In Parts 1 and 2, different types of investments and the concepts needed to put those investments to work were introduced by highlighting Asset Allocation (how you divide your money between stocks, bonds, and cash) and Diversification (having a broad mix of each of these types of investments), how crucial these are to your long-term success and the differences between core investments and how they work together.

So, let’s say you know you’re looking for long-term growth, and you’ve researched and chosen a couple of investment / mutual funds. Are you ready to buy? Not quite. There are a few more things to consider, i.e., what type of account to open, the impact of taxes, and how to keep your portfolio healthy and hopefully growing.

Why the type of account is important

When you’re simply putting money aside, whether for a rainy day or for something special in the next couple of years, a Bank or Credit Union savings account can work just fine. You’ll only make a small amount of interest but you will have easy access to your money.

An investment account is very different as it is offered through financial institutions such as Life Assurance Company or Investment Brokerage firm. These accounts allow you to invest in Funds or buy and sell individual investments like stocks and bonds. There may be an initial minimum investment or deposit amount needed, fees and depending on where you set up your investment, commissions may also be charged.

The financial institution is one decision, but you also have to decide what type of investment account best suits your goals: a Life Assurance Investment Fund, a Brokerage Account or a tax-efficient pension. The type of investment account will determine how much you can invest and when, and how your earnings will be taxed. Taxes are important because after all, it’s not just what you gain, but what you keep that matters, so let’s break it down according to some common goals.

Taxable accounts for “anytime” investing

A Life Assurance Investment Fund or Brokerage Account are the most flexible options, but remember, investing is for goals that are at least five years in the future as this allows you to weather the volatility of the stock market while also benefiting from the growth stocks provide. There are no limits on the amount that can be invested in these accounts and no timing considerations other than your own. You can invest as much as you want at any time and make unlimited withdrawals which is all pretty straightforward but the applicable tax rules can be a little more complex.

In a savings account, you pay DIRT tax on interest earned whether or not you withdraw the funds while Life Assurance Investment and Brokerage Account and how tax is paid is a bit more complicated. For Life Assurance Investment, Exit Tax is payable on any money you make and for Brokerage Accounts, Income Tax is payable on Dividends and Capital Gains Tax is payable on any money you make when you sell an investment that’s gone up in value.

Tax-efficient Pensions for retirement

Tax-efficient pensions are tailored to a specific goal like retirement as their are tax breaks on money invested and earnings grow on a tax deferred basis. Both of these help you grow your money very tax efficiently but access is restricted before reaching retirement.

  • Employer-sponsored pension — Your contributions can be taken automatically from your salary which provides upfront tax relief / break at source. Annual contribution limits are sizeable and are based on a percentage of salary and your age. Also, employers are more likely to contribute or match a certain percentage of your contributions and you should always take advantage of this extra money.
  • Personal retirement account — As an individual with earned income, you have the option of setting up an individual Personal Pension by paying contributions for your bank account. Annual contribution limit are also based on a percentage of your salary and your age and tax relief can be claimed directly from Revenue.

How to stay on top of your investments

Once your investments are up and running, take a long-term view but this doesn’t mean you can ignore them, however. The closer you are to using the funds, the more you need to monitor your investments by re-examining your asset allocation and possibly rebalancing.

Basically, rebalancing means looking at the percentage of stocks, bonds, cash, and other investments in your Investment Portfolio or Pension Plan and aligning them with your risk preferences, time remaining to stay invested and making changes if necessary. For instance, if stocks have done well, it might be time to sell some and use the proceeds to buy bonds. If bonds have had an exceptional year, it might be time to sell a few in favor of stocks. This is the strategy the largest institutional investors use and will help you keep your overall plan on track.

When to get help

Even when you understand investing, it pays to get help once in a while and a periodic consultation with a financial professional can help you deepen your knowledge and refine your decisions.

But whether you work with a financial advisor or go it alone, the main point of these last three columns is this: Don’t be afraid to ask questions. Be persistent, get the information you need, and get started.

Source: Schwab Moneywise, By Carrie Schwab-Pomerantz

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