More Investment Basics For the Clueless

Most folks are uninformed when it comes to investments, investing and personal finance in general. Many are clueless, and you might be surprised to find out that even your lawyer could be one of them. After all, he or she has a law degree, not an investment license.

Not picking on anyone, let’s get down to some real investment basics that confuse a lot of people, including some lawyers I’ve dealt with as clients over the years. If you feel clueless, maybe this article can clear up some issues for you.

I once had a lawyer (client) ask me whether I recommended an IRA … or would a CD at the bank be a better investment? This was a serious question and I had a tough time coming up with an answer that would not embarrass him, but I gave it my best shot. Here’s my answer.

You can not compare the two. An IRA is a type of account (individual retirement account) or a form of ownership. A CD (certificate of deposit) is an investment. You can own a CD, or many other investments, in an IRA. Or you can own them in other forms of ownership or in other accounts. For example, you can own a CD in a taxable account as an individual, or in a joint account with your spouse, or in an IRA.

A different lawyer and I gave retirement seminars together. I covered investing and he estate planning. After one of these, over a beverage, he quietly asked me if I would please give him a simple answer to a question. “What the devil is an annuity?”, he asked. I knew this was not an easy question for him to ask, since he made a living settling estates for his clients, and had obviously seen many annuity contracts cross his desk.

An annuity (tax-deferred annuity) is a popular investment among folks middle-aged and older. It offers the advantage of tax deferral, and names a beneficiary. In other words, you can invest money an annuity and it grows free from income taxes. Only when money is withdrawn are taxes an issue. If, for example, your spouse is named as the beneficiary, probate can be avoided.

In its simplest form (called a FIXED ANNUITY) an annuity is like a CD that pays interest that is tax deferred as the investment grows. If you name your spouse as beneficiary, the money in your annuity belongs to him or her upon your death.

You can also own a tax-deferred annuity in an IRA. It is then “tax qualified”, and IRA tax laws apply. No wonder most folks get confused.

Let’s see if we can clear up one more item that complicates life financially for many people. Millions of folks have money spread around in various retirement plans. They may have an IRA at the bank, and one with a brokerage firm. Plus, they might have money in several 401k plans with former employers.

Is it any wonder they feel like they’ve lost control over their finances? Plans like the traditional IRA and 401k are tax-qualified plans. If you know the rules, you can simplify things by consolidating them all into one IRA.

Dealing with financial matters isn’t as complicated as it looks if you learn investment basics. As a former financial planner, believe me, if you feel financially clueless … you are not alone. Don’t give up, and keep on learning.

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