iShares Barclays TIPS Bond ETF (TIP) Offers Decent Yield and Inflation Protection

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The iShares Barclays TIPS Bond ETF (TIP) provides a decent yield currently at 4.09% as well as future inflation protection and little to no risk of default or loss of principle.

As savings and CD rates have come down, I've begun to look anew at other sources of reliable income. After all, earning 1.5% on my money just isn't going to do it right now. So I've begun to look at options trading again (see my post on QQQQ) to generate income and also moderate to high dividend ETFs.

In the ETF space, I'm looking for an investment that is relatively safe, can provide a yield over 3%, and has a good track record of performance. If the ETF is comprised of bonds then I'd like some hedge for interest rate risk and a relatively short duration.

The iShares Barclays TIPS Bond ETF (TIP) fits those categories. It provides a current yield of 4.09%. Because the ETF is comprised of TIPS, Treasury Inflation Protected Securities, the value is protected against inflation. So, while most bonds will lose value as interest rates rise (if they do) TIPS should do a much better job of maintaining their value. Read a full explanation for how TIPS work.  TIPS are a form of Treasury Security, and thus they are backed by the full faith and credit of the US Government. Defalt risk is virtually 0.

What's nice about buying the ETF versus individual TIPS is that you can benefit from the ETF having some older TIPS that have higher interest rates. Thus, while the current 20 year TIP is only yielding 2.06%, the TIP ETF is providing over 4%,

Is It Better to Invest in an Individual Bond or a Bond Fund?

There are risks in the TIP ETF not present when deposting money into a savings account or a CD. If interest rates spike but inflation does not, then the fund will lose value. This could happen if the markets decide to stop buying Treasuries. So far though, investors have been more than eager to scoop up US debt (Strong 1-Year Treasury Auction Quells Rate Fears - For Now).

 


Roth versus Traditional IRA: The Age Old Question

Roth versus Traditional IRA: The Age Old Question

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A guide to help readers determine which is better for their financial situation: the Roth or Traditional IRA.

There is no right answer.  Real helpful, huh? To elaborate, the answer depends on your unique financial circumstances and goals.  To determine which retirement plan is best, you will want to consider a few important questions.  Where are you now?  Where will you be when you retire?  How will you get there?

Both forms of the IRA are great ways to save for retirement, although each offers different advantages.

Traditional IRA:

  • Tax deductible contributions (depending on income level)
  • Withdraws begin at age 59 1/2 and are mandatory by 70 1/2
  • Taxes are paid on earnings when withdrawn from the IRA
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available to everyone; no income restrictions
  • All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).

Roth IRA:

  • Contributions are not tax deductible
  • No Mandatory Distribution Age
  • All earnings and principal are 100% tax free if rules and regulations are followed
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available only to single-filers making up to $132,000 or married couples making a combined maximum of $194,000 annually.
  • Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

Tax Deferred vs. Tax Free

The biggest difference between the Traditional and Roth IRA is the way Uncle Sam treats the taxes. If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the $2,000 from your taxes (meaning you will only have to pay tax on $48,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.   The Traditional IRA is therefore tax deferred.

On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $132,000. Married couples are better off, with a maximum income of $194,000 yearly.

 


The Pros and Cons of the HSA (Health Savings Account)

The Pros and Cons of the HSA (Health Savings Account)

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We discuss the HSA and whether it's appropriate for your financial situation.

The Pros and Cons of the Health Savings Account

Health savings accounts (HSAs) are used to save money for future medical expenses.  Discover how these plans work and whether or not they are right for you.

A health savings account (HSA) is an account into which you can deposit tax-free money to be used for future medical expenses.  HSAs were established in 2003 and have rapidly risen in popularity.  They are part of a larger trend known as consumer-directed health care.  The aim of consumer-directed healthcare is to reduce the money spent on health care by placing more of the responsibility on you to shop for health care.  Want to spend less on hospital visits - smoke less, eat healthier, and exercise.  Because the days of your employer footing the bill are no more!

Account Advantages

The HSA is equipped with several advantages, many in the form of Uncle Sam's generous tax benefits. Contributions to the plans are tax deductible. The contributions can come from you, as well as your employer, if you have an HSA through work. Individuals age 55 and older can make additional catch-up contributions to the account each year until they enroll in Medicare.

All HSA earnings are tax-free, and there is no limit to how much you can accumulate in the account. When you take money out to pay eligible medical costs, those distributions are tax- free, too. But perhaps the most appealing part of an HSA is that there are no time constraints on when you can spend it. If you don’t use all the account money on healthcare costs, you don’t lose it. You can carry any money that’s in the account at year’s end over into the next year to pay for future medical costs.

One Plan, Two Components

The first consideration when it comes to HSA participation is the required companion healthcare policy. Although the potential for HSA participation was opened up a few years ago, you must have a specific type of coverage.

The first criterion in any situation is that you have a high-deductible health plan. These are just like they sound; the insured policy holder will initially pay greater out-of-pocket costs.

Eligible plans are available through various insurance companies; however, they all have deductibles for 2009 of at least $1,150 but no more than $5,800 for singles and between $2,300 and $11,600 for covered families. If your healthcare costs reach the deductible level, the policy coverage kicks in.

Once you get your insurance policy, then you can open your health savings account. Currently, an individual can put up to $3,000 a year in an HSA. An account for family coverage can be as much as $5,950. HSA contributions often come from savings by paying the typically lower premiums charged for the accompa- nying high-deductible policy. Then, when you have to meet some deductible costs, you use HSA money to pay. The deductible part is pure insurance costs and healthcare costs.  The side fund, the HSA, is a sep- arate entity, an actual savings account. You have the opportunity to put money aside for those emergencies when you do need to meet the deductible.

While a high-deductible insurance policy and HSA works well for many, it’s not a good fit for everyone. Some folks find that a traditional employer- provided plan, while it generally costs more in up-front payments, is more cost-effective over the longer term.  In any traditional health plan, you will have an office visit and prescription co-pays, but that’s not the case with an HSA. There is no office visit or prescription co-pay.

There are a lot of cases, such as young families making really good money, who would appreciate the tax advantages of HSAs but have small children that will have to go the doctor three or four times a year for shots, checkups and illnesses picked up at day care. In those cases, more traditional healthcare coverage is the better financial and medical choice. But for individuals or families who are in good health, HSA-eligible cover- age could be a better prescription. An HSA is particularly good if you’re rea- sonably healthy, in a higher tax bracket and your kids are older and don’t need regular checkups. Then you can really take advantage of the tax benefits of an HSA.