February 2012

Saturday, February 4, 2012

Carnival of Passive Investing #14 - January 2012 Edition Now Live at Afford Anything with Passive Investing Author, Mark Hebner

The 14th (January 2012) edition of the Carnival of Passive Investing is now live on Afford Anything at the link below. A big thanks to Paula (the owner of Afford Anything) for hosting! 

Carnival of Passive Investing # 14 - January 2012

This month, we were very honored to have passive investing author, Mark Hebner (author of the book, Index Funds: The 12-Step Recovery Program for Active Investors, and the founder/president of Index Funds Advisors, Inc.), helping to judge and rank the top 3 posts.

Thanks to everyone for participating. Congrats to this month's top 3 picks (shown below)!

#1: What Boxing Taught Me About Personal Finance, by the blog, My University Money. “Every ‘tough guy’ out there thinks they can fight, and every guy at the water cooler who has read the business section thinks he’s Warren Buffett – so they both have stupid male egos in common,” the author says.
#2: Saving, Investing and Gambling from the blog, Arbor Asset Allocation Model Portfolio. This article discusses — you guessed it! — the difference between “investing” and “gambling.”
#3: What Are Dividends? Why Should You Care? The blog, Simply Investing, asks a simple question – “What’s a dividend?” – and explains it in commonsense, easy-to-understand language. This post explains why dividends are a great way for the truly lazy – er, I mean, passive — to kick back and earn some nice returns.


Each month, there seems to continue to be quite a bit of confusion about what constitutes passive investing and what DOES NOT (i.e. - which posts will be included in the carnival or screened out). There's really nothing wrong with this confusion, as indeed, one of the original goals of this Carnival was to help spread the word about this specific niche of investing styles. As such, we want to make sure that everyone knows what passive investing is in order to keep the articles published in the editions of The Carnival of Passive Investing focused.

Overall, passive investing involves the use of passively managed (not actively managed - so avoiding individual stock buying/selling) investing instruments, such as index ETFs or mutual funds, in order to invest with the market. By using this method and avoiding individual stock selection, we are able to beat 70% or more of the investing "professionals" out there.

Examples of passive investing include asset allocation, index investing, ETFs, portfolio rebalancing due to market fluctuations, asset class evaluation, controlling investor emotions, strategies for adding new funds to your investment portfolio (dollar cost/value averaging), etc. Passive investing does NOT include INDIVIDUAL STOCK PICKING (even if they are dividend stocks), CREATING PASSIVE INCOME, OR MARKET TIMING. A definition of passive investing can be found here as well.


Thanks to our participants and host, Afford Anything. I (My Personal Finance Journey) will be our host of the next (February 2012 - # 15) edition, scheduled to go live on February 28th, 2012. Be sure to get your articles in now (see instructions below)!

Since Blog Carnival has ONCE AGAIN started to not work at all recently (most everyone that I know has had technical difficulties), you can use the Blog Carnival HQ submission form clicking here.

Also, I am now putting the final touches on the hosting schedule for 2012. Currently, all months have been claimed except for December 2012, so if you'd be interested in hosting on at the end of this year/beginning of 2013, take a look at the hosting schedule and then send me an email to get on the schedule.

Friday, February 3, 2012

Tax Free Savings Options - North America vs. the UK

The following is a guest post that shares some potent options to save on taxes on your passive investment holdings. Enjoy! 

Tax Free Savings Options - North America vs. the UK

For people that pay income tax, tax-free savings and investment options are necessary to shield hard-earned income from further demands from the tax man. There is an array of complex investment routes for doing this in both the US and UK, but these tend to involve specialist knowledge and accounting support. For most people, their tax-free-saving requirements are fairly well covered by similar schemes in both countries - ISAs and pensions in the UK and TSFAs and IRAs in the US and Canada.

Tax-Free Savings for Everyone

In the UK, we have ISAs, or Individual Savings Accounts, as the most popular form of tax-free savings. Each person over 18 can have both a cash ISA and a stocks and shares ISA every year. For children, there are JISAs, which can be set up by parents or other adults in the name of a child, to mature when they turn 18. 

All of these accounts have the advantage that they don't attract income-tax liabilities on the interest learned.
Both a cash and a stocks and shares ISA has an annual cap each year, but it is possible to move the balances to a better cash ISA if a more competitive rate of interest is found. One of the main benefits of a cash ISA is that previously invested money can be added to it without losing its tax-free status. However, customers have to be very careful to transfer their ISAs rather than withdraw cash from them and attempt to reinvest elsewhere. Once the money is withdrawn, it cannot be reinvested into another ISA and it loses its tax-free status.

In Canada, the government has introduced Tax Free Savings Accounts (TFSA's), which came into effect starting from 2009. These can be set up in flexible ways, such as through a savings account, mutual fund, or term deposit. Contributions are set at around $5000 a year, and any unused contributions can be carried over for the following year. The interest earned is tax sheltered, although the contribution isn't. Withdrawals can be made at any time.

Saving for Retirement

In the UK, pension schemes offer long-term tax-free savings up to certain limits, above which later income will be taxed if it exceeds pre-tax income level rates at retirement. There are various schemes available, including government social security, which is funded by national insurance contributions and corporate pensions, either through an employer or self-invested pension funds (SSIPs).

In the USA, there are different tax-free savings schemes, such as IRAs and 401k schemes. An IRA is a savings plan with federal tax benefits that allows someone to build a nest egg for retirement. These are generally used to supplement other retirement plans and can be opened for around a $50 initial deposit. With Roth IRAs, any withdrawals after age 59.5 are tax free, as contributions are made with assets that have already been taxed. There are other types of IRAs too, such as the Simple IRA, SEP IRA, and all of these have slightly different contribution and tax policies.

The schemes in both countries operate along similar lines, but each product needs to be carefully evaluated to get the best rates from the various market providers. For example, pension schemes can be hit by expensive management charges on both sides of the Atlantic. Some also believe that the limits of ISA savings aren't sufficient for heavily-taxed earners.

How about you all? What type of tax free savings options do you use? Which have you found is best?

Share your experiences by commenting below!