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Financial Planning - Financial planning in general. (Moderated)
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Posted by AsymF on March 20, 2008, 5:21 am
I was considering opening a SEP-IRA with our local SECU, but they show
an APY of 3.50%. Most figures I hear about are in the neighborhood of
10-12% APY. Why would the SECU be so comparatively low on their APY?
Who could I go with to earn upwards of 10% APY or higher on an SEP-IRA?
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Posted by kastnna on March 20, 2008, 10:46 am
> I was considering opening a SEP-IRA with our local SECU, but they show
> an APY of 3.50%. Most figures I hear about are in the neighborhood of
> 10-12% APY. Why would the SECU be so comparatively low on their APY?
A SEP-IRA is nothing more than a shell for investments that allows for
certain tax rules as established by the internal revenue code.
Think of an IRA as your left pocket and a regular brokerage account as
your right pocket. They are the same. However, your left pocket has
one set of tax rules and your right has another set of rules. Now
suppose your investment is a dollar. You can choose to put that dollar
into whichever pocket you prefer and it's still a dollar and it's
still expected to grow (or not) by the same amount. The pocket (or
IRA) does nothing more than define the tax consequences.
NO IRA has a promised APY. An IRA can have myriad investments inside
of it. CDs, mutual funds, stocks, bonds, REITs, etc can all be owned
in an IRA each with it's own potential return. Your potential return
is based (in part) on the risk associated with the investment you
pick.
My guess, is that your credit union (cough, cough... idiots) has done
you the "favor" of picking the investment inside of your IRA for you.
Likely money market or CDs. The investments are safe and therefore
have a low return. You could just as easily open an IRA and put mutual
funds or some other investment inside of it and POTENTIALLY make the
10-12% return you are looking for. Remember there are no guarantees.
I'm glad you asked your questions and please continue to do so. That
said, your question suggest that you have a lot of learning left to
do. Before you dive into this, seek a professional that is qualified
to help you. Find a fee-based CFP or even a respected friend that is
knowledgable in this area. The credit union is doing you a great
disservice. I speculate that the person you spoke to isn't even
licensed to sell securities and therefore defaulted you to CDs.
>
> Who could I go with to earn upwards of 10% APY or higher on an SEP-IRA?
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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Posted by Rich Carreiro on March 20, 2008, 10:46 am
> I was considering opening a SEP-IRA with our local SECU, but they show
> an APY of 3.50%. Most figures I hear about are in the neighborhood of
> 10-12% APY. Why would the SECU be so comparatively low on their APY?
It's a meaningless question to ask about the APY on a SEP-IRA.
A SEP-IRA isn't an investment. It's a type of account. The
return depends entirely on what investments are inside the
account.
The SECU (I assume that's some credit union) APY is 3.50% because
the only investments that are likely available for a SEP-IRA held
at a credit union are CDs, savings accounts, and money-market
demand accounts. And 3.50% is about what a CD is going to yield.
> Who could I go with to earn upwards of 10% APY or higher on an SEP-IRA?
You'll have to hold your SEP-IRA at a mutual fund or brokerage
company and investment in funds/stocks/etc. to *have a chance*
at getting a return like that. Keep in mind that to have a
chance at getting a return like that means you also have
a chance at losing money, perhaps a significant amount of money.
There's no place you're going to get a 10% return without
shouldering significant risk.
--
Rich Carreiro rlc-news@rlcarr.com
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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Posted by on March 20, 2008, 10:47 am
> I was considering opening a SEP-IRA with our local SECU, but they show
> an APY of 3.50%. Most figures I hear about are in the neighborhood of
> 10-12% APY. Why would the SECU be so comparatively low on their APY?
A SEP-IRA is an account type, not a specific security.
You can open a SEP-IRA and inside that account, you may have
anything from a money market fund or a CD to shares of the most
speculative stock you can find. (what's available in a
particular SEP-IRA account depends on where you opened it)
Presuming that by "SECU" you mean a local credit union,
it's likely that the security in question that you're
considering for your SEP-IRA account to hold is a
CD - a certificate of deposit. CDs pay yields that
are generally comparable to high-quality bonds. Take
a look at <http://bankrate.com/brm/rate/deposits_home.asp>
for some comparisons.
> Who could I go with to earn upwards of 10% APY or higher on an SEP-IRA?
Where have you seen "most figures" suggesting 10-12%?
For what it's worth, folks often use figures as high
as 10%-12% for a projected *long*-run return on a portfolio
which contains *stocks*. Not short run, nor guaranteed
in any way, and not bonds or CDs. After inflation is
taken into account the long-run return of large-cap
equities has been more like 7-8%. But to acheive that
return, there's a lot of risk involved - in some years,
such a portfolio can go down a *lot*. During just the
first 2-1/2 months of this year, money invested in an
S&P 500 index fund (a very popular option for SEP-IRAs)
would have lost more than 11%. In 2002, it would have
lost more than 22%. But in the 5 years through the
end of Feb, it would, in fact, have averaged about 10% gain.
So, again, where exactly did you see those 10-12%
returns? What were the investments? And if you want
those kinds of returns, are you willing to take the
risk that along the way, you may lose money (and that
there's no guarantee that even in the long-run you'll
get those kinds of returns)?
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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