What is a Progressive Income Tax?

A progressive income tax is supposed to take more money from persons with higher incomes. The basic idea is that the more money you make, the more taxes you will pay. In a progressive tax there are brackets, a person making $50,000 a year might pay a 5% tax and someone making $100,000 a year would pay 10%.

The original idea behind the progressive income tax in the United States was an income redistribution scheme. The concept was that the rich would pay more in taxes which would finance government services to help the poor.

Proponents of such taxes believe that they can eliminate disparities of wealth and poverty. Opponents contend that the tax never works as advertised and that many working people end up paying it while the rich can manipulate the tax code to get out of paying.

The Politics behind the Progressive Income Tax

The progressive income tax was first promoted by politicians such as Theodore Roosevelt and Woodrow Wilson in the early 1900s. These leaders believed that large concentrations of wealth were bad for society so they sought to break them up. They linked the tax to income levels in order to take more money from the wealthy.

Originally the tax worked much as they had intended and only the very wealthy paid. In the century since the tax has been extended so that almost all Americans pay it. Many states also implemented versions of the progressive income tax.

Since it has become very easy for wealthy individuals to deduct income from taxation some critics contend the tax is no longer effective. Others contend that it has become a tax on the middle class. Despite widespread dislike of this levy there is little likelihood that it will go away anytime soon. Many political leaders particularly in the Democratic Party are committed to preserving it.

How it Works Today

The current Internal Revenue Code mandates several different tax brackets. Your tax bracket determines what percentage of your income you will pay in income tax. Your tax bracket is based on your taxable income not your actual income. Your taxable income is determined by subtracting your deductions and exemptions from the amount of money you make. The difference determines your taxable income.

The reason you fill out a tax return and try to get as many deductions and exemptions as you can every year is to get yourself into a lower tax bracket. Under the current system there are six federal income tax rates: 10%, 15%, 25%, 28%, 33% and 35%. In the past federal income tax rates have been much higher for wealthier individuals.

Some states have progressive income taxes but many states have moved to a flat tax system. Under the flat tax everybody pays the same rate regardless of income. The advantage to that system is that everybody has to pay. The disadvantage is that it can be more of a burden on the poor and the working class.

Something to be aware of is that the US federal income tax system is not entirely progressive. The FICA or withholding tax on salaries is collected on a flat percentage basis. That means everybody pays the same rate regardless of income level. There has also been some political pressure to make the withholding tax progressive so wealthier individuals pay more.

The Patient Protection and Affordable Care Act (Obamacare) of 2010 mandated a sort of progressive income tax; a 3.8 percent surtax on investment income, for those making more than $250,000 a year. This could be an example of what future progressive income taxes will look like.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.

Are Indexed Funds a Good Investment?

Indexed funds are one of the best investment deals for average people. Unfortunately many of us never hear about them because the investment industry cannot make much money from them. The professionals want you to put your funds into something you have to trade over again not something that you hold onto for the long term.

A good indexed fund is like a good engine it just keeps purring along and making money. You will not have to think about it or worry about it as long as it is working properly. The problem is that indexed funds are about as exciting as the furnace in your basement, they work well and get the job done but they are not exciting or sexy. The investment press will not cover them and many brokers dislike them because they will generate a lot of commissions.

A Hands off Investment

The reason why an indexed fund is a really good investment for an average person who knows little about the market is obvious. It is a hands-off investment in fact a good indexed fund practically runs itself. You simply buy it and let it run on its own. Nobody needs to spend all of his or her spare time sitting in front of the computer making trades or picking stocks.

This is possible because of how an index works. An index is simply a list of stocks with certain characteristics. The managers of an index fund simply buy stocks that meet those criteria and sell the ones that do not. The managers of the Acme S&P 500 fund would simply buy shares in all the companies on the S&P 500, if Ace Corp dropped off the S&P they would sell it and buy whatever replaced it.

This strategy works because it automatically invests in those companies and industries that are actually making money. There is no fancy research or guess work. Nor is there any temptation to go out and search for the next big thing. It also provides diversification because it is invested in many different stocks, you will not lose money if one stock crashes and burns.

How an Index Makes Money

An indexed fund is only as good as the index it is based upon. The S&P 500 historically increases in value by around 12% a year so an S&P 500 fund should match those gains. This more than compensates for the typical rate of inflation which is around 4% and can even compensate for high inflation.

It should be noted that an index can lose quite a bit of money to market volatility. The S&P 500 lost 45.5% of its value in 2007 but recovered most of that value by 2011. Such losses are why an index should be used as a long term investment.

The best way to offset market volatility is to make sure that a large percentage of your funds are in another traditionally more stable investment. Examples of such instruments include treasury bonds and fixed annuities.

When and How to Buy Indexed Funds

Generally it is best to use indexed funds as a long term retirement investment. They can be purchased through IRAs, 401Ks and some annuity products. The drawback to this arrangement is that persons under 59 ½ years old will have to pay a 10% income tax penalty on funds withdrawn.

Younger persons might be better served purchasing indexed mutual funds or exchange traded funds (ETFs). Although mutual funds are better known, ETFs are usually cheaper and easier to buy. For persons seeking a long term retirement investment indexed annuities (which combine an indexed fund and a traditional fixed rate annuity) can be a good deal. Indexed life insurance policies in which the cash option is invested in an indexed fund are also available.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Ordinary Annuity, Retirement Annuity, and Income Annuity.

Is Universal Life Insurance a Good Investment

Universal life insurance can be a good investment under certain circumstances. For most people universal or whole life insurance is simply not a good investment. There are some exceptions to this rule which we will look into below.

Universal Life Advantages

A universal life insurance policy is a permanent life policy with a savings or cash value feature. The cash value feature allows the policy holder to use the insurance policy like a savings or investment account. He or she can purchase investments through it, take money out and even borrow money against it.

This arrangement has two advantages: it is a tax-deferred retirement plan under the Internal Revenue Code and it allows you to pass money onto heirs without incurring additional taxes. Any money invested in on one can be treated as tax deferred income and will not have to be reported on your tax return. Even though it shares some of the characteristics of an investment plan most people should not use universal policies as investments.

Not a Good Investment for Most People

Universal life is not a good investment for most people because it is life insurance. Most of its benefits are only available to your heirs after you die. Even though you can save money in one you will not be able to get most of the money while you are alive.

In today’s world the average person is more in need of long term retirement income than life insurance. Many people are more in danger of outliving their retirement investments than of dying young. Suppose Jock purchased a universal life policy when he was 55 and put $50,000 in it. Then he lived to 94 years old, Jock would not have that money cover expenses such as nursing home care when he got older. He could cash in the policy but what happens if he becomes incapacitated.

Instead of a Universal life policy Jock could have purchased an annuity. The annuity would provide a life insurance benefit but it could have also provided Jock with several hundred dollars in additional every month until he died. That money would be coming into help Jock with day to day bills and augment his Social Security. Best of all Jock would still have life insurance to leave to his heirs or clear up his bills when he dies.

Something that younger people should remember is that the tax-deferment in insurance policies comes with a catch. The IRS will charge anybody under 59½ years old a 10% tax penalty on funds taken out of insurance policies. That means a person would actually pay more taxes on that money if he took it out.

When Universal Life Would be a Good Investment

There are some people for whom universal life can be a good investment. These are people that would be purchasing a large amount of life insurance anyway.

An example of such an individual is Cliff, a wealthy physician. Cliff has several children and quite a few liabilities. He owns a practice, a house, a summer home, a ski condo and several cars. Not surprisingly he carries a large amount of life insurance. Since Cliff spends a lot of money on life coverage to begin with it makes sense for him to take advantage of universal coverage. He can use to greatly increase what he can leave to his kids.

Only use universal life as an investment when you would be purchasing life insurance anyway. If you have no need of a large amount of life coverage investment vehicles such as IRAs or annuities make more sense.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Single Premium Immediate Annuities, What is an Annuity, and Current Annuity Rates.

Are ETFs a Good Investment?

An exchange traded fund or ETF can be a very good investment. Unfortunately many of us are not very familiar with these vehicles that’s why we don’t know how to use them.

The reason that ETFs can be a good investment is that they are very flexible and have very low costs. Such funds are actually cheaper than traditional mutual funds and they can be much easier to buy and sell. That being said, exchange traded funds are not always good investment. There are sometimes when other instruments are a better deal.

Advantages to ETFs

An exchange traded fund is actually an investment company it pools the funds of investors and invests that money for them. Unlike a hedge fund or a mutual fund, an ETF is publicly traded on a stock exchange. You can buy and sell shares of it just like you can any other stock.

The cost of such vehicles is lower but like mutual and hedge funds they give you the advantage of professional investment. You will not to have to worry about the investment because the pros that run the fund will take care of it for you. The disadvantage is that you are at their mercy if the managers do a poor job you can lose money.

One big advantage to ETFs is that they make it much easier to diversify. You can invest in a whole group of stocks at once, or in foreign markets at a fairly low cost. It is also possible to purchase indexed ETFs which are further diversified. This limits a lot of the risks inherent in stock investing yet gives you some of the advantages.

Finally ETFs let you implement a particular strategy. If you think gold is going to up you can purchase a gold-ETF. If you think Australia is a good place to put your money there are funds that specialize in investment down under.

Who Should Invest in ETFs?

An exchange traded fund is usually a better investment for an investor that prefers a more hands on approach. An example of this would be somebody that buys a few shares on an irregular basis and hangs onto them. This would be somebody like Jane.

Jane likes the idea of being invested in the stock market but hates the idea of constantly trading stocks. By purchasing an indexed ETF Jane can sink some money into the stock market without having to devote a lot of time and effort. Another person might be Dick, Dick thinks money can be made from currency trading but he believes Forex is too risky. Dick can buy foreign currency ETFs that enable him to invest in currency futures without having to engage in speculation.

Finally there’s Bruce, Bruce thinks owning some gold would be a good idea but he has no wish to buy the physical metal. Bruce can purchase a gold ETF which owns bullion that way he can invest in precious metals without having to bother to actually store them. Bruce also wants to participate in the commodities market but he has no time for active trading. Bruce can purchase some commodities exchange trade funds that let him own futures without trading.

How to Invest in ETFs

For average investors that want to participate in the markets, ETFs are a pretty good deal. Investing part of your IRA in a stock-index ETF is a good way to protect your retirement next egg from inflation.

For persons that want to try their hand at speculation or stock picking, direct purchase of ETF shares through a brokerage is a low risk alternative to day trading. Something to remember is that at the end of the day, an ETF is just like a share of stock it can lose all of its value, so be careful when purchasing one.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.

Is Gold a Good Investment?

Under certain circumstances gold can be a very good investment. That being said there is a right way and a wrong way to invest in this precious metal. Unfortunately there’s an entire industry out there that is dedicated to getting you to invest in it the wrong way.

How Not to Invest in Gold

The worst way to invest is to buy physical gold in the form of gold coins, bars, jewelry, etc. This is a very bad idea for the average person for several reasons.

The first and most obvious is that in most places gold is no longer used as money. You cannot take your bullion down to your local supermarket and buy food for your family with it. At least with an investment such as a stock or an ETF you can sell it online and transfer the proceeds into your bank account. There is no way to transfer a gold bar into your bank account and use it to pay the mortgage or the electric bill.

If you have precious metals at home and you need to turn them into cash you’ll have to go to the pawnshop. Once there the pawnbroker will probably give you about 50% of the value of the metals. The reason for this is that the pawnbroker has to make a living he has rent, insurance, employees to pay etc. In other words the item you purchased for your family’s security will lose half its’ value.

Then there’s the fact that physical gold will not earn any investment income for you. It might increase in value but it earns no interest or dividends. Something that has little or no earning potential and is hard to sell is simply not a good investment.

Storage and Other Costs of Gold

If having no capacity to earn extra income and being hard to sell wasn’t bad enough, there are other costs to owning physical gold. You will have to store it somewhere. The most likely place would be a safety deposit box which you will have to pay for. That means long term ownership will lower your income because of an added monthly cost.

If you keep gold at home you will probably to buy extra insurance because most homeowners’ insurance policies will not cover high value items like precious metals. You will probably have to buy another policy or a special rider to cover them. To keep the gold safe you may have to install an alarm system and a safe which will also cost you extra.

Gold is Just Too Volatile

For the average person the costs of physical gold as an investment are simply not worth it. Even if you can afford the extra costs there is a strong possibility you could lose money. Historically gold has often lost all or most of its value, the metal lost half of its value in the 1980s. On August 23, 2011 the price of a troy ounce of pure gold fell by $104 in just one day. That means the metal lost 5.6% of its value in one day of trading.

For the average person gold is simply too volatile to put a lot of money in. Something that the gold promoters you see on TV will not tell is that gold hit an all time high of $850 an ounce in 1980 and never rose over that price again until nearly 30 years later. Obviously most of us cannot wait for an investment to regain its value.

Gold Hysteria Scams

Be very careful about gold hysteria scams, these are based on the premise that the entire economy is unsound and everything will collapse. That has never actually happened even during the Great Depression and the Civil War. Many economic institutions including large insurance companies got through such crises just fine.

The probability of all economic institutions crashing at once is about the same as the probability of an alien invasion it could happen but the odds are completely against it. Remember the hysteria merchants that are warning you about this catastrophe are trying to make money by selling you gold ignore them.

If you want to invest in gold look into gold-based or gold related investments such as ETFs and gold stocks. These are not sexy but they are legitimate investments, physical gold is a lousy investment if your name is not Goldfinger.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Calculator, Annuity Interest Rates, and Annuities Good or Bad.