Is ETFs better investment choice than regular mutual funds? I have started looking into it. They have greater tax efficiency.
I have invested in a few mutual funds through dollar cost averaging (whatever I could afford at the time) from early 90’s to mid 2000’s, stopped when college tuition started. I was kind of a dummy in investing so mutual fund was the easy way.
I want to start investing again, but not sure if I should continue putting money into existing mutual funds, add new mutual funds, or just switch over to ETFs.
I know everyone’s investment philosophy is different, objective is different etc., but I would like to hear from those who are in mutual funds and/or ETFs, what do you think of the two?
@menloparkmom if you are assisting a young low income person in opening an IRA, keep in mind that there is a thing called the Retirement Savings Contributions Credit (Saver’s Credit). A person can actually take a tax credit for part of their IRA contribution. The credit can be 0% if your income is too high, but for lower income levels the credit can be 10%, 20%, or even 50% of the IRA contribution, again depending on income. As you know, a contribution to a traditional IRA (but not to a Roth IRA) is a deduction from income, so it reduces your income. We found that my son could make a traditional IRA contribution that got his income down to the range where his tax credit jumped from 20% to 50%. Then with the remainder of his allowable maximum $5500 annual IRA contribution he opened a Roth. I suspect he will find it advantageous to do something similar this year (ie, make contributions to both traditional and Roth IRAs)
@NJres – or anyone else who may know…On the topic of Roth IRAs.
Can my son use 1099 income to fund his Roth IRA? I am trying to have him maximize his contributions during his tax-free years. I should probably post this over in the student FA/tax forum, but we seem to be close to the topic here.
If I recall correctly, if it is self employment income, then yes, the taxable amount. If it is from interes, divs, etc, then no. Limited to earned income.
We use to be in a Mutual Fund. Years ago. When we pared things down, we eliminated.
Or financial guy is a fiduciary. The returns we get on our Annuities are good for us; getting better return with ‘safe’ money than the bond market. We have a lot in equities - some with our financial guy (our Roth IRAs) which we have in his most aggressive funds - for best returns, and they closely monitor their investment pools. Our 401k is about 40% of our assets, and that is all in equities, so we needed stuff to bring our risk down. Annuities was the answer for us. Our only real estate is our home (there is a lot in FL that I acquired in inheritance - actually agreed to take it to close our our family Trust when my mom passed, and a gal is buying it from me over 5 years, so I get a payment each month on that).
Glad we have a little better cash flow with my return to work, and I was able to jump back in with flexible schedule and reasonable rate of pay as a RN.
I would suggest researching mutual funds and joining that for a less complicated approach. It was just easier for us to put money into DDs’ Roth IRA starting this with TD Ameritrade and purchasing ETFs with the money put in. Letting it grow some…eventually as DDs get into their professional jobs where they have accounts going, can transfer the $$ there. DD1 has an account going, but with her H’s job/career, her job will probably change, so leaving it in TD Ameritrade right now. DD2 is graduating from college in May, and once she establishes accounts, we can transfer her TD Ameritrade $$. We also had a stock account for them, and could add gift $$ to that. But right now we have our own spending priorities. And SIL’s car may ‘die’ and that will be a financial priority for them…
My parents were able to leave us a pretty decent inheritance (5 children). I would like to be able to leave my two DDs $$ (and grandchildren - first one is coming May) when H and I pass too. Hope to live longer than my parents (dad age 63 of cancer, and mom age 77 of dementia). H’s parents are both 88 and not good health - still managing in their home with help coming in.
“We use to be in a Mutual Fund. Years ago. When we pared things down, we eliminated.”
You still are in mutual funds, are you not? Your previous post which lists mutual funds:
“I adjusted our 401k holdings; got out of HBLTX (Hartford Balanced Income R5) - turns out they have about 42% bond holding in it and that had dragged down the returns (11.69% return last year). So shifted account % on the other 3 holdings. One of them, JGVRX (JP Morgan Growth Advantage R5) had a return last year of 35.69%.”
@Iglooo, my friends are trying to convince me that ETFs are better, because for mutual funds, you get taxed on the annual capital gain distribution, but ETFs mostly don’t have capital gains. Some articles do emphasize this “tax efficient” point.
Interesting that Vanguard said both are tax efficient. I got to read a bit more.
I plan to open up a Vanguard account for ETFs, I currently have Fidelity which offers ETFs, I can start there too.
I asked about CG distributions. The way I understood it was,roughly speaking, they are included in dividends and distributed as such with ETFs. The Vanguard rep I spoke to didn’t go into details. He emphasized the bottom line is one is not any more tax efficient than the other.
@doschicos you are right, but not an individual mutual fund - it is an investment choice under 401k. We had an individual mutual fund holding years ago.
H use to work for a company that had a SAR-SEP; we rolled that money over too to simplify our investments.
Decide where you have the best returns with the level of risk you can handle, how you want your investments ‘spread out’. It has been a ‘process’ for us, and a series of decisions over the years.
I haven’t looked at our taxes for 2017 yet, but will see how the picture is changing…we did move some money into Roth IRA from a State of AL account (I worked for a University in AL in the 1980’s, and this was the one account I couldn’t do anything with until I was older than 59.5.) So have taxes due on that.
I hope to see our Roth moneys be part of what we pass along to children/grandchildren. But one never knows what the future will bring.
@CT1417 In very similar situation here, our college Junior son has earned summer research stipend income as well as Fall and Spring term peer tutoring income for the last few years and he just keeps saving it up in a Vanguard muni account. Summer stipend is reported on a 1099 and tutoring is reported on a W2, from all indications I’ve read (but have not contacted a tax attorney), all of this income is eligible to be deposited into a Roth IRA up to the $5500 annual maximum. As he’s planning to go to graduate school and is quite the saver, when he’s home for Spring Break next month, we’ll be opening up his first Roth IRA with these 2017 earned income dollars and then 2018.
And for those who asked about Vanguard ETFs, I asked them while discussing setting up son’s Roth IRA. Was cautioned against by the representative, please consider the logistics of selling (not via Vanguard) and/or the potential brokerage fees associated. No first-hand knowledge, just passing along this detail.
May I interject a quick Roth IRA question? Is there anywhere that contributions need to be reported on the student’s tax return? Just in general, “informational” reporting. I know it’s not a deduction. Thinking the answer is “no.” Just checking!
@Hoggirl — TurboTax generated an IRA Information Worksheet that is marked ‘Keep for your records’, so I don’t think there is a reporting requirement.
I will say that when I was confusing my son’s age and my age and tried inputting that his Roth contribution was more than $5500, TT calculated the tax he would pay, and pointed out that he would pay it for as long as his contribution remained in excess of the allowance.