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What is a Bond Purchase Agreement?
If a municipality or company decides to issue bonds, they will need to form an alliance with an underwriting entity to help them price and distribute the bonds, and the Purchase Agreement outlines their contract. Underwriters on debt issues are normally large investment banks. They help the issuer, which could be a city government or company, structure the bonds and price them in a way that is suitable to their needs, and also agrees to help them distribute them. Continue reading...
Who are Some of the More Well-Known Investment Managers?
There have been many notable investors who have withstood the test of time. Of those that are still living, Warren Buffett definitely stands out of the crowd. If you had invested $1,000 with him in 1965, the investment would be worth over $6 million today. Some of those who could be considered in the realm of "founding fathers" of sound investment strategy would include J.P. Morgan, Benjamin Graham (author of the famous "The Intelligent Investor"), and John Templeton. Continue reading...
What are the Vesting Rules for My Self-Employed 401(k)?
There is no vesting required for self-employed 401(k) (aka Solo K) plans, since you are the employer and the employee. Vesting is a process in which assets that were completely owned by one party are eventually made the property of another party who has had use of the assets. In retirement plans, employer contributions typically have a vesting schedule, partially to give employees a reason to stick around for a few more years. Continue reading...
Is there such a thing as the “January effect?”
The January Effect is a hypothesis which states that stocks will see their biggest monthly gains in January. The January Effect states that the stock market usually increases during the first few days in January, or that the largest monthly gains of the year will be realized in January, therefore January will set the pace. There are many explanations for this effect, such as tax-loss selling in December, fresh starts after the New Year, and many others. Continue reading...
Can I Leave My 401(k) With My Former Employer?
Generally a plan will allow you to leave your assets in there indefinitely, but this is probably not ideal for you. Most custodians will be happy to hold onto your account dollars as long as you’re willing to leave them there. They don’t have to spend any time servicing your account since you can’t make contributions and probably aren’t even able to reallocate your assets, and they will continue to make money on your account with the built-in fees. You may be charged inactive account fees or small account fees as well. Continue reading...
What Does it Mean to have a "Duty of Best Execution"?
To have a “duty of best execution” means that a broker or entity fulfilling a trade request has to do so at the best possible execution for their client. The ‘duty of best execution’ is more than just a guideline - it’s an SEC law. Broker-dealers must report quarterly to the SEC on how they route customers' orders, to ensure compliance. "Best execution” refers to both timing and price. What is the Fiduciary Standard? What is the Suitability Standard? How do Advisors Charge and How Much Should I Pay? Continue reading...
Is there such a thing as the “pre-holiday effect?”
Pre-Holiday price fluctuations have been observed in many instances, but there a difference of opinion as to whether the markets are higher or lower just before holiday. Pre-Holiday Seasonality is the idea that prices will rise or fall before a holiday weekend in which the market will be closed for a day. When researching this phenomenon you may find colloquial wisdom stating that prices always rise before a holiday, but in actuality most of the evidence points the opposite direction: prices are most likely to close lower the day or two before a holiday weekend, and may remain low the day after the holiday, but this provides a possible opportunity to ride the upswing. Continue reading...
What is a Matching Contribution?
Employers can contribute to an employee’s 401(k) on a matching basis. Some employers will make additional contributions to your 401(k) based on the amount of your own contributions. Matching can be done on a dollar-for-dollar basis, meaning that for every dollar you contribute to your account, they will add a dollar as well. It can also be done using a factor, such as ½, meaning they will contribute a dollar every time you contribute two. Continue reading...
What are the Vesting Rules for my SEP IRA?
All SEP contributions are immediately vested for employees. SEPs are funded entirely by employer contributions, and these contributions are immediately vested for the employee. In other words, the contribution belongs to you immediately after it has been made, notwithstanding standard withdrawal rules. Withdrawal rules for a SEP are the same as those for Traditional IRAs. Continue reading...
Who Establishes a 401(k)?
Employers make the decision to establish a 40(k), but it has to be good enough for employees to want to participate. An employer is responsible for establishing a 401(k) and for overseeing it as the sponsor and fiduciary. A self-employed individual can also establish an Individual 401(k), which has the same contribution limits and requires none of the testing or auditing of a regular plan. Other options for work-site retirement plans are SIMPLE IRAs, SEP IRAs, and various kinds of profit-sharing and deferred compensation arrangements. Continue reading...
What Are the Vesting Rules for My SIMPLE IRA?
Employer contributions to SIMPLEs are immediately vested to the employee. The employer’s contributions into SIMPLE IRAs do not have any vesting restrictions. In other words, the contribution belongs to you immediately after it has been made, notwithstanding standard IRS rules for withdrawals from retirement accounts. SIMPLEs do have some restrictions during the first two years, however, that are known as the ‘Two Year Rule.’ Continue reading...
What is the October Effect?
The October Effect, also known as the Mark Twain Effect, is an anecdotally-founded fear that markets are vulnerable to catastrophe in the month of October. Several Octobers have appeared to be the origin of problems in the market: in 1929 at the onset of the Great Depression, the 1987 crash, and in 2008 at the start of the Great Recession. Perhaps superstitiously, many people expect October to be the worse month of the year for the market, supposing that if something bad were going to happen, it would happen in October. Statistically, there isn't much support for this idea. Continue reading...
What is an Accounting Standard?
Accounting standards are the practices which make financial information uniform and normalized between various businesses and accounting firms. Accounting standards constitute what is known as GAAP: Generally Accepted Accounting Principles. These may apply to how revenue is recognized, how assets are classified, acceptable methods of depreciating assets, and so on. Some of these are based on IRS opinions and the jurisprudence of the law, some are just industry best-practices that are widely used. Continue reading...
What is a Federal Credit Union?
Federal Credit Unions are essentially banks that are owned by their clients instead of publicly traded or what-have-you. Instead of being part of the FDIC, they have the National Credit Union Association (NCUA). They tend to be able to offer higher interest rates on savings and lower interest rates on loans than banks can, due to their mutual-ownership structure. Credit Unions operate as non-for-profit businesses, which can allow their management to use 457 retirement plans, but they are not associated with the Federal government. They do, however, charter under federal regulations, as opposed to state banks. Continue reading...
How Does Vesting Work?
Vesting is the schedule or process by which certain assets are eventually considered the property of an individual who uses them. If your employer provides some sort of matching, flat, or profit-sharing contribution to your retirement account at work, you will probably not be allowed keep the entire amount that they contributed if you change jobs or retire before a certain number of years have passed. Continue reading...
What Happens to My 401(k) if I Leave My Job?
401(k) account balances can be taken to the next place of employment, rolled into IRAs, or cashed out. Sometimes people don’t know what to do with a 401(k) when the change jobs. If it sits there too long, and the employer cannot locate you because you changed addresses, your account balance will be taken over by the State in which you worked. Your state should be able to locate your file using your social security number and pay you the account balance as of the date they froze the account. Continue reading...
Why Should I Have a 401(k)?
There are many potential benefits to using a 401(k) for retirement savings. You can break down the primary benefits of a 401(k) to 3 things: 1) Tax-Deferred Growth: This is probably the most advantageous aspect of a 401(k). Not only is the money contributed to the account pre-tax, which lowers your current taxable income, but the money also grows without being taxed within the account. The effect produced by the tax-deferred growth is much more powerful than most imagine. Continue reading...
What is a Cash-Balance Plan?
Cash balance plans are a type of pension in which the benefit is stated as a future account balance rather than an income stream. A Cash-Balance Plan is very similar to a normal Pension Plan. You do not technically contribute anything to the plan (unless you are an owner-employee), and you don’t have any control over the assets which are managed on your behalf. In a normal pension, the benefit waiting for you in retirement is a monthly income stream, but in a Cash Balance plan, your future benefit is stated as an account balance, which you will be able to take as either a lump sum or an income stream. Continue reading...
If I Leave My Job, Will I Still Get a Pension?
You may not be vested in a pension if you lave too early, or you may have to accept a lower payout. This depends on how many years you worked for your employer, and other factors which are described in your pension plan document. In some cases, the employer can specify a minimum number of years you have to work for the company in order to receive a Pension. Otherwise, the amount you receive will be vested in portions over a few years, until you will be able to leave your job and keep 100% of the accrued Pension benefits. Continue reading...
What are the Vesting Rules for My Keogh Plan?
Vesting rules depend on the type of Keogh contributions being made. The IRS imposes certain rules on Keogh Plans, which includes vesting restrictions. Different employers might have totally different vesting schedules, as long as they satisfy the IRS rules. It depends on the type of contribution being made, such as matching or profit-sharing or money-purchase contributions, whether the plan is a QACA, and so on. Many contributions are immediately vested, while some are gradually vested over a few years, and some are on a cliff-vesting schedule. Continue reading...