- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Understand and Use the Priority of Money
Before you can build a successful investment portfolio, you must understand the difference investment vehicles and investment (or financial) assets.
Investment vehicles are special types of investment accounts that provide a tax-advantaged framework that allows you to invest in various financial assets. Tax advantages include the deferral of current taxes (i.e., traditional IRA or 401(k)) or the elimination of future taxes on earnings (i.e., Roth or Education IRA). These accounts are useful because they provide specific tax advantages that are not available when financial assets are purchased individually. Investment vehicles are like shopping carts in the grocery store.
Investment assets are specific classes of financial securities in which you may invest, including stocks, bonds, mutual funds, real estate, money-market mutual funds, CDs, and so on. As you have learned, these financial assets are grouped into asset classes and are associated with different levels of risk.Investment assets are like the groceries you put in your shopping cart, i.e., in the investment vehicles.
There are many types of investment vehicles. Many investment vehicles are geared towards helping you build a retirement account. Most are named after a specific line in the Internal Revenue Code. For example, a 401(k) plan is a retirement plan offered to employees of private companies, a 403(b) plan is a retirement plan offered to employees of public companies, a Simplified Employee Plan (SEP-IRA) is a retirement plan designed for employees of small businesses, and an Individual Retirement Account (IRA) is a retirement plan designed for individuals. Table 24.1 shows characteristics of select investment vehicles for 2010.
Table 24.1 Select Investment Vehicles for 2007 (not including Catch-up Amounts)
| Tax Deferred |
Tax Eliminated |
Maximum Amount |
Plan |
|
| 401-k | Y | $15,500 | Businesses w/plans | |
| Roth 401-k | Y | 15,500 | Businesses w/plans | |
| 403-b | Y | 15,500 | Non-profit, tax-exempt | |
| Roth 403-b | Y | 15,500 | Non-profit, tax-exempt | |
| 457 | Y | 15,500 | State/municipalities | |
| SEP IRA | Y | 42,000 | Small businesses | |
| SIMPLE IRA | Y | 10,500 | Small businesses | |
| IRA | Y | 4,000 | Individuals | |
| Roth IRA | Y | 4,000 | Individuals | |
| Education IRA | Y | 2,000 | Individual Education | |
| 529 Plan | Y | 315,000 p.c. | Individual Education |
Understanding the priority of money can help you identify the tax benefits and other benefits that different investment vehicles offer. Understanding these priorities can help you to determine which investment vehicles will help you achieve your financial goals the quickest. The priority of money is divided into three sections: free money; tax-advantaged money; and tax-efficient, wise investments. Understanding the priority of money can help you determine which investment vehicles you should use first in working toward your financial goals.
