Example research essay topic: Mutual Funds Brokerage Firms - 1,738 words

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Investment Class For millions of investors, a frantic rush to contribute to Individual Retirement Accounts before filing their tax returns has become a rite of spring. But procrastinator or not, you have new choices for your IRA this year, including more bank certificates of deposit at attractive market interest rates, now that nearly all government ceilings have been removed. And if this is your second or third year of funneling money into just one type of IRA, it's time you diversified. Investments eligible for IRAs include CDs, stocks, bonds, mutual funds, annuities, limited partnerships and Treasury securities, to name the principal ones.

Only life insurance, precious metals, collectibles and investments bought on margin are off limits. Your choice among purveyors of IRAs likewise is varied: commercial banks, savings and loans, credit unions, mutual fund companies and insurance and brokerage firms. (Miller 36). You " ll need a clear investment strategy, especially if your IRA is $ 10, 000 or more. The issue is whether to plump for safe, steady income by investing in Treasury securities, top-rated corporate bonds or CDs, or to take some growth-oriented risks by going into stocks, equity mutual funds or limited partnerships. You should play it safe if your IRA is crucial to your retirement plans. If not, feel free to be aggressive, provided you recognize that yo can't deduct losses on your IRA investments from other income and can't gain any tax advantage in an IRA from reaping long-term capital gains rather than dividend or interest income.

Says Tom Wirtshafter, vice president of Nathan Lewis & Grant, a financial services firm in New York City: "Anyone aged 20 to 50 should lean toward putting money into stocks for growth, and someone 50 or older should be in bonds or other fixed-income investments for security. " (Chisel 90). The flexibility to choose among investments is not the sole virtue of an IRA. You can deduct annual contributions to these do-it-yourself pensions from taxable income - up to $ 2, 000 for a working person, $ 4, 000 for a working couple and $ 2, 250 for a working person with a non-working spouse. At age 59 - 1 / 2, you can tap your IRA without paying a 10 % penalty, though you will owe regular income taxes on the amounts removed. (Miller 38). You can open as many IRA as you please, so long as you don't exceed your annual contribution limit. What's more, you can switch trustees of your IRAs as often as you like without forfeiting the tax benefits, if you instruct one trustee to transfer the funds directly to another.

However, some custodians -- notably insurance companies -- punish suck fickleness by levying fees of up to 10 % of the amount in your account if you move it elsewhere. Once a year, you can reclaim your IRA funds for 60 days in a rollover: this can serve as a kind of short-term, interest-free loan to yourself that preserves the tax benefits, but you must redeposit the funds in an IRA. (Miller 38). While your long-term goals should help you balance your investments between growth and income, you should make the most of timely opportunities in your day-to-day tactics. Since most economists foresee a steady recovery this year, the stock market should be a solid bet, with the Dow perhaps hitting 1450 during the year. Interest rates should decline by a percentage point or so in the first half, then wind up the year about where they are now. Because real interest rates (nominal rates less inflation) are close to historic highs, fixed-income investments such as bonds or bond funds have much to recommend them.

In addition, insurance companies offer annuity IRAs, but their performance occasionally is lackluster and their fees can be high. (For more on fixed- and variable-rate annuities, see the story on page 93). The attractive wares offered by other IRA custodians include the following: Bank IRAs. Their appeal is, in a word, safety. CDs, the staple of commercial bank and savings and loan IRAs, are federally insured up to $ 100, 000. You can open a bank IRA by depositing as little as $ 25. Banks and S&Ls usually don't charge IRa management fees.

And once you invest in a CD, you can relax until it comes due months or even years later. If you expect interest rates to decline, a fixed-interest CD is a good way to lock in today's high returns: 9. 25 % for six months, 9. 65 % for 12 months and 10. 22 % for 30 months, on average. Instead of a fixed CD, you might prefer a variable one with rates that are adjusted every few weeks in line with money markets. The price of this protection: an initial yield roughly a percentage point lower than on fixed CDs.

And if rates fall, so does the yield. (Chisel 92). Insured bank money-market accounts also typically yield three-quarters to one percentage point less than a six-month fixed-rate CD. And the recent elimination of the $ 2, 500 minimum deposit for IRA investors makes the accounts more attractive. At some banks you also can open accounts that make it convenient to contribute small amounts to an IRA week to week.

Generally, the larger your deposit and the longer you " re prepared to entrust it to a bank, the higher the interest rate you " ll get. (Chisel 93). What's more, deregulation means that at many banks you now can specify almost any length of time up to 10 years for your CD while receiving a rate that's set by the marketplace rather than the federal government. But shop around because rates vary widely. New york City's Chase Manhattan Bank has lately been paying 9. 65 % on its six-month CD, for instance, while Chicago's American National Bank & Trust Co. pays just 8. 85 %.

When comparing rates, ask for the effective annual yield, which is what you " ll get after compounding. (Chisel 95). Mutual fund IRAs. If the economy expands over the long term, as expected, mutual funds should be a better haven for IRAs than banks because of the greater growth potential of stocks. Not only do funds offer built-in diversification, but they also provide professional management. And mutual funds are second only to banks in charging modest IRA fees, typically $ 5 or $ 10 a year. For your IRA, pick a company that offers a family of funds so you can switch among ones with different investment strategies.

Then, say, if interest rates soar and the stock market cools, you can move from a stock fund to a bond fund or a money-market fund with just a phone call. Among the better-regarded broods of funds are Fidelity, Kemper, Oppenheimer, Neuberger & Berman, Value Line and Vanguard. Some major banks, such as Citibank in New York, now offer versions of mutual fund families. Being able to switch from a fund directly to a CD is a plus, but otherwise the banks' funds offer scant variety and have yet to show they can perform as well as leading mutual funds. California's Wells Fargo soon also will let you trade securities in an IRA through a discount broker. You can open an IRA with an out-of-state bank simply by mailing in the appropriate forms and a check. (Downes & Goodman 43).

Jay Goldinger, the investment strategist pictured on our cover, urges you to invest conservatively in mutual funds that aim for "good, steady returns. " His IRA choice: closed-end bond funds sold on the New york Stock Exchange. These funds, which consist of high-yielding bonds, sell at a discount from the value of the underlying bonds themselves. Self-directed IRAs. If you are confident of your own investment skills and have $ 10, 000 or more to invest, it may make sense to pass up a bank, mutual fund or insurance company IRA and open a self-directed account at a brokerage firm.

You " ll then be able to call your own signals among a great variety of investments: stocks, bonds, mutual funds, covered calls, promissory notes, bond unit trusts, limited partnerships, zero coupon bonds, annuities and insured bank CDs. For this freedom, you can expect to pay a bit more in fees than you would for an ordinary IRA. One way to compensate is to cut your trading costs as much as 75 % by using a discount broker. (Miller 39). You " ll at least want to consider zero coupon bonds, Ginnie Mae unit trusts and limited partnerships for your self-directed IRA. Sold at huge discounts, zeros pay all their interest when they " re redeemed at maturity. This has the effect of locking in a fixed long-term compounded rate of return.

With other bonds the interest may have to be reinvested at lower rates. In exchange for this advantage, zeros often yield half a percentage point less than regular bonds but they " re still a bargain if you believe interest rates are on a long downward slope. Even so, be sure to stick with high-quality corporate issues or, better yet for safety, zero coupon CDs or zero coupon Treasury securities offered by brokerage firms. Many limited partnerships have been adapted to IRA investors.

Rather than being structured to throw off tax deductions, a number of real estate, oil and gas and other partnerships now aim for returns of as much as 20 % a year, though few achieve that lofty level. Since these are complex investments with some risk, deal only with reputable firms and have your accountant or lawyer scrutinize the prospectuses. (1). Despite all the ballyhoo about IRAs, they aren't for everyone. A salary reduction, company savings or Keogh plan can be a better investment dollar for dollar than an IRA for your retirement money. One reason: such plans sometimes can be eligible for more favorable tax treatment when you retire. Of course, you can always contribute to an IRA as well.

Indeed, for most people, IRAs are simply too good to pass up. (1). Words: 1, 602. Bibliography: Chisel, J. Individual Retirement Accounts.

Phoenix: Oryx Press, 1995. Downes, J. & Goodman, J. E. Dictionary of finance and investment. Hauppauge, NY: Barron's Educational Series, 1995. Investor education and assistance (2002).

Washington, DC: Securities and Exchange Commission. Retrieved September 30, 2002, from web Miller, H. New Choices for your IRA. Wall street journal: January, 1986.

Research essay sample on Mutual Funds Brokerage Firms