Photo Credit: Nicholson Cartoons

Though investors may love dividends for their income potential, stocks that issue dividends to investors also fair better in weaker markets.

What’s In a Dividend?

Dividend paying stocks are more than just income producers; they’re also wealth protectors.  Because dividend stocks pay out a dividend regardless of the performance of their stock price, they’re very much protected to the downside.  Consider the idea that fixed income investors can reroute investments to high yielding dividend stocks when the yields become attractive.  As such, dividend stocks are less likely to dip in price when the yield coincides with yields on corporate debt.  Higher yields mean a smaller chance a stock is going to zero.  Wouldn’t we all invest $10 for a stock yielding $.75, especially one that is financially sound?  Of course we would!

Dividends Over Bonds

Triple A rated firms may offer higher yields to holders of their corporate debt, but be wary of the downsides.  With rates at their lowest in history, the chance that interest rates will rise is almost a certainty.  When rates rise, the value of bonds dip, exposing investors to a paper loss until maturity, when the full face value of the bond is paid to investors.

Dividend stocks, on the other hand, do not have such certain downside, and for investors with less time on their hands, they present a very attractive opportunity.

The bottom line is that dividend stocks have a potential to the upside and minimal downside possibilities, while bonds are almost certainly headed to the downside in the foreseeable future.  With that in mind, it makes perfect sense to start allocating more of your fixed income allotment into stocks, but not just any stock: only high yielding dividend stocks.

Be Smart About Your Selection

If you’re nearing retirement, it makes little sense to start shifting large sums of capital out of fixed income and into dividend stocks.  Since there is generally more volatility and risk in stocks compared to fixed income, it would be best to stay where you are.

However, those with long term horizons have plenty of extra flexibility by proper employment of high yield stocks within a retirement portfolio.  For twenty and thirty year olds, ditch the debt and buy stocks; you’ll have plenty of time to make up the difference should losses occur.  However, with dividends as rewarding as they are now, you can even afford some capital depreciation.

With fixed income investors looking for higher yields, Build America Bonds may fit perfectly in their plan.  Enacted as part of the 2009 economic stimulus package signed into law by President Obama, Build America Bonds present an excellent opportunity for investors to generate substantial returns with lower risk vehicles.

How They Work

Build America Bonds are issued by municipalities, just like any other municipal bond, and they are subsidized by the Federal Government at 35% of the interest expense.  Thus, $100 million in bonds issued at 7% would yield $7 million in interest, with the Federal government chipping in $2.45 million of the cost.  Since such a large amount of the interest cost is defrayed by Federal coffers, investors have access to an asset class halfway between the risk of municipal debt and US Treasuries that generate returns similar to riskier corporate debt.

To compare, municipal debt obligations have a default rate of .06%, while AAA rated corporate debt has a 2.25% failure rate.  The risk to reward certainly favors municipal debt.

Benefits Maintained

Despite being subsidized by the US government, Build America Bonds earn the same tax treatment as municipalities.  As such, investors who earn 7% through a Build America Bond issue would keep the full 7%, providing an excellent opportunity to earn municipal returns with generally lower risk, since the municipality pays only 65% of the interest expense.

Getting started in Build America Bonds has been made easier by InvescoPowerShares, which launched the PowerShares Build America Bond Portfolio (BAB) with an extremely low .28% annual fee.  For such broad diversification, the .28% annual fee is of little consequence to investors who have diversification within the new asset class.

Municipalities Look Great

For those reaching retirement age, there have never been better opportunities in municipal debt.  With spreads between corporate debt and municipal debt growing thin, and taxes on everyone’s mind, municipal bonds offer the chance for extraordinary income.  Those with long timeframes before retirement should tread carefully, however, as higher interest rates in the future could mean paper losses on debt obligations until maturity.

Photo Credit: Business Week

What has always been a staple of financial planning is now supercharged in today’s economy of low rates and incredibly low mortgages prices.  Paying off the mortgage is one item investors should place on the back burner.

Managing Your Finances

Couple historically low rates with tax advantages for middle-class investors, including the ability itemize and write off interest expenses on mortgage payments, investors are better off investing the excess rather than paying down debt.  Young Americans are in an even better position; as the majority of a mortgage payment is interest and can be written off, they have to time accept more risk, allow their wealth to grow in the market place, and let their real estate holdings appreciate from their timely bottomed out prices.

Calculating the Bottom Line

Luckily for investors, interest on a mortgage is entirely deductible and generates a beautiful tax savings.  An investor in the 28% income bracket and a home loan at 5% would effectively pay just 3.6% in interest with the additional savings coming from an itemized deduction.

Home owners looking to refinance have an additional reason to do so.  Points, which are the charges mortgage brokers add to a mortgage, are also deductible over the life of the loan.  Therefore, a 15-year refinance that costs $1500 would allow a borrower to write off $100 a year for 15 years, which generates $28 of tax savings plus a lower interest rate on the amount borrowed.

Beating 3.6

Anyone with even the most rudimentary of investing knowledge should be poised to beat, and exceed, an annual return of 3.6%.  Those who lock into low rates today may even be able to beat the 3.6% interest rate with corporate bonds, as historically inexpensive rates give way to more a more reasonable level.  Considering that stock funds have generated greater than 10% per year and bond funds roughly 5% per year, there isn’t a single borrower (with a good interest rate) that should be paying down debt early.

Of course, if you haven’t already, lock in today’s rates.  If history is any indication, they won’t be around for much longer.

Taxes, taxes, taxes: those three words have thus far defined the campaign trail, as hundreds of members of government are up for re-election this year.  However, taxes aren’t just important to your government, nor your paycheck, but to your retirement plan as well.

Diversifying Your Tax Risk

Tax diversification has nothing to do with anything illegal or actions in a “gray area.”  In fact, tax diversification is becoming one of the most important elements of financial planning.  Today’s tax laws are nothing like yesterday’s, and tomorrow’s are sure to be different than today, which is why it’s critically important to diversify your risk.  You want to be ready for changes in the tax code and have a flexible plan to work around Uncle Sam.

Minimizing Your Risk

With ideas like the Fair Tax, Flat Tax and all types of other different taxing schemes being thrown around in Washington, it’s impossible to know whether today’s tax code will be anything like the tax code when you’re ready to retire.

Post-tax accounts like ROTH IRAs could be taxed again if the Fair Tax passes, or it could generate higher tax bills if taxes decrease before your retirement date.  Likewise, pre-tax accounts like 401ks could generate higher than expected tax bills if taxes rise before your retirement date.

A proper balance will help you minimize your own risk, while still opening yourself to the possibility of paying lower taxes on your retirement savings.

How to Balance Your Assets

The best way to balance your risk is to open both a pre-tax retirement account and a post-tax retirement account and invest equally in each.  By doing so, you have a net zero exposure to changes in the tax code and can plan to save without the fear of higher taxes in the future.

The best strategy is to open a 401k through your place of employment, or a regular brokerage account (both pre-tax) combined with a Roth IRA (post-tax).  Though it is possible tax laws will not change before you reach your retirement date, the best planning is always completed by eliminating as many variables as possible.  And with tax rates as high as 35%, it’s a good variable to remove.

401k programs are notorious for offering very few, yet expensive, options for their clients.  However, one loophole may save you thousands of dollars per year and let you have more control over your retirement plan.

The Self-Directed Brokerage Window

A small but growing minority of 401k providers now offer their clients a self-directed brokerage window, allowing them to make trades with their 401k savings and buy funds and stocks not directly offered through the plan.  The brokerage window will let you buy any stock, fund, or exchange-traded fund on the open market with your 401k savings at a fixed commission price.

Using the Window

Investors who want to use the window to guide their own financial future should ask their 401k provider if they allow the option.  A quarter of 401k providers offer the option for a flat rate annual fee of usually $100 – $200 plus a fixed trading commission to make your own trades.

While the prospect of paying any more to your provider may seem a little ridiculous, a $200 annual charge plus $20-25 per trade is far less than the expense on most mutual funds.  In fact, investors with assets of $20,000+ in their 401k should actually save money, all the while increasing the number of options they have to invest.

Making the Most of Your Window

Making the most of the brokerage window requires that investors do as little trading as possible to avoid the high commission cost on individual trades.  Remember, unlike online brokerages that charge anywhere from $4 to $10 per trade, your 401k provider likely charges a fee of as much as $35 per trade.  When you consider you’ll have to make several trades each month, the fees start adding up.

To avoid these high costs, consider moving assets into your own directed portfolio annually or semi-annually, reducing the commission costs while keeping the same diversification.  Exchange-traded index funds make this incredibly simple and inexpensive, and they cost just fractions of what the average 401k mutual fund charges.

Once you’ve familiarized yourself with the Roth IRA basics, you should know whether or not you want to open a Roth IRA or not (and, of course, whether or not you’re eligible).

If you decide the benefits of a Roth IRA are too good to pass up, then you’re ready to set up your account.

Below are the steps you’ll need to take:

1) Investment Preparation

Make sure you’re ready to open a Roth IRA right now. Setting up a Roth IRA is a long-term commitment. It’s not something to be taken lightly. If the money you plan to invest in your Roth IRA is money you will need by year’s end, then consider building up your savings first, then search for a top rated Roth IRA account provider.

For example, you have at least six months of living expenses set aside in your savings or money market account. If you have any high-interest debt, pay that off first. Debt in the form of a modest fixed-rate mortgage is okay, but debt in the form of credit cards is a major hindrance to your financial health. Make sure you pay off those credit cards!

Once you’re on firm financial footing, you’re ready to open a Roth IRA.

2) Find A Discount Brokerage Firm

You’ve made the decision to open a Roth IRA.

Great!

Your next step is to select the financial institution where you’ll open your account. A number of options exist for individual investors, including both traditional bricks-and-mortar firms as well as their online counterparts (although traditional firms have online services).

I highly recommend setting up your account online. Most online brokerage services are significantly less expensive than full-service, walk-in-the-door financial institutions where an employee has to be paid to help you. All such a person would do anyway is fill out the same online information as you, so you might as well do it yourself and save some money. I’m going to make the assumption that since you’re reading this online, you already know how to surf the web. And opening a Roth IRA account online is no harder than that!

Choosing what firm to use will be the hardest part of the process, and there’s no firm that is right for everyone. Each discount broker will have a different schedule of fees, different trading costs, and minimum initial and recurring investment amounts. You need to do some research to find out which one best meets your individual needs.

For example, if you envision yourself trading a lot, then choosing a discount broker with low trading commissions makes sense. But if you envision yourself trading very little, you may be willing to accept a higher trading cost if doing so means a lower threshold for your initial and recurring investments.
In your research, here are some questions you might consider:

* Is a minimum initial investment required?
* Is there a minimum amount for subsequent contributions?
* Are any fees associated with the account?
* Are automatic bank draft contributions available?
* Is free automatic reinvestment of dividends available?

Considering questions like these, you’ll have to choose the options that are best for you. But here’s a few discount broker recommendations:

TradeKing

Roth-IRA fee: No
Charge per trade: $4.95
Minimum Initial Investment: None

TradeKing is the discount broker I use for my own Roth IRA. They have no minimum initial investment requirement, and they charge only $4.95 per trade. But the most important factor in my decision to use TradeKing was their option for free automatic reinvestment of dividends. You can also set up a regular weekly or monthly contribution amount as low as $10.

Open Your Roth IRA with TradeKing Now

Etrade

Roth-IRA fee: No
Charge per trade: $9.99
Minimum Initial Investment: None

Etrade offers 2 different pricing structures, so your commissions will vary between $7 to $10 for automatic investments, all the way up to $9.95 per trade for real-time individual security purchases. The advantage of Sharebuilder is its automatic investment program. The program allows you to set up a plan to purchase a set dollar amount of a given stock on a monthly basis.

This is good for investors who have a small amount of money to invest, but want to diversify their purchases without spending the majority of their Roth IRA contribution on trading fees. It’s also great for those who wish to dollar cost average their investment portfolio.

Open Your Roth IRA with Etrade

OptionsHouse
Roth-IRA fee: None
Charge per trade: $2.95
Minimum Initial Investment: None

Optionshouse offers great rates for it´s commission with options set at $9.95 and stocks at $2.95 per trade, and this is possibly the only reviewed site to offer broker assisted trades for the same price as trade alone executions. The margin interest her is also a set figure at 6.45%, making this an extremely usable site for the traders who only wish to make several executions per month.

Open Your Roth IRA at OptionsHouse Now

3) Fill Out The Application

Once you choose your online discount broker, simply follow the steps on their site in order to open an account. When prompted, check the account option for “Roth IRA.”

When you do, you’ll be asked to fill out an application. The application process for an Individual Retirement Account (IRA) is easy. Most brokers allow you to fill out the application online, but then they’ll require you to mail or fax a signed copy afterward (just follow the instructions they provide). In the meantime, you’ll need to have some basic information at your fingertips:

* Your Social Security number
* Your bank account number
* Your bank account routing number
* Your current employment information
* Your initial investment amount

Once you’ve gathered this information, simply follow the onscreen instructions to complete the application.

4) Your Initial Investment

At this point, with your application complete, you’ll be prompted to make an initial contribution to your Roth IRA. Unless you’re using a wire transfer to do this, the process may take up to 3 to 4 business days to complete since the discount broker needs to contact your bank and set up the bank draft process. Once the transfer of funds goes through, your money will most likely go into a money market account where it earns interest until you decide to make your first investment.

5) Automatic Investments?

While you’re waiting for your initial funds transfer to go through, take the time to explore the discount broker’s online trading site. Familiarize yourself with the different areas of the site and the availability of options at your disposal.

I highly recommend setting up an option whereby monthly or weekly contributions are automatically drafted via your bank account. This is a relatively painless way to fund your Roth IRA during the course of the year.

Also, if you’re a buy-and-hold investor of individual dividend-paying stocks, you might want to choose an option for free automatic reinvestment of dividends. This will allow you to buy fractional shares of a company’s stock whenever a quarterly dividend is paid. If done right, this strategy can lead to compounding investment returns that significantly increase your account’s performance.

Overall, take the time to gain some familiarity with the broker’s site, so when it comes time to invest, you’re ready to pull the trigger.

6) Start Investing

Assuming you’ve already chosen an investment strategy with which your comfortable, the process is now complete. Once your initial contribution shows up as “available” in your online account, you’re ready to start investing!

After managing my Roth IRA account for almost 4 years, I decided to swap it in exchange for a Fidelity business account. Of course, some of you are calling my nuts so I listed my reasons right below.

1. Can’t Wait til 59 1/2

Roth IRA is a great tool for long term wealth building, however the benefits aren’t great enough until you reach a much older age. While I appreciate the tax exempt benefits, I strongly dislike the long waiting period until I receive full access to my funds. With a business account, I get access 24/7 365.

2. Corporations make money, spend money, then pay taxes

Ah, the beautiful corporation. Corporations get away with murder since they pay the government last in terms of revenue, expenses, and taxes. Plus, if you incur any trading and/or investing losses, you can write those off as business losses. Lose money in your Roth IRA? Technically, your Roth represents you, not company XYZ.

3. Better business leverage in case of meltdown

The global recession has hit many (not all) businesses hard. I’ve seen some longstanding businesses close their doors due to the madness. So what happens when you store a ton of capital in a long term vehicle when your business may need some additional capital as leverage? Well, then you probably got under.

4. Better long term returns in stocks versus funds

Because of the strong emotional connections between Americans and their retirement, you are more likely to invest in safer, mutual funds. Understand that 80% of mutual funds underperform their underlying indexes? Fine, go with the index fund but you won’t experience any 1000% gains like IP, ROIA, etc.

When investors think of “risk aversion,” typically treasury bonds, corporate bonds and municipal debt rank highly on the list.  In today’s economic climate, however, it appears there may be more risk in low yielding debt than there is in stocks themselves, which are generally considered to be the most risky.

The Flee to Bonds

With deflation concerns brewing through the markets during the credit crunch, investors fled to cash, fixed income and other investments to protect themselves from dips in the market.  A deflationary environment would make cash more valuable as the market hemorrhaged leverage from itself, decreasing the overall wealth of the world.

Bonds would make an even better investment, investors believed, because not only would investors be protected from deflation, but they would also earn a return on their purchases.  With so much cash entering the bond market in what was a matter of days, bond prices skyrocketed and yields plummeted, as investors were willing to accept the smallest of returns just to have a safe “store of value” for their cash.

Bonds Could Be the Next Popped Bubble

After posting gains of more than 50% since March, the lowly yields offered on most corporate and government bonds appear more like a rounding error than a return.  As investors shift in sentiment from protecting their wealth to growing their wealth, stock prices will soar as bonds lag the market.

Interest Rate Hikes Coming Soon

Investors should pay very close attention to the Federal Reserve when trying to time the great bond exodus.  Currently, the Federal Reserve is keeping the overnight low at its lowest point in history, 0-.25%.  However, many analysts are expecting that in the first or second quarter of 2010, the Fed could start raising rates to curb inflation and to briefly cut the money supply to pause future inflation.

Of course, the interest rate set by the Fed greatly impacts the price of bonds; as rates rise, bond prices move in the opposite direction to push yields higher.  This will be the breaking point.  Many corporate bonds are currently trading at a premium price, meaning the market price of the bond is more than the value of the actual bond.  This results from the opposite trading between price and yield, where investors drive the price up if they are willing to seek a smaller yield.

Short Term Losses, Long Term Stagnation

Bond prices have likely reached their peak.  Should an investor buy into a bond today, it is most likely that he or she will lock in the current yield of the bond and experience paper losses as bond prices move downward and yields move up.  It is important to note that you only get the yield and price that you buy, and should yields move up 2-3%, your investment would still be earning the same return, while the value of your bond would have dropped by the same 2-3%.

Playing it Safe

Luckily, bonds are as varied as stocks.  If you do plan to stay on the bond route, there are a few categories that may be better than others.  Treasury and state municipal debt should be last on the list, as these debt obligations were perceived to be the safest at the onset of the financial crisis and currently carry a higher than normal premium due to strong demand for the bonds.

Investment grade corporate debt is one of the better risk/reward bond categories, as the returns are tied to a company’s ability to repay the debt.  With so many disappointing earnings reports over the last year, corporate debt was perceived to be less safe than government debt – which means it carries a much smaller premium.

If you’re willing to accept more risk to avoid any substantial premium, junk debt investments are still carrying lofty returns, but come with the added risk of a weak credit risk.

An Alternative to Bonds

High dividend stocks remain a very competitive contender in the fixed income space.  Prices for stocks were slaughtered across the board in 2008, and many companies are still paying the same dividend despite falling equity prices.  If you wish to avoid the US in your investments, the exchange-traded fund WisdomTree DEFA Equity Income (DTH) yields more than 11% and has no exposure to any US stock.

Whether you’re just getting started in your retirement planning or you’ve been a lifelong saver, important and expected news is coming for your 401k program.  Chances are high that in 2010, the federal government may actually lower the annual contribution limits of your 401k due in part to nonexistent inflation statistics.

How Will I Be Affected?

Without a serious uptick in consumer prices in the last quarter of the year, analysts are expecting that the average family will not be legally allowed to invest as much in their 401k as they were in 2009.  In 2009, individuals under 50 could invest as much as $16,500 to a 401k program, and those 50 and older could tack on an additional $5,500 for a total of $22,000.

In 2010, however, it appears that investors will only be able to invest as much as $16,000 per individual, with the $5,500 “catch-up” amount remaining the same for investors over the age of 50.  Defined contribution plans will also encounter a lower limit, with the maximum contribution likely to fall as low as $48,000 in 2010.

Unfortunate Timing

Unfortunately, for investors, the timing for the new low limits is possibly the worst it could be.  Investors, who have seen their accounts halved as the stock market fell, are unable to invest directly in 401ks to better dollar cost average their positions.  However, it now appears that the financial crisis is behind us and economic indicators are picking up, making 2010 a prime time to invest.

In addition, many localities should be flush with cash starting in 2010 with the help of the $787 billion stimulus package, which will divest as much as 50% of the total cost of the bill in 2010 alone.  Those efforts, combined with economic stabilization, should help ease the dip in consumer confidence and spending, providing many good opportunities in the stock market in 2010.

How to Beat the Limits

Investors who find that the limits are not suitable for their investing strategy should take a look at either an IRA or a Roth IRA.  Investors 49 and younger were able to invest as much as $5,000 into an IRA in 2009, but it is likely that these limits will drop as well.  Those 50 years of age and lower were granted an extra $1000 for a total annual contribution of $6000.  IRAs allow significant headroom for investors to make use of today’s low prices.  Investors younger than 49 should be able to invest as much as $21,000 in both an IRA and a 401k, while those 50 and over should be able to invest as much as $27,500.

Stocks Are on Clearance

Interestingly enough, the Dow Jones Industrial Average closed at the same price on September 11, 2001 as it did September 11, 2009.  Although the dates are interesting to peruse, they aren’t particularly important.  What is more important is the fact that today’s investor can buy stocks at the same price they could have eight years ago.  The opportunities present today are unlike any we’ve ever seen, especially with prices dipping as far back to 1998 during the worst of the financial fallout.

Pick up Where You Left off

If you’ve been in the market for the past eight years, you have most likely purchased many top notch businesses at much higher prices than they’re worth today.  This shouldn’t be a warning, but rather an opportunity to bring the average cost per share down to what they’re trading today.

Economic analysts are expecting a full recovery to begin in the second half of 2010, and it would be unwise to wait for the returns to come to you.  Promise yourself to invest more now, while stocks are at their lows, to take advantage of the huge upside opportunities present in today’s market.  If you still have time before your planned retirement date, there is even more time to profit and grow your retirement account along the way.

Keep an Eye on Yields

Despite their significantly lower stock prices, many companies have yet to lower their dividends.  This creates an excellent opportunity to allow dividend yields to help you better compound your portfolio.  One of the historically best dividend yielders is Philip Morris International, Inc. (PM), which at its current price, is yielding investors more than 4.6% per year.  That return, though it may seem minimal, is more than three times the return of your average savings account and nearly in line with many corporate bonds.  At these prices, toss fixed income off to the side, invest in high dividend companies that return solid yields back in the form of dividends, and when the time comes, take advantage of the spike in capital gains as these beaten stocks turn higher.

As gold reaches $1000 per ounce and silver pushes its pre-bubble highs, investors have an increasingly vested interest in precious metals.  Once ignored for their below-average returns, metals and retirement portfolios are becoming a tried-and-true mix.

Why Buy Metals?

Of all the “speculative” investments, gold and silver are some of the least volatile.  The term “speculative” is often granted to investments that do not themselves produce.  Your gold holdings won’t grow more gold, nor will your physical silver coins ever pay dividends.  Thus, precious metals earn the classification of “speculative,” which many people assume to be naturally risky.  Gold and silver are said to have “intrinsic value,” or worth that is natural.  As is often repeated, gold and silver have never been worth nothing, and they tend to fluctuate in price to correspond with changes in the money supply or with fear.

Inflation and Deflation Help Metals

Throughout the financial crisis, pundits fearing deflation were still recommending gold.  Why?  Gold is a safe haven investment, and despite being heavy and hard to trade, gold will always have value as a store of wealth.  Investors fearing an economic apocalypse stocked up on gold, thinking that even if the value of the dollar and the markets crashed, gold would retain its worth, thus protecting them from any economic collapse.  As the US government worked to bail out Wall Street, investor sentiment again changed, turning bearish to reflect a fear of inflation after trillions of dollars in bailouts and a new stimulus packaged had been pumped into the economy.

Over the long term, gold is more responsive to inflation as an increase in money supply, but a flat supply of gold should only mean higher prices.  In the short term, gold is incredibly attractive to investors who fear a cataclysmic collapse, as the precious metal has survived for centuries as a store of wealth and retains its intrinsic value.

Why Retirement Gold Makes Sense

You do not have to be a doomsdayer nor a perma-bull for inflation to find value in gold as a store of wealth for your portfolio.  Ultimately, the goal of any retirement account is not only to grow your wealth, but similarly protect it.  Financial planners often criticize investors for investing too little and sometimes too much, as it is in the best interest of savers to maintain the same standard of living throughout your lifestyle.  Gold helps preserve a future lifestyle, even if in the next 30-40 years equity prices fall off a cliff.  If you have 10% of your portfolio in gold, you’ll always have at least 10% of your funds, no matter how well or poorly your other holdings perform.

How Much Gold is Enough?

Defining the amount of precious metals that should be used in a retirement account is difficult, as we all have different objectives, timeframes and spending habits.  However, the biggest disparity in how much you should invest in precious metals is generated by the way you decide to invest in metals.

For instance, you could buy gold or silver at 30:1 on the spot metals market, but with a 3% investment, you’d have nearly half of your retirement invested in the fate of metals.  You could buy metal mining companies with the same 3%, but then you’d be leveraged again, as small changes in the price of metals would ultimately affect the miner greatly.

Last but not least, you have physical metals that you can hold in your hand.  Physical metals are great, but they need to be stored and protected, and they provide a return equal only to inflation.

Your Best Gold Bet

The best way to hold metals is by purchasing gold or silver mining stocks.  The benefit of miners is that you do not have to store the metals; your positions will rise or fall faster than the change in inflation, and these companies tend to pay hefty dividends when not on the market for new mineral rights.  Investors should consider a small, but respectable, investment of 5% of their total retirement account.  This amount would fit perfectly in line of “cash” which almost all portfolios, mutual funds, and pensions hold as a safeguard to a reversal.  Holding miners will also allow you some leverage on the returns of gold or silver, and this strategy will be akin to holding 10-15% of your retirement account in precious metals without using too much equity to have a safe haven shield.

Maintain the Same Long Term Buying

Investors should opt to slowly buy into gold and silver, never minding the various peaks and troughs along the way.  Luckily for investors, the tailwinds of inflation are behind any investment in commodities; after all, only during a few years in the 20^th century was the US dollar temporarily deflated.

Averaging in today’s peak prices, buying metals still make sense, especially considering precious metals have done nothing but appreciate in value with inflation.  To the long term investor, there is no reason to try to time the market with these types of investments.  Instead, rely on what works: buying in on the long haul and protecting your assets against inflation and economic uncertainty.

While a stockpile of cash is unlikely to generate any top-notch returns, for many people, an emergency fund could have prevented the financial and retirement peril created by an on-going recession.  According to a recent Monster.com poll, more than 50% of Americans have less than one-month of income saved.  After one month, those polled would have to tap their retirement savings or other critical investments.

How Much Savings is Enough?

It is universally accepted that employees should seek to save as much as six months of income before investing in retirement funds and other long term plans.  With an emergency stockpile of cash, investors and workers alike would be able to weather any short term economic storm and have enough resources to make it through without irreversibly damaging their fiscal position.  Six months of saved income follows six months of unemployment benefits, which grants a full year of job searching, a length that appears ample for virtually every industry.

Risking Your Credit and Future Profession

The smallest of slip-ups in your payment history are black marks to the banking and lending industry.  Each late payment recorded is another reason for lenders to avoid you as a credit risk and employers to look over you as irresponsible.

A study by NPR found that 42% of all employers check credit scores, thus having a low score could prohibit you from securing a job at one of the few places that are hiring.  In addition, interest rates on debt and other obligations are likely to skyrocket after one missed payment, further inducing fiscal burden while left jobless.

In a recent example, Chase raised the minimum payment on thousands of late accounts to 5% of the minimum balance from 2%, an increase that sent many minimum payments from $200 and $300 per month to $500 and $750 per month.  For a person living on a budget, without weekly salary checks or any means of income, the explosion in costs only lowers the amount of time before bankruptcy.

Retirement Money Isn’t Free

Beyond the credit risks and possibility you may be out of a job for a long time, you must consider the cost to access what money you might have.  Early withdraw penalties in 401k programs total 10% of the balance withdrawn.  Using a model that suggests the Dow has produced average returns of 10% per year, you would be effectively giving up an entire year of growth on your account just to have the money that you put in 12 months ago.  Alternatively, with many retirement accounts still off their 2007 peaks, you would be forced to sell your assets at one of the least expensive points in history, and you would need to play catch up when stock prices soar higher.

How an Emergency Fund CAN Make You Money

Unfortunately, when it comes to investing, liquidity and safety are two words that often correspond with some of the least profitable investments.

However, consider this scenario to illustrate the importance of an emergency fund.  You earn $3,000 per month post-tax and have saved up $18,000.  One year after you started your job, you’ve lost it, but you have savings of $18,000 for the next six months.  If you had invested the money into a retirement account, such as a 401k, it would cost you $1800 to withdraw it.  By keeping the money in cash, you’ve saved that $1800, effectively earning yourself a 10% rate of return (plus bank interest) when comparing your situation to the 401k alternative.

How to Generate Maximum Returns with an Emergency Fund

Luckily for investors, rates are often the highest when an emergency fund is dormant and lower when your emergency fund may need to be utilized.  Generating maximum wealth from your emergency fund can be obtained by using a simple, but effective, tool that has been in use for decades in the bond industry.  In order to get the highest average returns, bond investors will often invest in a variety of maturity dates to spread out their wealth with their portfolios.  Likewise, the wise use of certificates of deposits can generate better returns, as well as provide liquidity.

The Six Month CD: A Recession Savior

Knowing that a health emergency fund consists of six months of saved income, we’ll use a six month CD as the example.

Should your emergency fund contain $18,000, you would want to slowly, month by month, take one month of earnings and place it into a six month CD.  After six months, you would have six CDs, with one just maturing and five more to mature in the following five months.  Although CDs are not known for their liquidity, there is a tremendous benefit in the CD rollover; each month, a new CD can be used or it can be again rolled over, obtaining the maximum amount of interest.

Currently, money market accounts yield little more than 1% per year; a six month CD, however, yields 1.3% per year.  Though the spread seems tiny now, as rates are down to historic lows, the spread during economically prosperous times often reaches 1-2% per year.  Should you be in a poor fiscal position, that same 1-2% may make all the difference in having enough money before the next job opportunity opens its door.

Investors planning for retirement may finally have an opportunity to keep more of their portfolio profits.  As the cost to carry investments over long periods of time evaporates, the investing class will enjoy a higher standard of living, and banks will build a better relationship with their clients.

Not Free, But Nearly

In just a few short years, the biggest development on Wall Street has grown from just one fund.  Exchange-traded funds are hot; in fact, nearly 33% of all stocks traded each day are an ETF, and companies are catching on the bandwagon, offering new investment plans centered on an ETF model.

Exchange-traded retirement plans are the next frontier; never have investors been so enabled to balance their future however they decide.  And with all of this transparency and good accounting, investors also get annual fees a tenth of what they’re used to paying.  Scrap load fees too, as exchange-traded funds cost only the brokerage fee to make the trade – which is significantly better than the standard 4-5% pure commission load.

Meet the New Boss

The new boss in retirement planning is not financial planners or traditional brokerage firms.  Instead, the new boss is the deep discounting direct broker that allows investors to buy and sell ETFs just like stocks.  The financial sector is quickly divvying up exchange-traded fund demand between themselves as they try to offer as many portfolios as possible to attract investors into the inexpensive funds.

So Many Funds, So Many Opportunities

At present, there are approximately 800 exchange-traded funds operating on Wall Street.  Though many of the funds overlap by offering a similar portfolio of stocks or operate in one sector or commodity, there is plenty of consumer choice in which exchange-traded product to purchase.  The average investor has multiples more funds than ever needed to fully encompass the market, and many investors are slicing up the pie between low-cost index funds and a few personal favorite sectors.  Such buying is prompting ETF issuers to create actively managed and target date funds to court mutual fund investors into something new.

401Ks Are Next

Exchange traded products have been the most popular in IRAs and other retirement accounts, where the investor generally makes one bulk investment each year.  However, as more competition enters the exchange-traded product industry, investors can expect that brokerage fees will ultimately fall to make ETFs the best option for any investor, regardless of total capital.

At present, only the wealthiest of investors see a huge benefit on their initial investment, while less wealthy investors do not see immediate returns and may take as long as 5-10 years to recoup their initial investment costs.  Programs like ShareBuilder and other low cost brokers shall feed the ETF scene as investors have to pay a brokerage fee with each subsequent investment they make.

Will ETFs Supplant Mutual Funds?

It remains to be seen whether exchange-traded funds have enough staying power to become the ultimate investment product for the next generation.  ETFs assets are still dwarfed by mutual funds, as many in the investing public haven’t even heard of exchange-traded funds.  However, the tide could soon change as the populist movement towards saving money grasps a greater part of the investing class.  With such low fees and great liquidity, it should come to no surprise that ETFs will emerge as a mutual fund contender.

Photo Credit: The Eopch Times

Actions by world governments are steering investment dollars away from the stock markets.  In addition to the economic downturn, investors have a variety of other reasons they’re not willing to rush into the market just yet.

What Will Happen Tomorrow?

No one knows what tomorrow will bring in the market.  There could be a huge government takeover of a private firm or a federally-assisted merger.  In a market this unpredictable, very few people find comfort in playing the stock market dartboard game.  Naturally, in a market like the current one, investors are weary to hold positions overnight, let alone weekends.  Hoping for a multi-week rally may be difficult for investors to stomach.

Too Many People Making Too Many Decisions

Market makers are usually the people who sew together a bid and an ask order to complete a stock trade.  Today, however, there is a new definition of market maker, and this includes Tim Geithner, Barack Obama and Ben Bernanke.  Those three names cause more up and down movements on the stock market than any earnings report or economic forecast.  Investors have memories of government interventions going terribly wrong, and too many people making too many decisions is scaring investors away from making any long term investments.

Unemployment Digs into Retirement Funds

What do salary pensions, 401ks, 403bs, and IRAs all have in common?  They’re shrinking – quickly.  The baby boomer population that squirreled away millions during the asset bubble boom is now drawing from their accounts to sustain their standard of living.  Millions more of Americans afraid of unemployment aren’t saving for retirement as much as they’re saving for tomorrow.  Though some investors are revamping their retirement portfolios, many more are sitting on the sidelines, too scared of what tomorrow will bring to trust their savings to the Wall Street Casino.  A distrustful investor is no investor at all, but rather a saver.

Wall Street is Chaotic

Famed CEOs and investment managers look guiltier than baseball players in front of Congress.  Wall Street’s best crooks are having a hard time playing the fraud game when willing parties are no longer interested in investing.  Were the United States to escape the credit crisis, frauds like Bernie Madoff and hundreds of CEOs with outrageous salaries would never have been ousted.  Now that the public is aware of these frauds, they’re unwilling to assist in any way.

Investors Remember Bubbled Markets

Real estate, crude oil and commodities haven’t been forgotten just yet.  Just eight years after the end of the last bubble, investors are taking notice of what’s been hurting their portfolios for so long.  Chasing returns around in an endless circle seems to be the name of the game, and investors aren’t playing it.  No one knows if real estate has even bottomed just yet, or if artificially low interest rates will bring about a whole new bubble.

Earnings Haven’t Reversed Trend

Though economic indicators began pointing to north at the turn of the year, very few companies are seeing improved profits over last year.  While this is normal, it should be expected that stock prices will lag for as long as missed expectations and losses are recorded.  Investors must also consider that many underfunded companies are still trading alongside healthy companies.  Government bailouts are mostly to blame for this phenomenon; think AIG, Ford, GM, Chrysler, and even GE.

Dividends Aren’t Enticing

At present, the best dividend yields are attributed to the worst stocks.  Many financial companies are paying a 5% plus yield to investors, even though many of these dividend payments won’t transpire into reality.  In a regular market, high dividends are usually the market of solid firms like Altria or cash rich companies like Microsoft.  Yet ironically, in today’s market, it’s the falling stars that pay the best.

Everyone Has Already Darted To Safety

There are three safe havens: cash, treasuries and gold.  All of these are near worthless as investment vehicles.  Both cash and treasuries pay horribly, and you’ll never beat inflation with today’s yields.  Gold, on the other hand, has been history’s anti-inflation instrument, but it’s now well over $900 an ounce and some are calling it a bubble.  Even the safe havens are saturated!

When Will The Tide Turn?

The FED sees a growing economy by 2010, keen professors say five years, and some doom and gloomers say 15 years.  At any rate, there is now more cash parked out of the markets than ever before.  Should the cash and confidence return to the markets, the next few years should be full of bull market runs.  The tide on Wall Street will turn as soon as the wave of confidence returns.

Stable funds, which are investments that can only be bought and sold through various tax-deferred pensions, gained in popularity when Wall Street fell in 2008. Stable value funds, as a whole, were able to edge out the market and produce an average 4.7% return last year compared to near 40% declines for major market indices. However, one of the many tools that stable funds use to retain their value is now faltering with the world’s insurance giants. Heftier premiums and higher hedging costs may leave stable funds at the back of the pack for 2009 returns.

What’s Happening?

Stable funds operate on a completely different dictionary than most stock and bond funds. A stable fund is designed to do one thing and one thing only: protect wealth against market declines and inflation. However, stable funds do pay a return, known as the crediting rate or the rate of interest that the fund will earn. Generally, stable funds buy into a basket of fixed income securities and then hedge their bets with low cost insurance from larger investment banks. By hedging, the stable fund seeks to maintain its book value, or how much the fund as a whole is worth.

Big Market Movements

Huge movements in stock and bond markets have affected the book value of many stable funds. When the value of bonds drop, so does the value of the portfolio. In this case, the insurance company hedges to prevent the price from actually changing; however, this is not reflected in the portfolio.

Higher Insurance Premiums

As multinational insurance giants are wiped off the map due to a financial crisis, the amount that stable funds are paying to insure their assets has soared. Risk aversion, as well as a limited amount of capital, affects insurance rates and the number of insurance companies that can compete for the policies. Higher insurance premiums eat into the returns that investors are expected to earn, as it is a direct cost of hedging.

Laid Off Employees Aren’t Happy with Stable Funds

Stable funds are largely invested in long term debt from treasuries to corporate bonds and other instruments. Because of this, many laid off employees are having a hard time withdrawing their equity from their retirement stable funds because insurance companies and bankers are unwilling to insure or “wrap” their holdings. In this case, banks would have to infuse the fund with cash to make good on withdraws and give banks an equal stake in the holdings of the fund until more money is invested in the fund. In the days of the asset bubble, this business model worked perfectly, as old money was replaced several times over with new money. However, financial hardship in many areas of the country is putting additional strain on the stable fund industry.

It Could Get Even Worse

Stable funds might be 2009’s worst performing funds. With recent gains in the stock market, a bull market rally now could mean stable fund investors miss out on the gains. In addition, record low yields and rates are unlikely to stay around for much longer as bond investors fear inflation. Higher inflation rates pushes down the prices of bonds and the book value of the stable fund. It becomes a lose-lose cycle of losses that can simply not be avoided. The difference in the book and market value of the funds will have to be made up with even greater infusions of capital from banks, insurance companies or from investors, who after seeing the bull run in early 2009, may be weary to lock in money at such low rates.

There are Better Ways to Invest

There are plenty of better, safer and far more liquid investments than stable funds. Though many of those invested in stable funds do not have a choice as it is a part of a pension program, others may find the slightly lower returns in certificates of deposit a fair exchange for greater liquidity should the financial need arise. Though stable 401k funds may have topped the charts in 2008, they’re far more likely to make a lackluster performance this year.

SEP (Simplified Employee Pension) IRA accounts are a great way for small business owners and self employed individuals to invest a portion of their company profits for their retirement. You may qualify for a SEP IRA if you own a C corporation, S corporation, sole properitorship, LLC, or joint venture partnership.

SEP IRA Benefits

• Easy to Setup and Contribute to
• Low administrative fee in comparison to actively managed retirement funds
• Flexible contribution limits
• 100% tax deductible and your earnings grow tax deferred

SEP IRA Requirements

In 2009 a SEP IRA has a contribution limit of $46,000 ($45,000 in 2007). Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

A SEP IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees. (Source: sepira.com)

Top SEP IRA Brokers

Start Investing Your Business Profits for the Long Haul

The sooner you open a SEP IRA for your small business, the longer compound interest will increase your overall gains. The key is to take action as soon as possible to not waste another second.

What’s holding you back from opening a SEP IRA? What other questions do you have?

In an age where virtually every one of life’s biggest expenses are covered by “expendable” company benefits, many investors and employees alike are growing more concerned over their financial future – with good reason.  1.2 million jobs were shed in the first two months of 2009, and the trend is not expected to buck.  However, the good news is that most future retirees and savers will be unaffected, at least in their retirement savings, if they were to lose their job.

Untying your job and your golden years

The popularity of 401k programs has tied many people to their job.  The good news is that the overwhelming majority of 401k programs have little exposure to your employment, as long as you selected diversified stocks.  401k programs by-in-large are kept with unrelated financial firms and are not tied to the financial good standing of your employer.  However, you may need to worry about the possibility of bank failure; retirement accounts are protected by the SIPC up to $250,000; in most cases, this may not be enough if you’re nearing retirement and have one million in your 401k.

Pension programs are immune to bankruptcy

Pension programs that pay a percentage of your pre-retirement wage every month are protected by accounting rules.  Currently, pension programs and future benefits for retirees are kept off the books of businesses and protected against bankruptcy and loss.  Check with your employer and see if your current pension program is a qualified program, which would be a pension that is protected against loss by a private insurer.  In many cases, the PBGC or Pension Benefit Guaranty Corp., will back the value of your pension to the tune of $54,000 per year.  Though this may not be enough to cover the full payment of several high earning fields, it’s a respectable wage and enough an income for most people, even if it means trimming down on your standard of living.

How to protect yourself

The first step is to make sure that all of your information with your current and former employer is 100% accurate.  In the event that your pension gets taken over by an insurance company, they’ll need to contact you.  And since you will have lost your job and no longer make the daily trip to the workplace, contact may be more difficult than you think.

The human resources department at your current employer can tell you if your information is up to date, and they can also give you information about the company that backs your pension for further due diligence on your own.

Insurance assets are fly-by-night

If you’ve ever purchased a home with a mortgage, you know there’s a huge market for secondary financial assets.  Many insurance companies write the plan, but then sell the policy to someone else.  In many cases, you’ll never know the transaction even took place.  The best bet is to make consistent contact with the human resource department annually to know who is backing your pension.

Financial advisors have long recommended that investors tone down their portfolio risk as they age to prevent the chance that falling equity prices will stifle retirement plans. However, as many have experienced over the past year and a half, stock prices have fallen off a cliff and now threaten the retirement of millions of people.

Throw out what you know

It now may be time to forget everything you have ever thought about market risk. You may need to assume more, rather than less, risk to catch up and generate returns. After the beating the markets have taken to fall more than 50%, stocks look cheaper now than they ever have before, especially in the long term.

Safe havens won’t make money

After plunging this far, the safe haven purchases of corporate debt and treasury bonds won’t do much for your portfolio. After a 50% decline, you would need to wait out a full 20 year treasury bill just to get past par; that’s far too long to wait just to catch up to where you were just one year ago!

Safe haven investments were never intended to generate returns, but instead to protect investor capital amid falling stock prices. However, after a 50% plunge from top to bottom, it would be unwise to lock in the paper losses and switch strategies to protect your assets (this should have been implemented a year ago); instead it’s time to ramp up the portfolio and go long equities for the long term.

Sell safe, buy risk

Conventional wisdom would never suggest that investors go for more risk as they reach their retirement goals, but unconventional markets demand unconventional strategies. Investors should begin to sell off their holdings of debt and other safe assets like money markets and opt for equities – but not just any equity. Leading the recovery will not be those companies that led the decline; you won’t see financials leading Wall Street when the recovery does finally come.

Go for the biggest and the best

Investors should look for the best companies in any particular industry to spotlight them in their portfolios. When searching through names to buy, don’t think small and certainly not beaten; you want quality names that have blue chip staying power, ones that have been unfairly smashed in the market’s decline. Stocks like Intel, Kellogg, Altria are strong, and they are sure to live through this recession and many others to come back stronger than they were before. All three of these brands have staying power, and with the exception of Kellogg, all three were sold off at an incredible pace as the market declined.

Buy the market if you can

One way to make a long term investment in a market bottom while smoothing out volatility is to buy into an index fund. In this case, a long term investor should consider an index like the Dow Jones Industrial Average to buy 30 big blue chip names. Luckily for investors, most of the “fall” in the Dow has already been wiped out Bank of America, Citigroup and General Electric, who have all plunged to new lows. Those three have been the laggards of the index, (General Motors too) and they have reflected poorly on the remaining quality companies that make up the index. From here, those four names have little to shed while the remaining 26 have plenty of ground to make up. If the four Dow laggards catch up, that would be great. However, if they don’t, the difference to investors would be negligible.

Many senior citizens are bombarded by advertisements promoting new reverse mortgage offerings, which can offer extra income during retirement. A reverse mortgage essentially entails selling your home in pieces for monthly payments. It does provide an excellent source of much needed income for many seniors, but it can also prove to be a costly way of raising funds.

Is a Reverse Mortgage Right for Me?

It depends. Life expectancy and how much you need to retire are two critical elements. If you’re in a position to work and only need an extra hundred to two hundred dollars per month to make ends meet, you’re far better off with a part-time job. However, if you’re not in this situation, and Social Security isn’t quite footing the bill as you would like, the reverse mortgage may be perfect for you.

Several Different Facilities

There are several different options for cashing in the equity in your own home. There are lines of credit which provide the most freedom, allowing you to take the line of credit as you need it. Then there are the lump sum, tenure plan, and a combination of the two.

The lump sum is exactly as it sounds; the full balance of your home’s appraised equity is paid to you in cash. The tenure plan pays out a monthly sum, and the combination plan allows for a tenure or lump sum to be mixed with the line of credit.

You Can’t Move

The inability to move is what holds many people away from reverse mortgages and financially ruins many others. Reverse mortgages last for as long as you own the home, meaning if you move and sell the home, all of the balance is due immediately. And because many plans price in an estimated appreciation value for your home, you could end up paying far more than you ever expected.

Be Ready for High Fees

Most reverse mortgages are loaded with fees to account for a brokerage commission. Expect fees as high as 10% of the equity of your home as stated by the lender. This fee is generally taken out of the loan when it is given to you; instead of receiving a check for $100,000, only $90,000 may make it into your bank account.

Payouts Based on Age

The older you are, the better payout you will get against the equity in your home. This is because lenders view you to be a limited risk, as the chance you’ll burn through all of your equity cash payment is almost zero. Lenders hope to recoup some of the lent money and cover the remainder through the sale of your home, and subsequently, it is obvious they’d rather lend to older retirees.

Talk to a CFP First

There are literally hundreds of reverse mortgage variants. It’s always best to evaluate your special circumstances with someone who truly understands your situation and can help you decide which route to take. The reverse mortgage business is very profitable for lenders, and it can be a great opportunity for borrowers should the need be there. However, if you don’t have that much of a need for cash, you’re better off skipping a reverse mortgage.

A global recession has every investor looking for ways to reduce costs. From the number of times we visit fast food restaurants or how we regulate the home thermostat, it seems like everyone is beginning to track every dollar. With the markets in distress and retirement accounts taking a nosedive, it might be time to start looking into what is often the biggest money-hole. How much are you over-paying for your investments?

Cutting Out the Excess

It’s easy to see how small savings can make a tremendous nominal difference. The daily latte accounts for $120 per month, and that digital cable package you never watch removes the same amount from your pocket each year.

When it comes to investing, the majority of fees are percentage based, meaning they impact us more when we have more money. Percentage based fees are everywhere, and in this economic climate, it makes sense to track down every last basis point.

Kill the Target Fund

Any financial planner worth his pay will tell you that target date funds are an absolute disaster for making money on Wall Street. Target date funds are those that guide your allocation process for you, making decisions based on the “target date” for your retirement. For example, someone with a 2010 target date fund would be almost exclusively in bonds, while a 2050 target date fund would be almost all equities.

Target date funds are a pure and simple way for retirement planners and fund managers to make more money. Almost all target date funds are reinvested in other mutual funds with an added expense tacked on, and there is no evidence that these funds even keep relevancy to your expected retirement date.

In reality, the allocation process is simple and can be done once a year to maintain a decent retirement portfolio. Don’t pay someone a few percentage points of your retirement balance to perform a five minute job for you; reallocate yourself and save thousands on a reasonably sized portfolio.

The Premium Broker

Retirement investors have no need for the advanced features and options that premium brokers offer and similarly do not need to pay more for access to these items. If you’re paying anything to buy and sell mutual funds, you’ve already lost profits, as most discount brokers offer free mutual fund trades. Premium brokers are for the frequent trader and not for the long term investor. Commission costs may not seem high as a percentage of your retirement balance, but $20 is better invested in your portfolio than paid to maintain your portfolio.

Tell the Stockbroker Goodbye

The worst time to hire a stockbroker is in periods of bear markets. Stockbrokers by-in-large are dedicated to the brokerage and not to the individual investor. The brokers work for the firm and want to sell large volumes of stock and other investments for their paycheck – not for your retirement future. Getting good advice from the average stockbroker is like asking for a car’s history from a used car salesmen; there is simply a conflict of interest. Stockbrokers are keen on selling the most expensive products, as that is where their income is derived.

Investigate Your Tax Possibilities

Tax savings is what may generate your biggest benefit. Tax codes are difficult to understand and put in terms that few investors are willing to read. Your best investment is to hire a proper tax professional who can guide you through the process of writing off losses and lowering investment income. There are plenty of perfectly legal and advantageous ways to save on your taxes – giving you a better bottom line, even in a bear market.

Financial advisers will never recommend that you borrow from your 401k – and for good reason. Unfortunately, life does not always go to plan, and making a decision on borrowing quickly becomes a reality. In the days where employment is dropping along with incomes, it’s comforting to know that you’ll be able to get a “get out of jail free” card from your 401k, should the need arise.

The Easy Way: Emergency Fund First

If you’re not in a position where you need to borrow from a 401k, and you have a reliable income, you need to first build up an emergency fund. Having three to six months of income to float you during hard times without borrowing or charging up your credit cards will save you in the long run.

Think back through the last 10 years, and it’s certain there has been at least one period of time when money was the top concern. Think about this: should you ever lose your job, would you rather have $10,000 cash to fall back on or thousands of dollars of credit cards? If this is you, or could be you, there is no reason not to start funding an emergency fund.

Get Used to Being Taxed Twice

Borrowing from your 401k means that your money will be taxed twice. First, you’ll be paying back your 401k with post-tax dollars, and your withdrawals in retirement will also be taxed. Very few people think about the borrowing costs as it relates to taxes, but often it’s the most expensive part to borrowing from a 401k.

You Can’t Lose Your Job

If you’re borrowing from your 401k and you lose your job, the balance of the loan will be due within 60 days. If it is not repaid in this timeframe (and you’re under 59 ½ years old), then you’ll pay another penalty of 10% on top of taxes. The unfortunate aspect to this scenario is that most people who tap their 401k are doing so because of a job loss. If you’re married and have lost your job, you can get around this problem by borrowing from your spouse’s 401k and avoid the problems associated with job loss. Obviously, there is no quick fix if both jobs are lost, but we’ll err on the side of good luck and hope that never happens.

401K Loans Are the Last Loan to be Tapped

Never go into a financial problem thinking that you’ll be able to borrow from your 401k. Borrowing from a 401k has risks, and even though it’s better to be paying interest to yourself rather than a banker, there is a possibility you could take the loan at the bottom of the market and pay it back at the top. In this case, you’ll not only have lost out on time and added interest, but also the returns of your portfolio.

Read the Language

Some 401ks do not allow you to pay back the loan and make contributions at the same time. This can create an additional expense, as you’ll no longer receive the employer match on your funds. It is important to understand every detail about taking a 401k loan before you do so. At the very least, strive to get a full match on every possible dollar– 401ks are as close to free money as most of us will ever see.