Wednesday, October 3, 2007

Where Should I Put My Savings? Different Types of Investment Accounts

In the big world of investing, it seems we hear a lot about what securities to invest in, but not as much about what types of accounts to invest in. There are so many different types of investment accounts, each covering a different purpose, and new types of accounts seem to be created weekly. What are some of the basic types of investment accounts and what can they do for you? This article covers some of the accounts that are available currently and why you would use each one.

Retirement Accounts

IRA stands for Individual Retirement Account. An IRA is meant for those who do not have access to employer sponsored retirement plans such as 401(k) plans or those who would like to contribute more than the maximum allowed by their employer plans. Why choose an IRA? Tax-deferred growth is the answer. With a standard savings account, you have to pay taxes on the interest or earnings that the account makes each year. An IRA, on the other hand, doesn't require you to pay taxes until the money is taken out in retirement, thus leaving more money in the account to grow each year. In many instances you can also deduct your IRA contributions on your taxes, giving you further tax savings. It seems like a small thing especially when the account balance is still small, but over time it makes a big difference. Investing $10,000 for 30 years in a regular savings account with a 28% tax bracket and a 6% average growth rate will give you $35,565 whereas that same amount put into a tax-deferred account will give you $57,435. Eventually, however, you do have to pay taxes on the earnings in your IRA, but you are still left with $44,153 after taxes are paid. Your net gain for tax-deferred growth is just over $8500.

Another individual plan is a Roth IRA. It is somewhat similar to a traditional IRA but the difference is that you cannot deduct the contributions and the earnings grow tax-free instead of tax-deferred. This type of plan is good for someone with a longer timeframe to invest or those whose tax bracket in retirement will be close to or higher than their current tax rate. Tax-free growth means that you don't have to pay taxes on any of the earnings in the account. If we start with $10,000 and invest it for 30 years at 6% growth like our example above, you would be left with $57,435. None of that money has to have taxes paid on it since the initial $10,000 already had taxes taken out and the earnings grew tax-free. Before you wonder why anyone would not automatically use a Roth IRA, consider the fact that the initial $10,000 investment wasn't tax deductible like it was for the traditional IRA above. With a 28% tax bracket, the Roth paid $2,800 on its initial $10,000 investment. If we look at the growth potential of $2,800 for 30 years in a tax-deferred account, it grows to $16,082. So, in this person's situation where their tax bracket is the same in retirement as it is while working with a 6% rate of growth, a Roth wouldn't be the best option. The Roth would only grow to $57,435 - $16,082 = $41,353 when all taxes are taken into consideration while the traditional IRA would grow to $44,153. There are several online calculators that can estimate which type of IRA would be to your advantage. Search under Roth vs. Traditional IRA for more information and calculators to determine the best account for you.

In addition to individual plans there are also employer-sponsored plans. SEP IRA, SIMPLE IRA and Keogh plans are in between Traditional Individual Retirement Accounts and the standard employer sponsored plans such as 401(k)'s. SEP's, SIMPLE's and Keogh's are for self employed individuals or small companies that need to put aside more money than a standard IRA allows but aren't large enough to warrant the expense of a 401(k) plan. Each plan allows both employee and employer contributions. Each has set maximums between $6,000 and $30,000, depending on the plan and the contributor, and each has tax incentives for both the employer and the employee. These plans are great for small businesses to be able to set aside money for themselves and their employees and not have to go through the time and expense of larger employer sponsored plans.

The last type of retirement plans are employer sponsored plans. When it comes to retirement, it seems everyone knows the term 401(k). This is because a 401(k) is the retirement plan of choice for medium and large companies. In 2006, the maximum contribution to a 401(k) is $15,000. If you are over fifty and your employer offers the 401(k) "catch-up" contribution, you can contribute up to $5,000 more, so $20,000 total. Your employer may also contribute to your 401(k) plan which generally doesn't decrease your contribution allowance. Originally, 401(k) plans were only offered to for-profit companies. Those who worked for non-profit companies such as charities, schools, universities and hospitals weren't able to contribute to 401(k) plans but were able to open 403(b) plans which allowed most of the same contribution limits as a 401(k). Government or public employees often used 457(b) plans for their contributions and for highly compensated employees there are 457(f) plans. This eventually changed to where 401(k) plans are now available to non-profit companies so more and more of the non-profit sector are opening 401(k) plans for their employees. Taxes on these types of plan can vary from one plan to another, so it is best to consult your plan director or talk with the investment company that manages your employers plan.

Education Savings Plans

Education plans have become available in the past decade allowing parents to better save for their children's education. Instead of trying to set money aside in taxable savings accounts, parents can now setup an education savings account that has various tax advantages depending upon the type of account used. Choosing an education savings account depends upon what your long-term goals are for the money. There are three basic types of education savings accounts, IRC section 529 plans, the Coverdell Education Savings Account (CESA) and the Uniform Gift to Minors Account (UGMA). Each plan is tailored a little differently when it comes to its tax advantages and who gets the money from each plan, but each has the same general purpose, to save for your children or grandchildren's future.

Medical Savings Accounts

There are three different types of accounts to help you save for healthcare costs, Flexible Spending Accounts (FSA), Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA). The first of these, Flexible Spending Accounts are also called section 125 plans or "cafeteria plans." This plan allows participants to put pre-tax money into the account each year to cover health insurance deductibles, co-payments, dental care and other medical expenses. Cafeteria plan money cannot accumulate from year to year, however, so it needs to be used up in one year or it will be gone. The second type of medical savings account is a Health Reimbursement Arrangement. It is similar to an FSA but the employer contributes to the account instead of the employee.

The employer can make contributions contingent on an employee participating in designated health and wellness programs. In June 2002 it was updated to allow funds to rollover from year to year, but it cannot be rolled over from employer to employer so if you change employers, you loose the accrued benefit. The last and most recently created plan is a Health Savings Account. This plan enables employees with high-deductible health insurance plans to set aside and invest money to use to pay the deductibles or other healthcare costs in the future.

These plans are designed to put healthcare decisions more into the hands of the employees. These plans are also portable so they move with you when you change employers and they can be rolled over from year to year.

Other Accounts

For those who are just looking to invest, a brokerage account is the medium to use. Brokerage accounts are setup through investment companies to allow you to purchase securities such as stocks, bonds, mutual funds, money markets, options, etc. Generally the money sits in a "core" account such as a money market until you are ready to invest it in other securities. There are fees for purchasing many securities which vary depending on the company that the account is setup with. Brokerage accounts can also offer check writing, debit and ATM cards for easier access to money in the account. Since there are no tax-advantages of a brokerage account, money can be withdrawn at any time from the core account. These accounts are perfect for additional savings that you want to invest in the stock market.

The standard savings account is probably what everyone is most familiar with. Offered by any bank, a savings account allows you to set money aside and receive a variable or fixed interest rate depending upon the account. Savings accounts are very liquid and can be withdrawn at any time, but they don't allow check writing capabilities. Most savings accounts now days do offer ATM cards. Certificates of Deposit or CD's are types of savings accounts that require money to be left in for a certain period of time in exchange for a slightly higher interest rate, these accounts are less liquid and there is generally a fee to take the money out before the predetermined period of time.

Whatever the reason or account used to set aside money, it is always a good thing. Savings in any form creates a more secure financial future and allows for problems or emergencies to be taken care of without having to obtain loans or dip into less liquid savings such as a home or other physical assets. Opening up any of the above types of accounts gets you started on the right track towards savings.

Copyright 2006 Emma Snow

Emma Snow is a writer who specializes in financial planning. She has worked in the financial industry for over eight years. Currently Emma works on a Finance and Investing site at and Investing Partners

Forex Trading - The 4 Biggest Myths that Cause Traders to Lose

If you believe the four forex trading myths below you will lose. There all commonly accepted by the vast majority of traders but dont let that worry you, the vast majority of traders dont win!

So here are the top 4 myths of forex trading.

1. Someone else can give you success

It amuses me the amount of information I get from forex vendors that promise me huge riches and a regular income, for spending a few hundred dollars with them.

My own view is if their profits are so good why are they hassling me?

The answer of course is, that their courses and e-books are junk and they are hoping to dupe me with tempting advertising copy.

Dont fall for their copy be realistic, the only person who will make you money is yourself, so learn forex trading yourself.

If you dont learn the basics yourself and know how and why your forex trading system works, you will never be able to follow it with confidence and discipline and these are vital in achieving currency trading success.

2. Day trading makes money

The biggest myth of all is perhaps that you can make money with a day trading system you cant.

All daily volatility is random and you stand no chance of winning, as you can never calculate the odds and forex trading is an odds game.

3. You need to work hard

No you dont!

You have to ensure that you get the right forex education and learn the right knowledge to succeed.

You can learn all you need to know in about 14 days and you should be able to trade in less than an hour a day.

People often think the more effort they put into trading currencies, the more they will get out in terms of profit, but this is totally wrong you get your reward for being right and thats it, the market rewards you for results not effort.

4. You need a complicated forex trading system

No you dont.

This leads on from the above point in many respects, as many traders simply assume that more indicators the better the system will perform.

This is incorrect, in fact the complete opposite is true simple systems work best as they have fewer elements to break and are more robust in the brutal ever changing conditions of real trading.

Remember to keep it simple, this will increase your odds of forex trading success.

Dont believe any of the above

So there you have the top 4 currency trading myths, believe any of them and the market will take your money and you will end up in the losing majority.

Avoid them and you can set yourself up for currency trading success, in the worlds most exciting and lucrative investment medium.


More on becoming a profitable trader some critical FREE Trader PDF's and more FREE Forex Education visit our website at

Futures System Trading - How To Choose A System

If you are new to system trading, after reading my previous article ("Futures System Trading - Reality Check") you might feel a bit uneasy about the whole business. That's good because you should. There is a vast wild jungle out there with swamps scattered all over rather generously. One false step and you just said good-bye to a nice chunk of dough.

How then should you choose your system, you may ask. The short answer is: the same way hedgehogs multiply, that is, cautiously... The long answer is that you have three options and each of them can be good if used judiciously.

The first option and probably the best one is to find a vendor who offers his system through a broker (using Tradestation or Strategy Runner to generate orders) and charges you based on the actual profits his system makes in your account per month. That usually means a 10-20 % cut of real profits for the vendor. Vendors like that are few and far between and if you ever decide to choose one like that you want to make sure that you know how his system performed in the past in a real account and not on paper. The broker that handles vendor's business or the vendor himself should be able and even eager to provide this kind of information. If they can't, don't bother as this is usually an indication that you are dealing with some monkey business. If the system is new and there is only a limited amount of information about its actual past performance you may want to wait a quarter or two to see how the system is doing. Rush is never a good thing in these matters.

The second option is to buy a good system from a reputable vendor. You want to buy a system that is fully disclosed and it is very advisable to choose a system that has very little room for curve-fitting (no more than 1 to 2 parameters that are optimally adjusted in the backtesting process) over a system that has plenty of room for this. The latter are usually less robust than the former. If the system is not fully disclosed (i.e., it comes as a gray or black box) you will never know if it was optimized and to what extent. This is not good as it is rather easy to produce a system with a stellar past performance by curve-fitting it to the data. It is very naive to expect that the system designed this way will continue its stellar performance. The opposite is more likely, that is, the system, being not very robust, might unravel as soon as you start using it. Now, how to make sure that you are dealing with a reputable vendor? I would dismiss all hypsters as a rule. A good system can speak for itself, no hype is necessary. I would also avoid vendors who are not very forthcoming with information on the realistic system performance: for instance, they do not account in their advertising for the slippage and commissions in a realistic way. This can have grave consequences as the previous article was meant to show you. Particularly insidious can be 'non-fill' slippage occurring in systems that use limit orders. As opposed to regular slippage caused by the use of market or stop orders, the kind of slippage in question is not always easy to estimate and if not accounted for can lead to significantly inflated profits. It can even turn an essentially losing system into a great looking winning one.

I believe that the only honest way to account for this kind of slippage is by disregarding all the trades whose entry or exit prices were not penetrated by at least one tick. A robust system will survive this type of cleansing, a bogus one will not. I do this routinely with my systems, but alas, to the best of my knowledge, no one else does. If you are still wondering why, you may want to re-read my previous article. Another issue is regular slippage which should be estimated realistically depending on the particular market's liquidity. For instance, this kind of slippage is smaller for a market as liquid as the S&P500 emini futures (ES) than for the Russell 2000 emini futures (ER2) that also enjoys some popularity among traders. Finally, you definitely do not want to overpay for the system. I think that nowadays you should be able to buy a good fully disclosed system for less than $1000. However, most vendors still think that they can afford to charge more. I would avoid them. If a vendor really believes that he has a good system that is worth more, he can always generate a steady income either by employing the first option mentioned above or by leasing it (option three to be discussed next). Finally, it's good to check if a vendor offers a money back guarantee (at least conditional) for his system. Most will not, so those who do should, in my opinion, be given priority over the others. You can certainly agree that a vendor who offers some form of reasonable guarantee has more faith in his system than a vendor who shuns any idea of such a guarantee.

The third option is to lease a system on a monthly or quarterly basis. This is a good option, but very often not as good as the previous ones. Electing a system for trading in this way requires as much prudence if not more as in the other options, the reason being that when the year of using the system comes to a close you may end up paying much more for the system than you would by buying it outright and still have nothing to show for (see the previous article for an example of a situation like that). This is so, in part if not largely, because the subscription fees are absolutely not commensurate with the system actual performance, so be careful not to overpay. As a rule, I would avoid any vendors who charge more than $150 a month. The majority of them will hardly ever deliver profits to your account when all is said and done and so you want to be frugal as much as possible. Beware though of the common trap: people tend to think that if something is expensive it must be good. This is absolutely not true! A vendor who charges $300 a month for his system may not necessarily deliver greater profits than the one who charges only $150. The past hypothetical performance cannot be used as a justification for higher fees.

All systems are born equal every single quarter and the system is only as good as its next quarter and not its past 5 years. You also need to realize that unless a vendor backs up his claims of past performance with a Tradestation performance report, you should not put much faith in what he claims. However, even with the Tradestation report available you still don't know if the system has not been curve-fitted and so you might end up paying a lot for something that could be performing much worse than the past performance would indicate. It should not come as a surprise that this option is most frequently used by vendors. The reason is quite simple: they can keep milking you forever, no matter whether they deliver or not. Unlike in the first option where the vendor's fee is tied to your account's actual performance or in the second option where you can get a system for life for a one-time fee (and not only can you use it but even learn from it if the system is fully disclosed which is by far the best deal in this option), in the last option you are hardly ever in the winning position and so the only way to make sure that you do come ahead as a winner is to ensure that your subscription fee is as low as possible.

Waldemar Puszkarz, Ph.D., is a web veteran with 15 years of web surfing under his belt. By training, he is a theoretical physicist, but his interests are much broader than science and include trading financial markets, sports betting, poker, and researching online business opportunities. He is also an avid book reader and sports afficionado. Currently he is making his living mostly as a day trader. He has been in the trading trenches for almost a decade during which he has traded a variety of financial instruments. He is the owner and webmaster of ( which provides free common sense trading education and simple trading systems for e-mini and stock markets as well as reviews of honest online business opportunities in Meet HOBO ( section of his site.