Index Funds, IRA's And More!
What Is an Index Fund?
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An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor's 500 Index (S&P 500).
An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover.
These funds follow their benchmark index regardless of the state of the markets.
Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts.
Legendary investor Warren Buffett has recommended index funds as a haven for savings for the later years of life.
Rather than picking out individual stocks for investment, he has said, it makes more sense for the average investor to buy all of the S&P 500 companies at the low cost an index fund offers.
***What Is an Individual Retirement Account (IRA)?
An individual retirement account (IRA) is a tax-advantaged account that individuals use to save and invest for retirement.
The Internal Revenue Service (IRS) also uses the term individual retirement arrangements (IRAs) to broadly refer to individual retirement accounts, individual retirement annuities, and other trusts and custodial accounts that act as a personal savings plan with tax advantages for setting aside money for retirement.
There are several types of IRAs—traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Each has different rules regarding eligibility, taxation, and withdrawals.
***What Is a Traditional IRA?
A traditional individual retirement account (IRA) allows individuals to direct pre-tax income toward investments that can grow tax-deferred.
The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal.
Individual taxpayers can contribute 100% of any earned compensation up to a specified maximum dollar amount.
Income thresholds may also apply.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors.
Retirement savers may open a traditional IRA through their broker (including online brokers or robo-advisors) or financial advisor.
***What Is a Roth IRA?
A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied.
Established in 1997, it was named after William Roth, a former Delaware Senator.
Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being how they’re taxed.
Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible.
But once you start withdrawing funds, the money is tax-free.
Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.
This and other key differences make Roth IRAs a better choice than traditional IRAs for some retirement savers.
***What Is a Simplified Employee Pension (SEP)?
A simplified employee pension (SEP) is an individual retirement account (IRA) that an employer or a self-employed person can establish.
The employer is allowed a tax deduction for contributions made to a SEP IRA and makes contributions to each eligible employee’s plan on a discretionary basis.
Additionally, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was enacted on Dec. 20, 2019, small employers get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA with auto-enrollment.
That’s on top of the start-up credit they already receive.
SEP IRAs often have higher annual contribution limits than standard IRAs.
Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to receive employer contributions.
One major benefit it offers employees is that employer contributions are vested immediately.
***What Is a SIMPLE IRA?
A SIMPLE IRA is a retirement savings plan that most small businesses with 100 or fewer employees can use.
"SIMPLE" stands for "Savings Incentive Match Plan for Employees," and "IRA" stands for "Individual Retirement Account."
Employers can choose to make a non-elective contribution of 2% of the employee's salary or a dollar-for-dollar matching contribution of the employee's contributions to the plan up to 3% of their salary.
Employees can contribute a maximum of $13,500 annually in 2021.
The maximum is increased periodically to account for inflation.
Retirement savers ages 50 and older may make an additional catch-up contribution of $3,000, bringing their annual maximum to $16,500.
***What Is Insider Trading?
Insider trading involves trading in a public company's stock by someone who has non-public, material information about that stock for any reason.
Insider trading can be either illegal or legal depending on when the insider makes the trade.
It is illegal when the material information is still non-public, and this sort of insider trading comes with harsh consequences.
***What Is an Insider?
Insider is a term describing a director or senior officer of a publicly traded company, as well as any person or entity, that beneficially owns more than 10% of a company's voting shares.
For purposes of insider trading, the definition is expanded to include anyone who trades a company's shares based on material nonpublic knowledge.
Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company.
***What Are High-Yield Bonds?
High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
High-yield bonds are more likely to default, so they must pay a higher yield than investment-grade bonds to compensate investors.
Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios.
However, some high-yield bonds are fallen angels that lost their good credit ratings.
***What Is a Junk Bond?
Junk bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments.
A bond is a debt or promise to pay investors interest payments along with the return of invested principal in exchange for buying the bond.
Junk bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors.
Junk bonds are also called high-yield bonds since the higher yield is needed to help offset any risk of default.
***What Is the Law of Supply and Demand?
The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource.
The theory defines the relationship between the price of a given good or product and the willingness of people to either buy or sell it.
Generally, as price increases people are willing to supply more and demand less and vice versa when the price falls.
***What is the Law of Supply?
The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.
The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale.
***What is the Law of Demand?
The law of demand is one of the most fundamental concepts in economics.
It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions.
The law of demand states that quantity purchased varies inversely with price.
In other words, the higher the price, the lower the quantity demanded.
This occurs because of diminishing marginal utility.
That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, and use each additional unit of the good to serve successively lower-valued ends.