annuities, which usually come with fees that vary based on the individual annuity, the insurance company, and current interest rates. The benefits range from a guarantee of principal from the insurance company (similar to a CD), to a host of different riders and more. It is easy to get lost in all of the details. However, one of the major advantages of an annuity is that, much like an IRA, your investment grows tax-deferred (meaning it can grow and compound without being subject to income tax until the money is withdrawn).