eRacks Systems Tech Blog

Financial Freedom

Creating wealth requires smart investing which is something you have to learn if you want to achieve financial freedom. In the following paragraphs you will learn how to select, invest in and manage high quality mutual funds that can actually generate the required returns, you’ll also learn about online trading.

First, you need to understand the difference between a taxable and tax-free bond, as it will be the largest portion of your mutual fund holdings.

The tax advantage of a bond is that it does not have to pay a capital gains tax when you sell it but you have to pay income tax when you withdraw the money when it is sold. In contrast, a mutual fund pays no taxes when you sell it. As such, the bond will pay a lower tax rate than a mutual fund. Also, the bond’s yield is higher than a mutual fund. If you have $100,000 in your IRA and you sell a $1,000,000 bond, you will end up with $99,999.99. This is a 5% yield, which is much better than the 2.5% yield of the bond. This means you will make $5,000 more, but you will have to pay taxes on it. In some states, the tax will be higher. The best way to reduce your tax bill when you sell a bond is to roll the bond into another retirement account, such as a Roth IRA.

To be sure, you may want to look at mutual funds. It’s easier to do this than roll bonds into a Roth IRA because you only need to sell one bond. This bond will be converted into another mutual fund, which will be converted into yet another mutual fund, and on and on.

What if my IRA provider won’t take me to another mutual fund if I use another company’s bond?

A bond is a bond. No, this isn’t some kind of weird, “weird” bond, it’s a bond. If you get a new investment manager and she doesn’t offer a bond fund for you, then you have options.

Option #1: Look for an exchange-traded fund that is similar to the fund you want to work with. Exchange-traded funds are mutual funds that track the performance of a broader market index, such as the S&P 500 index. These funds are available to retail investors who invest using a brokerage account, a 401(k) plan or a high-yield bank account. An exchange-traded fund provides the investor with a price, which they can then use to buy or sell the underlying index. ETFs provide you with the ability to buy or sell securities at a pre-set price, so that your holdings can match the movements of the market. ETFs can be traded in different ways, such as over the counter (OTC), over the phone, through the Internet or through mutual fund brokers.

For the first 10 years of trading, you don’t need to invest in any individual exchange-traded fund. Instead, you can simply buy a mutual fund that includes the shares of an ETF.

But it is crucial to understand that ETFs are actually stocks, which means that when you invest in them you’re investing in the overall market. In fact, the market, like a giant pyramid scheme, is a giant investment scheme, because it is in fact designed to make money for the people running it.

joe September 17th, 2013

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