Q&A Vault

It depends. Not all brokerages are good for buying index funds and automating your investing.

The two biggest reasons why I recommend Fidelity is because they have a huge selection of low-cost index funds, AND their funds have no investment minimums. That being said, if you already have accounts elsewhere and you'd rather not go through the hassle of moving to another brokerage, here's how your current brokerage measures up:

• Vanguard - Great for automated index fund investing, but ONLY if you have a lot of money to invest. Vanguard index funds have initial investment minimums of $3,000. So if you're trying to build a diversified portfolio with several index funds, you need at LEAST $10,000 to do so while meeting Vanguard's investment minimums.
• Charles Schwab - Also great for automated index fund investing. This brokerage is very similar to Fidelity (i.e. no investment minimums, no account fees, low-cost funds). However, Schwab does not offer as many bond index funds as Fidelity. For example, Schwab doesn't have a U.S. Treasury bond index fund, so you wouldn't be able to implement the Swensen asset allocation with only Schwab index funds. Nor does Schwab offer any REIT or Emerging Market index funds. And if you try to buy Fidelity or Vanguard funds with a Schwab account, you will be charged expensive transaction fees. Thus, Schwab is not ideal for anyone who wants to implement the David Swensen portfolio.
• TD Ameritrade - TD Ameritrade is not great for automated index fund investing. They do not have  any in-house low-cost index funds. And if you try to buy Vanguard, Fidelity, or Schwab funds with a TD Ameritrade account, you will be charged a $49.99 transaction fee. Ouch! If you want to invest in index funds, then definitely consider moving over to Fidelity.
• Robinhood - Robinhood is not the best brokerage to start with if you are a beginner investor. First and foremost, because they do not offer any Traditional IRA or Roth IRA accounts. They only offer regular taxable accounts. And quite frankly, you do not have any business investing in a taxable account if you don't yet have an IRA! Not only this, but Robinhood does not offer any index funds in the mutual fund version. They do have ETFs, which are of course another form of index funds, but with ETFs you will not be able to automate your investments. 
• E*Trade - E*Trade is a decent option for automated index fund investing. To buy Fidelity funds with an E*Trade account, there is a $19.99 transaction fee. To buy Vanguard funds with an E*Trade account, there is no transaction fee but there is a $49.99 penalty if you sell within 90 days or less. Same with Schwab funds. So if you stick with only Vanguard and Schwab funds and you don't plan to sell within 90 days or less, then staying at E*Trade is fine.

Here are all the reasons why I personally use Fidelity and why I recommend Fidelity for this course:

• Fidelity index funds (mutual funds) have no investment minimums. Compare this to Vanguard, whose funds have a $3,000 investment minimum. Thus it's much easier for small investors (i.e. less than $10,000 to invest) to build their desired asset allocation if they don't have to worry about fund investment minimums! 
• Fidelity has a huge selection of low-cost index funds, so if you have a Fidelity account, you can buy all these funds without any transaction fees. 
• Fidelity offers the Health Savings Account (HSA), which Vanguard does not. It's best to have all your financial accounts in one place, so you want to find a brokerage that offers all the account types that you might want to open in the future.
• Fidelity has a checking account (it's called the Cash Management Account) which comes with a debit card, mobile check deposit, and fee-free ATM withdrawals. Again, it's a great place to keep all your financial accounts in one place.

Fidelity is not available in most countries outside of the U.S., and if it is, it's not necessarily the best brokerage for international investors.

• U.K. - Start with a Stocks and Shares ISA at Vanguard UK.
• Canada - Start with a TFSA (for non-retirement goals) or a RSP (for retirement). I recommend TD Direct. 
• Australia - Start with an account at Commsec Australia.
• Rest of the World - Start with an international account at TD Ameritrade. (Note: Not available in all countries.)

Check the Add-On Module for more details!

The short answer: As much as you can.

The long answer: The maximum allowed annual contribution is $6,000 per year. You can have multiple IRA accounts (either at the same brokerage or at different brokerages), but you can't contribute more than $6,000 TOTAL to them for any given year. For example, you can do $3,000 in a Roth IRA at Vanguard and $3,000 in a Traditional IRA at Fidelity. If you are age 50 or older, you can do an additional $1,000 in "catch-up contributions" - so you can put away $7,000 a year.

The ideal scenario would be that you contribute $500 a month to your IRA (via automated investing, just like I teach you in the course), so that you max out the $6,000 limit every year. If you can't do $500 a month, then just put away what you can! Even $50 a month is still something, and your IRA will grow over the years.

The deadline to contribute to your Roth or Traditional IRA is the tax filing deadline for that year. For 2020, the deadline is April 15, 2021. For 2021, the deadline is April 15, 2022. 

If you haven't made your 2020 contribution yet, make sure to do so by April 15, 2021. If you already filed your taxes for 2020, you can still contribute to a Roth IRA since it's an after-tax account.

To contribute to a Traditional or Roth IRA, you must have earned income. Earned income is based on what you reported on your tax return, and it means money that you earned from a paycheck or self-employed income.  

The only exception to this is if you are married and you're a non-working spouse. In that case, you can open what's called a spousal IRA and contribute to that even though you do not have earned income.

Also, keep in mind that you can't contribute more to your IRA than you have in earned income.

Example #1: You are unemployed at the moment, but you were employed for a few weeks in 2020. You reported (or will report) $4,000 on your 2020 tax return. Since you have earned income for 2020, you qualify to make a 2020 contribution to your Roth or Traditional IRA. But since you can't contribute more than you have in earned income, the most you can contribute for 2020 is $4,000.

Example #2: You were unemployed for all of 2020, but you started working again in 2021. Since you don't have any earned income for 2020, you don't qualify to make a 2020 IRA contribution. You can, however, start making 2021 contributions once you start earning money at your new job.

Example #3: You do not work (i.e. you're a student, stay-at-home parent, etc.), but you are married and your spouse has earned income. Thus, you qualify to make a contribution to a spousal IRA (which can be either a Roth or Traditional).

Here are the 2020 income limits for making Roth IRA contributions:

• Single - If you make between $124,000 and $138,999, you qualify for a partial contribution. If you make $139,000 or more, you do not qualify.
• Married Filing Jointly - If as a couple, you make between $196,000 and $205,999, you qualify for a partial contribution. If as a couple, you make $206,000 or more, you do not qualify.
• Married Filing Separately - If you make under $10,000, you qualify for a contribution. If you make $10,000 or more, you do not qualify.

If your income is too high to contribute to a Roth IRA, consider doing a "backdoor" Roth IRA. This is where you open a Traditional IRA, make a non-tax-deductible contribution to it, and then CONVERT the money to a Roth IRA. The reason this works, is because even though there are income limits for Roth IRA CONTRIBUTIONS, there are no income limits for Roth IRA CONVERSIONS. Watch this YouTube video for more information about backdoor Roth IRAs.

It's almost always a good idea to rollover a 401(k) to an IRA, because you have more flexibility and access to more investing options with an IRA. The best way to do it by opening a Rollover IRA at your chosen brokerage (I recommend Fidelity), then following their steps online or calling a customer service rep to walk you through the rollover process. For step-by-step info on how to do a Fidelity rollover IRA, you can watch this YouTube video.

Note: Rollover IRAs are the same thing as Traditional IRAs. So a Traditional 401(k) gets rolled over to a Traditional IRA. If you have a a Roth 401(k), you will have to roll that over to a Roth IRA.

If you can pay the tax on the conversion, this is generally a good idea. It's a 2-step process to rollover a regular 401(k) to a Roth IRA:

1) You would have to first move it into a Rollover IRA (which is basically a Traditional IRA)

2) Then, convert the Rollover IRA into a Roth IRA. You would have to pay income tax on the full amount that you convert. If that's a lot of money, you might want to convert only a portion each year.

If you have any money in a Roth 401(k) or in an after-tax 401(k), that portion would have to get rolled over directly into a Roth IRA.

When rolling over 401(k) or Roth 401(k) assets, yes. When transferring other types of accounts (i.e. a Roth IRA at TD Ameritrade to a Roth IRA at Fidelity), you have the option to either transfer assets "in-kind" (i.e. transfer the stocks, bonds, or funds), OR to sell everything in the account and transfer over uninvested cash. If you like the investments you have, just transfer over the assets in-kind. If you plan to revamp your investment portfolio once transferred, then sell what you have in the old account and transfer over un-invested cash.

Any investments you hold inside of a Roth IRA are not subject to any capital gains tax or income tax. You can buy, sell, and collect dividends and interest income without ever incurring a tax bill. Furthermore, any withdrawals later on in retirement will also be tax-free. So if you don't have a Roth IRA already, get yourself one! You'll thank me later :)

Any investments you hold inside of a Traditional or SEP IRA are not subject to any capital gains tax or income tax. You can buy, sell, and collect dividends and interest income without ever incurring a tax bill. However, any withdrawals later on in retirement will be taxed at your regular income tax rate.

So for example, let's say you contributed a total of $200k to your Traditional or SEP IRA over your lifetime. Due to market growth, let's say your IRA grew to $400k by retirement and you withdraw all $400k at once. You'd owe taxes on all $400k.  (Although, in reality, you'd probably withdraw a little bit at a time and pay the taxes as you go.)

Any investments you hold inside of a taxable brokerage account will be subject to capital gains tax and income tax.

Inside of a taxable account, when you sell an investment that you've held for one year or less, then you owe short-term capital gains tax on the profit. Please check with your accountant to find out what your short-term capital gains tax rate is. But it's typically equal to your regular income tax rate. If you sell the investment for a loss, no tax is owed and you can use that loss to lower your tax bill that year. 

When you sell an investment that you've held for more than one year, then you owe long-term capital gains tax on the profit. If you sell the investment for a loss, no tax is owed and you can use that loss to lower your tax bill that year. Please check with your accountant to find out what your long-term capital gains tax rate is. But it's typically much lower than the short-term capital gains tax rate. That is why when you are rebalancing your portfolio and or selling investments for a profit, you want to make sure you wait one year and a day so that you can incur the long-term capital gains tax rate vs the short-term capital gains tax rate.

If you don't sell your investments, then any gains are considered "paper gains" and you will not be taxed on that. You only get taxed when you sell and "lock in" your profits.

As for dividend and interest income, that will be counted as taxable income in the year that you earn it. Even if you reinvest all your dividends and interest income, you will still owe taxes on it that year. Every year, your brokerage will provide you with Form 1099-DIV or Form 1099-INT to tell you how much dividend or interest income to report on your tax return.

Choosing index funds (whether mutual funds or ETFs) based on recent performance is not a smart move.

In any given period, there will always be a particular asset class, geographical region, or a segment of the market that is outperforming. However, as the economic tide changes, any outperformance will not last. Outperforming funds become underperforming funds, then become outperforming funds again. Case in point: Over the last decade, S&P 500  index funds (i.e. U.S. large-cap stocks) have been the clear outperformer out of all other stock market index funds.  However, this wasn't always the case. From 2003-2007, emerging markets index funds gained a total of 327% compared to the S&P 500 index funds' 61%! Thus, it wouldn't be farfetched to predict that emerging market will outperform the S&P 500 once again in the future. You see this all throughout history. 

That just goes to show - performance is cyclical, so you never want to choose funds just because they've been performing well recently. Due to the cyclical nature of the economy, those are the exact funds that will become the underperformers in the near future. 

The right way to choose what funds you invest in, is to start with a sensible asset allocation, and pick your funds based on THAT. Don't chase performance! Pick an asset allocation and stick to it. 

In the U.S., the large-cap stocks (i.e. the S&P 500 stocks) make up about 80% of the total U.S. stock market. So by investing in a simple S&P 500 index fund, you're pretty much investing in the entire U.S. economy. However, that still excludes 20% of the U.S. stock market. 

There have been times when small-cap stocks have hugely outperformed large-cap stocks (1991-1993), and vice versa (1994-1998). It's hard to predict which segment is going to outperform in the coming years. However, over the long run, small-cap stocks have outperformed large-cap stocks by about 1%.

That's why instead of choosing narrowly-focused index funds like FSSNX (small-cap stocks), FSMDX (mid-cap stocks), or FXAIX (large-cap S&P 500 stocks), it's better to get maximum diversification with a TOTAL MARKET index fund (such as FSKAX or VTSAX). A total market index fund is like a a small-cap fund, mid-cap fund, and S&P 500 fund all rolled into one.