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10 hours ago
- Business
- Yahoo
Fidelity Says This ‘Stable' Investment Is Surprisingly Risky — What's Really the Safest Buy?
Newer investors are often looking for the next big growth vehicle that can skyrocket your wealth the quickest. But slow, stable and predictable growth is a sweet spot investors should not overlook, such as that offered through both Treasurys and certificates of deposit (CDs). Find Out: Read Next: Both of these investment options have the potential to yield a guaranteed income without risking your initial investment if you keep them invested for a set time or 'maturity' period. However, just because an investment is stable, that doesn't actually mean it's without risk. Fidelity broke down the difference between the two investment options, to determine which one is truly the safest investment. Here are the key factors you need to consider. While earnings on any kind of investment are great, they feel a bit less so when you have to pay taxes on those earnings. Here's an area where Treasurys have a benefit over CDs. While the interest from any earnings on CDs are taxable, Treasurys are exempt from state income tax. So, investing in a Treasury can actually play into a tax protective strategy if you live in a high-tax state, particularly if you are in a high tax-bracket. From a tax perspective, if deciding between a Treasury and a CD yielding about the same APY, it probably makes more sense to go with the Treasury. Learn More: If you're making great earnings on an investment but don't have access to the funds, known as liquidity, this can be an issue. Both Treasurys and CDs share the same problem of locking in your funds until a 'maturity' date, which can be anywhere from a few months to a couple of years, on average. You can potentially sell both products before their maturity dates and receive a lower amount than what you'd get if you remained invested, but Treasurys have a more liquid market, according to Fidelity, making them easier to sell before their time if you need the funds faster. Once again, this gives the Treasury a slight edge over a CD. People often choose both CDs and Treasurys because of their low risks, so long as you stick with the maturity period. They both come with a fair amount of security in how they're backed. CDs are issued by banks and insured by the federal government's FDIC insurance (up to $250,000 per bank, per person). Plus, you can purchase them from different banks to increase the maximum protection — meaning if you bought one for $250,000 from Bank A and another $250,000 from Bank B, you'd be covered for $500,000. Treasurys are backed by the U.S. government with no limit. That means the government will do whatever it must to make sure they can pay you back at the time of your maturity. Thus, Fidelity suggested that Treasurys are a better choice for those who have large amounts of money they want to put in low-risk investments. If you have smaller amounts of money, it's probably about equal in terms of risk and safety to do a CD or a Treasury. The last deciding factor is when and how these investment products pay out. CDs have different rates and payment intervals, often between several months and a few years, so you could receive your payout in as little as six months, say. Treasury bills, on the other hand, can be invested for longer periods of time, as many as 10 to 30 years, which CDs do not offer. And, Fidelity pointed out, the Treasury market offers another product known as Treasury Inflation Protected Securities (TIPS), which also offer protection against inflation, something CDs don't do. While CDs are still a safe and stable option, especially for those investing smaller amounts, Treasurys have advantages that make them better for those with larger amounts to invest. More From GOBankingRates 3 Luxury SUVs That Will Have Massive Price Drops in Summer 2025 Are You Rich or Middle Class? 8 Ways To Tell That Go Beyond Your Paycheck Clever Ways To Save Money That Actually Work in 2025 This article originally appeared on Fidelity Says This 'Stable' Investment Is Surprisingly Risky — What's Really the Safest Buy?
Yahoo
5 days ago
- Business
- Yahoo
10 Times You Should NOT Do a Roth Conversion
A Roth conversion is the process of rolling over retirement funds invested in a pretax account, like a regular IRA or 401(k), into an after-tax Roth IRA. You'll pay capital gains taxes at the time of rollover, but you won't pay taxes in retirement when it's time to withdraw from the Roth. Find Out: Read Next: While a conversion can be the right thing for some retirees, or soon-to-be-retirees, to do finance experts suggested 10 times you should not do a Roth conversion. 'One of the biggest mistakes people make with Roth conversions is assuming they're always a good idea, according to Stephan Shipe, CFP, founder and CEO of Scholar Advising. However, he said, 'If you're still working and expect your income to drop in retirement, it often makes sense to wait. Paying taxes now at a high rate, when you could defer and pay at a lower rate later, can undermine the strategy entirely.' Shipe said that Roth conversions are best timed during low-income years, such as after retirement but before required minimum distributions or Social Security benefits begin. 'That window creates an opportunity to shift assets without pushing into higher tax brackets or triggering IRMAA (Income-Related Monthly Adjustment Amount, for Medicare) surcharges,' he said. Another overlooked point is that tax law isn't fixed, Shipe pointed out. 'Roths are appealing because they hedge against future tax increases, but conversions are taxed under today's laws.' With the odds of higher tax rates in the future, that hedge only has value if it doesn't strain your cash flow or jeopardize other parts of a financial plan, he explained. Be Aware: If you're close to retirement, you're probably in your highest earning years and facing your highest tax brackets, which is a good reason to think twice about a Roth conversion, according to Carson McLean, founder and lead wealth advisor at Altruist Wealth Management. 'Doing a Roth conversion while in a peak tax bracket means you pay more tax now than you might need to. For most people, it is better to wait until after they retire, when income drops and they fall into a lower bracket,' McLean said. That window between retirement and when required minimum withdrawals (RMDs) or Social Security start is usually the best time to do conversions, because you can control your taxable income and minimize the tax bill. Retirees can begin taking Medicare health insurance at age 65 but be warned: a Roth conversion raises your modified adjusted gross income for the year, McLean said. 'This higher income can push you into a higher Medicare premium bracket, which means you will pay more for Medicare Part B and Part D two years later.' For people who are not yet on Medicare and get health insurance through the ACA marketplace, a higher income can reduce or eliminate their subsidies, leading to much higher out-of-pocket premiums. 'These added healthcare costs can quickly outweigh any tax benefits from the Roth conversion,' McLean said. People with low income may not benefit much from a Roth conversion, either, especially if their tax rate will not increase in the future, McLean said. 'The bigger issue is cash flow. Ideally, you want to pay the conversion tax from money outside your IRA so you keep more in the account growing tax-free.' If you don't have extra cash, paying the tax from the IRA reduces your retirement savings and the potential benefit of the conversion. If you have charitable inclinations and plan to leave your IRA to a charity, there is no benefit to converting, McLean said. 'The charity does not pay taxes, so the account goes to them tax-free either way. If your heirs will be in lower tax brackets than you are, it is usually better to let them inherit the traditional IRA and take withdrawals over time.' A Roth conversion can also trigger a leap into a higher tax bracket if you try to convert a lot of money at one time, according to Doug Carey, a certified financial analyst at WealthTrace. 'If possible, it is best to spread out the conversions over several years to avoid moving into a different tax bracket,' he said. You should also avoid converting when there is other income coming in, such as stock options or a large bonus. Some final considerations for holding off on a conversion because it won't be worth the taxes, according to Carey, are: You are receiving Social Security benefits or will very soon. You have a pension, which already puts you in a higher tax bracket than those without a pension. Your life expectancy is low. A Roth conversion needs time in order to break even due to the large payout in taxes when the conversion takes place. You don't have enough taxable income to pay the taxes on the conversion. The best way to find out if a Roth conversion is right for you is to talk with a fiduciary financial advisor. More From GOBankingRates 3 Luxury SUVs That Will Have Massive Price Drops in Summer 2025 25 Places To Buy a Home If You Want It To Gain Value 3 Reasons Retired Boomers Shouldn't Give Their Kids a Living Inheritance (And 2 Reasons They Should) This article originally appeared on 10 Times You Should NOT Do a Roth Conversion Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
