Medicare premiums and income tax returns

LYNN BRENNER  for Newsday writes: QUESTION: In two of the past three years, I've received fees as executor of an estate. This income has pushed my Medicare insurance premiums into a higher category. Will these premiums eventually return to normal? Do I have to take action?

ANSWER: Based on what you say, you don't need to take any action.  Your Medicare premium is based on the most recent tax return available to the Social Security Administration, which is typically 2 years old. In other words, your 2014 premium is based on information in your 2012 tax return. Two years after your income returns to normal, so will your Medicare premium. 

In some situations, however, readers should ask the Social Security Administration to reconsider the income level that determined their current Medicare premium. For example, you should notify the agency if you amended your 2012 tax return; if you've married, divorced or become widowed; if you or your spouse stopped working or work fewer hours; if you lost income-producing property because of a disaster; if your pension plan was terminated or reorganized; or if you received a settlement from an employer or former employer who went bankrupt, closed or reorganized.

In 2014, the monthly Part B Medicare premium is $104.90 for individuals who had $85,000 or less of 2012 modified adjusted gross income (MAGI), and married couples filing jointly with $170,000 or less of 2012 MAGI. Individuals with between $85,001 and $107,000 of 2012 MAGI and joint filers with between $170,001 and $214,000 pay $146.90 a month. Thereafter, the premium rises on a sliding scale. The highest charge is $334.90 a month, paid by individuals with more than $214,000 of 2012 MAGI and joint filers with more than $428,000 of 2012 MAGI.

The bottom line Your Medicare premium is usually based on information in the income tax return you filed two years earlier.
Websites with more information 1.usa.gov/M52MAY and 1.usa.gov/1eaJ5SZ
 

Tax Technology Roadmap: The Next Steps in Creating a Strategic Asset / A tax technology strategy will enable a company to align with the company’s business priorities, tax function strategy, and enterprise technology investments.

Todd Bixby and Michael W. Burak for PricewaterhouseCoopers/Area Development write: When it comes to effectively adopting and enabling tax technology initiatives, where do industrial manufacturing companies and other leading organizations stand? What strategies are businesses employing to help their tax departments not only derive the greatest benefit from available technology, but also actually transform the tax function to drive more value for the organization?

To identify leading practices, baseline technology use, and general challenges in tax technology, PwC and the Manufacturers Alliance for Productivity and Innovation (MAPI) recently surveyed more than 280 companies with a nearly 36 percent response rate to learn:

• How manufacturing and other companies assess their tax technology environment;
• What approach tax executives are taking to decide which software to use within the tax department; and
• How tax departments evaluate satisfaction with their chosen technology products.

Survey respondents said they largely view technology as a key to enhancing quality and increasing efficiencies. Nearly 85 percent said improved technology and integration would increase their tax effectiveness. Surprisingly, though, most respondents — 77 percent — said they do not have a tax technology strategy in place. More than 75 percent said they do not have a dedicated tax technology role within their organization. Additionally, a majority of respondents indicated it was a challenge to take advantage of current enterprise technology. 

TECHNOLOGIES THAT WILL POSITIVELY IMPACT THE TAX FUNCTION

1. Data Integration and ERP

   reduce the data load process and related variances and errors

2. Document Management

   reduces collection and manipulation efforts and improves staff efficiency

3. Workflow

   improves internal controls, minimizes recurring rework, and increases collaboration

4. Reporting and Forecasting Tools

   identify critical trends and cycles that may trigger change in business process

5. Data Warehouse/Data Mart Applications

   allow for more efficient data sharing, and faster access and increased consistency

Why the apparent disconnect? Why are so many companies hesitant to fully embrace tax technology initiatives? Manufacturing companies and other organizations mostly agree on the value of instituting a tax technology strategy, which outlines a company’s plans for implementing and utilizing technology to enable tax operations. A tax technology strategy helps the tax department outline a multi-year roadmap that articulates the projects that need to be undertaken in a prioritized and integrated fashion, along with the value propositions to drive alignment across the company. This allows a tax department to align with the IT budget process and any enterprise programs that might be under way and more effectively leverage enterprise investments in technology. For example, if a financial transformation project or ERP (enterprise resource planning) implementation is being executed, the tax department can take advantage of the functionality to improve the tax operation with very little additional investment. It also enables the tax function to better evaluate its existing tax processes to identify areas for improvement and align the best solutions to support those processes. 

Creating and executing a tax technology strategy requires focused resources, with support from key stakeholders, including those in tax, finance/accounting, and IT; a tax technology lead to coordinate data collection, reporting, and technology needs, and directly link with other organizations; and an internal sponsor of the initiative who will disseminate the strategy, win leadership support, and implement the resulting tax technology strategy.

Once a strategy and roadmap has been developed, it becomes a living document that needs to be managed, updated, and assessed regularly to become a rolling view into the tax function, not unlike an IT strategy is reassessed periodically to adjust for shifting priorities.

Companies largely understand the importance of creating strategies around tax technology and pursuing related initiatives. However, many have not made appropriate investments in these five areas that can play an integral role in transforming tax into a strategic business partner within the organization.Which technologies will most positively impact the tax function?
Twenty percent of survey respondents said they experienced either a significant deficiency or a material weakness related to tax within the past three years and said enhanced technology or data would have helped them avoid a significant deficiency. In addition to having a tax technology strategy and roadmap, there are five technologies (most likely to appear in that roadmap) that would most positively impact the tax department’s work, based on the survey findings and PwC’s experience in tax and technology. They are:

1. Data integration and ERP: Until recently, most of the focus on tax technology has been on implementing tax point solutions such as compliance, provision, or indirect software. Unfortunately, this approach has continued to support an environment with disconnected or siloed solutions void of data or process integration. Additionally, complex spreadsheets are being used to do a tremendous amount of tax calculations and are the de facto standard for reporting. In the end, finance data and systems have not been tax sensitized for the needs of the tax department; thus, significant manual data gathering and reporting needs to be done to get the right level of data to support the tax function. 
   
   These deficiencies drive tax departments to devote significant time and resources to the routine task of gathering data to perform tax-specific functions and having highly experienced tax professionals doing data preparation work, instead of true tax and tax planning work. With the resurgence of financial transformation projects, including new implementations and upgrades of ERP systems, there is an opportunity for tax departments to leverage these investments to make improvements in the tax function.
   
   While 85 percent of respondents said they leverage an ERP solution, they report that it is frequently not being leveraged to the fullest extent for tax. Most companies said improving “tax-sensitive” data would improve the efficiency and effectiveness of the tax provision and compliance software. Consequently, data integration and tax-sensitizing data are viewed as areas that can make the greatest positive impact on tax, and the trend is to focus on tax data sensitization and integration across tax/finance functions.
   
   While dedicated tax technology tools remain the primary vehicles for provision and compliance, more than 62 percent of respondents said they continue to use spreadsheets as their provision tool. Better data and solution integration would drive improvements in provision and compliance efficiency, according to 85 percent of respondents. This finding further supports PwC’s experience that automating the data feed into a provision or compliance tool from a common data platform significantly reduces the data load process and related variances and errors.
2. Document management: How can a company more efficiently manage its files and minimize time spent managing data and documentation — a task that seems to take an inordinate amount of time within the tax function? One way companies are improving in this area is by establishing centralized document management solutions to store and manage critical tax documents, including work papers and deliverables.
   
   An overwhelming majority of respondents — more than 90 percent — reported their document management relies on shared drives and email. Most said implementing a document management system is a high priority in the tax roadmap, and more than half have a tax portal or plan to implement one that could be leveraged for document management.
   
   By taking such an approach, an organization can drive improved quality of information, by way of faster access and increased consistency. This strategy can result in improved quality of the data underlying tax work products, increased retention of institutional knowledge, easier leverage of nontraditional resource models (shared services, remote, etc.), and improved support of other tax functions, such as controversy. A reduction in collection and manipulation efforts can improve staff efficiency — freeing employees to perform higher-value, tax-specific tasks.
3. Workflow: The automation of tax processes — flexible workflows, notifications, electronic signoffs, and status tracking — is a chief component of effective process management. By documenting tax processes, identifying those needed to participate in each task, and instituting a standard approach to triggering and managing the handoffs, a company can more effectively carry out tax activities. Among the benefits of workflow are improved internal controls, a clear definition of how to perform critical tax processes, management of dependencies on non-tax stakeholders (accounting and third-party tax providers), minimized recurring rework, and increased collaboration and sharing of tax documents across tax and finance. 
   
   More than 25 percent of respondents said they have workflow tools, but only 9 percent use those tools. That leaves tax departments much room for improvement when it comes to enhancing process and workflow management and potentially decreasing process execution time. Integrating workflow and document management solutions can create even more efficiencies.
4. Reporting and forecasting tools: Tax reporting and forecasting capabilities enable actionable dashboards and reports that help tax management identify critical trends and cycles that may trigger change in business process or identify new insights into tax strategy. This makes tax data a strategic information asset and allows tax to become a more integrated business partner within the organization. Despite this opportunity, only a small minority of survey respondents reported spending significant time on data analysis — likely due to greater focus on data gathering and segregated processes.
   
   Using reporting and forecasting tools in a common, integrated tax data environment, a company can improve analytics and KPI (key performance indicator) analysis. It is able to measure specific tax items for filing and comparison purposes as well as measure the cross-functional value of the tax function. Additionally, it can produce more advanced analytics, such as demonstrating the cost saved by using an optimized transfer pricing strategy rather than maintaining the status quo. An organization can also improve its forecasting accuracy and usefulness by improving access to information and spending less time collecting and manipulating that information. Additionally, focus on increasing visible value can lead to greater staff satisfaction, which can in turn improve staff retention.
5. Data warehouse/data mart applications: Many companies still have disparate places where they store data and tax calculations. This can lead to inefficiencies within the tax function. Creating a solution to centralize all relevant tax data — a tax data warehouse or data mart, for example — is sometimes necessary to achieve the efficiencies noted earlier. Additionally, software, hardware, and other enterprise programs can often be leveraged to accommodate this need. Options such as these allow for more efficient data sharing, and faster access and increased consistency, which can improve the quality of the data underlying tax work products.

In Sum
Companies largely understand the importance of creating strategies around tax technology and pursuing related initiatives. However, many have not made appropriate investments in these five areas that can play an integral role in transforming tax into a strategic business partner within the organization. As such, tax leadership should engage with company leadership and commit to the next steps in the evolution of its tax function and lay out a three- to five-year tax technology roadmap that aligns the business priorities, the tax function strategy, and the enterprise technology investments.

Kitces, Wealthfront trade punches over online tax-loss-harvesting feature / Well-known blogger and industry gadfly continues to pepper online advisers

Trevor Hunnicutt for Investment News writes: The nuances of tax strategy became the latest battleground in the debate over the place of computer-aided financial planning.

Michael Kitces, a blogger and researcher, published a blog post early Wednesday criticizing a paper on tax loss harvesting by Wealthfront Inc., one of the largest online advisory firms.

In the 5,000-word post, Mr. Kitces refuted the calculations and assumptions underpinning a white paper released by Wealthfront to promote its tax-loss-harvesting features, saying the paper drastically overstated the benefits to an average investor and raised larger questions about the ability of the online platform to serve investors' needs “using only an investment team and sharp engineers but without actually having a [certified financial planner] or [certified public accountant] in a high-level advisory or leadership position.”

The paper drew fire from Wealthfront chief executive Adam Nash, who said there were flaws in the way Mr. Kitces represented the data and that the report included “inflammatory” remarks, including an insinuation that if Wealthfront did not make changes, it could face scrutiny from regulators for misstating projected investment returns.

“Unlike a research paper, some of the criticisms are quite ad hoc,” Mr. Nash said. “It's very obvious that he's trying to make a point … It's not his job to properly report our research. For some of his bigger points, I think his examples are cherry-picked.”

Wealthfront, which was founded in 2008 and manages $600 million in client assets, has marketed its web-based tax-loss harvesting service as sophisticated and inexpensive, as the growing company looks to persuade investors that its algorithm-powered approach to investing can be useful to wealthy clients.

In a blog post announcing new features in December, former Wealthfront president and CEO Andy Rachleff described the service as delivering “more ways to minimize your taxes than any other financial adviser in the investment management industry.”

Wealthfront's service holds a portfolio of securities representing the broad stock market and looks for opportunities to sell individual stocks when doing so could offer tax benefits. When a security declines by a certain amount, for instance, it gets sold and replaced by a stock with a high correlation, meaning it tends to move in tandem with the stock it replaced. The service is offered to accounts with more than $500,000, and the firm assesses no transaction costs or other charges on top of its annual 0.25% advisory fee.

Mr. Kitces said that while Wealthfront has some unique benefits, the white paper about its tax-loss-harvesting feature misstated how much of a benefit investors could enjoy, and ignored the fact that some investors might face higher taxes in the future. He added that other advisers make similar misrepresentations, but that Wealthfront is “the only one putting it on the front page of their website as an enhancement to their [clients'] long-term returns.”

But what Mr. Kitces, a partner at Pinnacle Advisory Group in Columbia, Md., and an occasional consultant, did not disclose in the article that he had a business relationship with Betterment, a New York-based Wealthfront competitor with $303 million in assets. He also did not disclose the relationship in a blog he wrote about Wealthfront last month forInvestmentNews.

He did display a Betterment logo on a separate section of the website about his consulting business.

Facing pressure on Twitter from a Wealthfront publicist, Mr. Kitces appended a disclosure to the tax-loss-harvesting blog later Wednesday. He said he had written about the issues before his relationship with Betterment.

In an interview, Mr. Kitces said he was paid by Betterment to speak to the firm's employees about the advisory business in mid-December.

“Companies seek me out because of the analysis that I can do and the knowledge I have of the industry,” Mr. Kitces said. He said he had a number of clients, including financial advisers, who are presumably in competition with Wealthfront.

Mr. Kitces declined to discuss the financial terms of the relationship with Betterment, saying he was prohibited from doing so by the terms of his contract. He said the payment was marginal, representing less than 1% of his annual income.

“We have no ongoing relationship,” Joe Ziemer, a Betterment spokesman, wrote in an e-mail. “It was strictly a one-afternoon engagement. He is not an adviser or regular consultant to the company.”

Betterment declined to disclose the terms of the contract. Mr. Ziemer said the firm “had no knowledge that he was working on this piece.”

“We talked about what features advisers would like and tax loss harvesting was discussed as a feature, but we did not discuss Wealthfront,” Mr. Ziemer said.

Mr. Kitces said it was unfortunate that the disclosure issue would distract from the substance of his critiques.

Mr. Nash acknowledged that Mr. Kitces made some good points in his blog and that minor adjustments would be made to the paper, but that the firm was unlikely to dramatically change the results or the conclusion. He said Wealthfront was working to revise the paper, but does not know when the updated version will be available.

“Back-of-the-envelope numbers are always quicker to do than rigorous research and analysis,” Mr. Nash said.

Tax-prep software showdown: H&R Block Deluxe vs. TurboTax Deluxe / We evaluate these DIY programs for their ease of use and value

Tobie Stanger for ConsumerReports.org writes:  If you're among the 41 percent of American taxpayers brave or cost-conscious enough to do their own taxes, you've got plenty of tools at your disposal in the form of free and low-cost tax-prep software.

This year H&R Block and TurboTax, two leading do-it-yourself tax-prep software products, have attempted to simplify so users of their guided interviews don’t have to do so much clicking. In early January, we tested online and CD-ROM versions of both, inputting information from a hypothetical family of four. (You can also download the products: hrblock.com and turbotax.com.)

We tried the online versions free; with both you pay only when you file. All prices are as of early February; you might be able to find lower prices with online coupons, or through your bank, investment company, employer, or other source. Prices also may increase late in the tax season.

	H&R Block Deluxe	TurboTax Deluxe
Common features	You can import W-2s, 1099s, and other income documents. Use guided interviews or skip around. A refund box ticker updates what you’ll get or owe. Both programs guarantee accuracy of their calculations. Audit support and a searchable database of Q&As.
Price	CD-ROM: $39.99 for five federal returns and one state return. Online: $29.99 for one federal return, $36.99 for one state return.	CD-ROM: $59.99 for five federal returns and one state return. Online: $29 for one federal return, $36.99 for one state return. (Might increase after March 22.)
Navigation and design	Online, we didn’t have to register right away, so we could play around with the program until we felt comfortable. We needed fewer clicks to get through some sections, especially in the beginning when inputting personal information.	Having to register right off the bat was annoying. But we appreciated the program’s uncluttered design. Pluses: The program estimates your state and federal refund at the same time. And you can access the “Questions” box on every page and quickly search for an answer or ask a question via e-mail.
Human help	H&R Block experts are CPAs, enrolled agents, tax attorneys, or tax preparers who have at minimum completed its tax-prep training course. The expert answered a tax question in a timely way but the response required follow-up.	TurboTax experts are CPAs, enrolled agents, and tax attorneys. But free expert advice was only available to online and mobile users. The expert answered a tax question in a timely, comprehensive way.
Valuing donations (This feature gives dollar values of donated items. Our test used items in excellent condition.)	DeductionPro: Of a dozen items we entered, most were valued somewhat lower than with ItsDeductible (at right). But this program had some categories that ItsDeductible didn’t have, such as elliptical trainers ($61.57).	ItsDeductible: It took fewer clicks to arrive at item values. Most valuations we saw were higher than with Deduction- Pro. We liked that it didn’t include the price of a used child car seat, a safety risk.
Explanations	Bulleted points made for easy reading in pop-up boxes. Block explained some items quite well, including what defines a full-time student and who’s a dependent. Easy-to-access Q&As on every page provided useful and sometimes unusual facts. (For example: Yard-sale income usually doesn’t have to be reported.) But we found explanations of where to input data from Form 1099-MISC quite confusing.	Explanations were worded for simplicity. Minor explanations often were the most useful. For example, we learned that just having a mutual fund with foreign stocks doesn’t mean that you have an “interest in a foreign bank account,” so you could skip that section. A big plus was the option to print out long explanations from pop-up boxes.
Bottom line	The CD-ROM’s simple design and navigation makes it a good choice for a tax DIY novice. It’s a better value than the TurboTax version, especially due to its free advice offer.	We liked the online version of this product better than its CD-ROM version, and better than H&R Block online. Small investors or those with home-based side businesses don’t need to pay the recommended $20 or $45 extra to upgrade.

IRS Small Business Tax Center Has Everything You Need

You don’t need to be a tax expert to run a business, but knowing the basics about taxes can help you run it better. You’ll find the basics and much more at the IRS.gov Small Business and Self-Employed Tax Center.
Whether you’re new to a business or been with it awhile, the Tax Center can help. You can apply for an Employer Identification Number, get a form or learn about employment taxes. The Center also includes these resources:

• IRS Video Portal.  Watch helpful videos and webinars on many topics. Find out about filing and paying business taxes or about how the IRS audit process works. Under the ‘Businesses’ tab, look for the ’Small Biz Workshop.’ Watch it when you want to learn the basics about small business taxes. 
• Online Tools and Educational Products.  The list of Small Business products includes the Tax Calendar for Small Businesses and Self-Employed. Install the IRS CalendarConnector tool and access important tax dates and tips right from your smart phone or computer, even when you’re offline. 
• Small Business Events.  Find out about free IRS small business workshops and other events planned in your state.

Go to the Small Business and Self-Employed Tax Center and use the A-Z index to find whatever you need.

Connect Xero to Liveplan / Powerful business planning with LivePlan

David Pollack for Xero Blog writes: LivePlan is a cloud based solution from Palo Alto Software – veterans in the business planning space.  It can help you with everything from pitch creation and business planning to ongoing financial management. By connecting Xero to LivePlan, you can analyze your accounting information in real-time in order to keep your business on track.

Business planning is a great tool for any business.  In fact, a Cranfield University study proved that those who write and track their  business plan experience 30% more growth potential than those who don’t engage in planning.

Who is it for?

LivePlan is for both established business owners and entrepreneurs who are just getting their ideas off the ground. Its functionality allows you to:

• Write a complete business plan
• Deliver a professional pitch to investors/lenders
• Monitor your progress and track your growth

How LivePlan works with Xero

Connect LivePlan with Xero to import your financials into the LivePlan Scoreboard. This integration will allow you to track how your business is doing, in real time, and compare your progress against your forecast.

Where you can use LivePlan

LivePlan works for users in over 172 countries, including the U.S, UK, Canada, Australia and New Zealand.

Try out LivePlan for free

You can sign up to try out LivePlan with Xero for free.  Click here to find out how.

The year ahead with Xero : Free Webinar February 12th

Xero writes: Join our managing director, Gary Turner, on Wednesday 12th of February for a 45-minute live online webcast. He’ll be looking at the year ahead for Xero and its partners, plus new updates you’ll be seeing in Xero over 2014.  You’ll hear all about the new year-end resources we’ve developed. They’ll help you and your clients make the most of the coming new tax year. We’ll also be talking about: 

Upcoming training

New guides

Access to enablement resources

Customer case studies

Marketing support to help you get more clients

You’ll also find out how the £90m of new capital we raised in the autumn will shape Xero's success in the UK this year – and how this will translate into better, more innovative products and services for you and your clients.

And you'll get a chance to ask any questions you want, live online.

Webinar Registration

Intuit’s Chart Signals Shift to Intermediate Downtrend INTU's 20-day moving average has crossed down through its 50-day

Sam Collins for Investorplace.com writes: Intuit (INTU) — This company provides business and financial management solutions for small businesses, consumers and accounting professionals.

Earnings are expected to increase 11% in fiscal 2014, ended in July, but the stock is currently selling at 20 times estimated earnings in an industry that is only modestly increasing its revenues.

INTU topped out above $77 in mid-January following a run from around $64 in late August. It has broken its near and intermediate support, and the 20-day moving average has crossed the 50-day moving average, signaling a shift to an intermediate downtrend. 

Sell INTU short at $72 or higher with an intermediate target of $64. Short-sellers should place a stop-loss order at $75. 

Short-selling is a speculative technique and not suitable for all investors. Check with your broker for any special requirements before shorting this stock.

4 Free Tools to Super Charge Your 401k or IRA

Rob Berger for the HuffPo writes: The right tool for the right job can make all the difference. Not only does the right tool improve the quality of any job, but it also makes the work more enjoyable. This fundamental truth applies to everything from carpentry to auto repair. It also applies to investing.

Since the rise of the defined contribution plan, just about everybody is or should be an investor. Whether contributing to a 401k, IRA, or both, investing has become a necessary skill to successfully build a retirement nest egg. The good news is that there are a number of free tools available to help make you a smarter investor.

Here are four of these great investing tools.

Personal Capital

Personal Capital offers a free online tool to track investment returns, evaluate asset allocation, and monitor investment fees. Once investment accounts are connected, Personal Capital automatically updates a portfolio's performance, offering charts and graphs to better understand an overall portfolio.

The tool allows investors to track 401k, IRA and taxable accounts. It's cash flow tool enables investors to easily track reinvested dividends. And its 401k Fee Analyzer shows how much a 401k retirement account is costing its participants.

Morningstar

Morningstar offers the most comprehensive information on mutual funds found anywhere. Entering a fund's ticker will reveal detailed information, including the fund's expense ratio, minimum investment, top holdings, market capitalization, value/growth orientation, and geographic exposure. The site also offers great investing content from experts, as well as a very active discussion forum.

In addition, Morningstar has a tracking tool that provides a wealth of information about an investor's portfolio. The tool can easily track total fees across an entire portfolio, reveal the specific companies each mutual fund owns, and track the percentage exposure an investor has in each mutual fund or ETF.

Vanguard

Vanguard is best known for its low cost, index mutual funds and ETFs. Less known are the educational resources available on its website. The mutual fund giant offers insight into the major investment topics, including retirement, education, and taxes. It also offers 4 timeless investing principles that every investor should read.

Better Money Habits

The last free tool is the result of a partnership between Bank of America and the Kahn Academy. Called Better Money Habits, the website aims to improve financial literacy. Its focus is more on personal finance than investing, which is precisely why it made this list.

Sound investing requires capital. Without sound money management, it's easy to over spend. Yet it is only by spending less than we make that investing for retirement is possible. The Better Money Habits website can help you do just that.

A new way to invest in a 401k ETFs: Of mutual interest

The AP/Oregon Live writes: Be the market. Minimize costs.  It sounds like a Zen saying, but it's also an investing strategy that more of us are adopting. Every month, billions of dollars flow into mutual funds and exchange-traded funds that simply track a market index rather than try to beat it. Demand is so strong for the lower costs of index funds that it's pushing the industry to alter its offerings. The latest shift: 401(k) plans built entirely around ETFs, rather than traditional mutual funds.

Charles Schwab launched an all-ETF 401(k) offering on Wednesday and says it expects several employers to begin offering the program to their workers later this year.

For those who don't have any investments outside their 401(k) accounts, it may seem like yet another impenetrable acronym to learn. But unlike CDOs, LBOs or EBITDA, ETFs are similar to something with which most investors are familiar: traditional mutual funds. Like them, an ETF offers an easy way to own a wide basket of stocks, bonds or commodities.

Owning a share of the SPDR S&P 500 ETF (SPY), for example, is like owning the entire Standard & Poor's 500 index, from Abbott Laboratories to Zoetis. The Vanguard Total Bond Market ETF (BND) tracks an index that covers thousands of bonds from Treasurys to mortgage-backed securities.

Interest in ETFs has boomed in recent years. They had a total of $1.67 trillion in assets at the end of December -- up elevenfold from a decade earlier, according to the Investment Company Institute. Just last year, their assets grew 25 percent, with a particularly strong surge for ETFs that hold U.S. stocks.

Traditional mutual funds still hold much more in assets -- a total of $15 trillion at the end of 2013 -- but ETFs represent a stronger growth opportunity for fund companies.

That meant it was only a matter of time before 401(k) providers began focusing on ETFs, says Steve Anderson, head of Schwab Retirement Plan Services. "Looking at the trends, I don't know how we could afford to ignore them," he says.

By offering ETFs, Anderson says some 401(k) plans could lower their expenses by more than 90 percent. They're the ones that that primarily use actively managed mutual funds, ones that try to beat their benchmark index and tend to charge higher expenses as a result.

 "Active management has been dominant in the 401(k) space," Anderson says. "The industry has done well over all, but we're not as sure the participants have made out as well."

Consider Schwab's Multi-Cap Core ETF (SCHB), which tracks the performance of the Dow Jones U.S. Broad Stock Market index. It has an expense ratio of 0.04 percent, which means that $4 of every $10,000 invested in the fund goes to paying manager salaries and other operating costs in a year. Schwab's ETF for stocks from emerging markets (SCHE) has an expense ratio of 0.15 percent.

Compare those figures with 0.92 percent, which was the average expense ratio for actively managed stock mutual funds in 2012, according to the Investment Company Institute's most recent fact book.

Schwab is suggesting that 401(k) participants use some of those savings to pay for investing advice. In its new plans, Schwab will enroll participants in a service that suggests how much they should be saving and in what kind of ETFs depending on their age, income, account balance and savings rate. Participants can opt out of the advice service, which comes at a cost.

The drive toward ETFs has also accelerated as more investors get comfortable with merely matching a stock or bond index's performance, rather than trying to beat it. Some actively managed mutual funds do of course top their benchmark index, but they're rare.

Over the five years through June 2013, only 21 percent of large-cap U.S. stock mutual funds beat the S&P 500, according to the most recent data from S&P Dow Jones Indices. For global stock funds, only 37 percent beat the S&P Global 1200 index.

ETFs differ from traditional mutual funds in one key way: Investors can buy and sell ETFs whenever they want during the day, and Schwab says its all-ETF 401(k) participants will be able to do so as well. That's in contrast to traditional mutual funds, whose shares trade only once per day after the market closes.

On a particularly volatile day, some investors will sell their ETF shares at peaks, and others will sell at valleys. Investors selling shares of a traditional mutual fund, meanwhile, will all get the same price at the end of the day, no matter what time during the day they placed the order.

But experts say just because investors can buy and sell ETFs easily through the day doesn't mean they should.

Investors' 401(k) accounts are supposed to be long-term investments for retirement, not day-trading accounts. As long as they hold onto their ETFs for the long term, says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, they'll benefit from ETFs' lower expenses.

Top 3 Monthly Dividend Paying ETFs For A Roth IRA

Steve Nicastro for Seeking Alpha writes: This article continues my series on the best investments for a Roth IRA account. In my search, I have stumbled across a number of intriguing investments - both stocks and ETFs - which I feel present a compelling long-term investment opportunity.

To recap briefly, my criteria is as follows:

- My picks are geared towards investors with at least 30-35 years until retirement, so I am focused on buying very long-term investments - both stocks and ETFs - which I believe will outperform the market over that time period.

- I love the idea of re-investing dividends in a Roth every chance you get through a dividend reinvestment plan (DRIP). A DRIP allows you to purchase more shares without having to buy more shares in the open market and allows you to benefit from the powers of compound interest.

- A DRIP also allows you to dollar-cost average your position over time, another powerful, long-term investing strategy.

Here are the previous stories in this series:

• This Could Be the Perfect ETF for a Roth IRA
• This Could Be the Perfect Stock for a Roth IRA
• This Could Be the Perfect Stock for a Roth IRA, Part II
• Top 5 Stocks for a Roth IRA
• Top 3 Monthly Dividend Stocks for a Roth IRA

Why a Roth IRA?

I personally like a Roth IRA over a 401k for a number of reasons.

- With a Roth IRA, you are investing post-tax money, but you are getting tax-free returns at retirement, unlike a 401K, which invests pre-tax money, but is taxed at retirement. Therefore, I believe a smart strategy would be to start a Roth IRA account as soon as possible, invest in dividend paying stocks or ETFs with a low expense ratio and enroll them in a DRIP and watch your money grow tax-free over a number of years.

I am not completely against a 401K if your employer matches your contributions. You just need to know what fund you are invested in and how much the expense ratio is.

- I like the freedom of choice when investing in a Roth IRA: you can invest in stocks, ETFs, bonds, etc. Plus, you can specifically choose ETFs which carry super-low expense ratios - unlike many mutual funds which carry expense ratios over 1%.

- The freedom of choice in a Roth IRA allows you to choose between a number of blue-chip dividend paying stocks such as Altria Group (MO), McDonald's (MCD) and as I mentioned in my previous article, Realty Income Corp (O).

- Another great feature of a Roth IRA is that you can take out yourcontributions when you want (but not your gains), without any penalty.

- For 2013 and 2014, the IRS website says the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of: $5,500 ($6,500 if you're age 50 or older), or your taxable compensation for the year.

For full information and rules on a Roth IRA account, visit the IRSwebsite.

Why Monthly Dividends?

Compound interest is a powerful force. The more you compound your money over time, you more you will end up with at the end. So, it makes sense to invest in a stock or ETF which pays out its dividend monthly, as opposed to another investment which pays quarterly, semi-annually or annually.

For example, let's use two people who both start with $20,000 in a Roth IRA, and invest just $50 a month for the next 30 years. Both investors earn a rate of 6% annually on their investment (which is the approximate average annual return in the stock market over time) but investor A receives his dividends monthly, while investor B receives its dividends quarterly.

- Investor A ends up with $169,310.97 after 30 years, a total return of 345.56%.

- Investor B ends up with $167,975.46 after 30 years, a total return of 342.04%.

As you can see, the difference is nearly $2,000 favoring investor A. Not a tremendous difference, but still extra cash in investor A's pockets.

Please note that I don't think this means investors should choose one stock or ETF over another just because one pays dividends monthly and the other pays quarterly. It is just another thing to keep into consideration when performing your due diligence.

Top 3 Monthly Dividend ETFs for a Roth IRA

Here are three monthly dividend ETFs which I feel stand out above the rest:

*Wisdom Tree Small Cap Dividend Fund (DES)

(click to enlarge)

(Credit: Yahoo! Finance)

The WisdomTree SmallCap Dividend Fund seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree SmallCap Dividend Index, which is a fundamentally weighted index measuring the performance of the small-capitalization segment of the US dividend-paying market.

This fund carries an expense ratio of just .38% and currently yields 2.28%. Over the past five years, the fund has returned average annual gains of 19.83% and average annual gains of 8.12% since inception. You will see above that DES has outperformed the Dow Jones index over the past five years.

The sector breakdown is as follows: Information technology (9.7%), consumer discretionary (12.2%), utilities (13.04%), industrials (17.6%) and financials (25.37%).

The top 5 holdings in the fund are: Covanta Holding Corp. (CVA), which makes up .87%, PDL BioPharma Inc. (PDLI) with .89%, Compuware Corp. (CPWR) with .95%, UIL Holdings Corp. (UIL) with .99%, and Vector Group Ltd. (VGR), with 1.53%.

I like DES for the yield but also for its long-term appreciation potential. I think it could be a great long-term pick for a small-cap fund in a Roth IRA account.

*The Global X SuperDividend ETF (SDIV)

The Global X SuperDividend fund seeks investment results that correspond to the price and yield of the Solactive Global SuperDividend Index. The Underlying Index tracks the performance of 100 equally weighted companies that rank among the highest dividend yielding equity securities in the world, as defined by Structured Solutions AG (Source: 2013 prospectus).

The fund carries a management fee of .58% and has a current yield of about 6.54%.

The top 5 holdings in the SDIV are: Fisher & Paykel Healthcare (OTCPK:FSPKF) with 1.56% of net assets, Suez Environnement Co. (OTCPK:SZEVF) with 1.60%, Northstar Realty Finance Corp. (NRF) with 1.71%, RR Donnelley & Sons (RRD) with 1.79%, and Electricite De France (OTC:ECIFF) with 1.81%.

The industry breakdown is as follows: 18.73% in financials, 15.46 % in utilities, 12.10% in REITS, 11.29% in telecommunication services, 8.65% in industrials, 7.65% in energy, 7.21% in Mortgage REITs, etc.

I believe that investors looking for an attractive yield and global diversification should check out the SDIV. The fund holds 23.62% of its assets in the USA, but 19.59% in Australia, 10.54% in the United Kingdom, 6.93% in Canada, 4.28% in Singapore, etc.

My biggest concern with the SDIV is that the fund has too much exposure to the real estate market, with 12.10% in REITS and 7.21% in mortgage REITs. Therefore I would strongly recommend that investors consider diversifying into different funds if you are considering investing in the SDIV.

*iShares High Dividend ETF (HDV)

The iShares High Dividend ETF is exposed to high-quality U.S. companies with a focus on high dividends. The ETF carries an expense ratio of just .40% and contains 74 holdings in total. Since inception in March of 2011, the fund has returned 16.39% annually, and currently yields 3.17%.

You will see below that the HDV is beating the Dow Jones industrial average since its inception:

(Credit: Yahoo! Finance)

The sector breakdown for the HDV is as follows: 26.52% in consumer goods, 18.25% in healthcare, 14.58% in utilities, 11.06% in oil and gas, 9.9% in telecommunications, 7.62% in technology, etc.

I like the HDV because the ETF mainly because I feel it contains a number of very high-quality dividend paying stocks. For example, the largest holding in the ETF is AT&T (T), making up 9.9% of the ETF. AT&T is one of my top picks among US large caps and the stock currently yields 5.7% with a P/E of just 9.6.

Other top holdings in the HDV include:

- Chevron Corp. (CVX), 7.66%.

- Johnson & Johnson (JNJ), 7.5%.

- Proctor & Gamble (PG), 6.52%.

- Merck & Co. (MRK), 6.01%.

- Philip Morris International (PM), 5.95%.

- Intel Corp. (INTC), 4.78%.

In total, the top 10 holding of HDV make up a little over 62% of the portfolio.

HDV looks like a very solid long-term investment for a Roth IRA because of the low expense ratio and exposure to high quality dividend paying stocks.

Conclusion - A Mix of These Three Good Be the Right Move

These three ETFs all look like solid choices in my view. Remember, I also like the idea of investing in monthly dividend paying stocks as well.

No matter what your investment choice, you should begin investing for retirement as soon as possible because of the powers of compound interest: the longer you invest, the more your investments will compound and dollar cost average themselves, leading to much bigger gains over the long haul.

This post is meant for informational purposes only; please do your own due diligence before investing.

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COMMENTS

Comments (3)

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jack kregComments (487)
I like your article, I use a mix of ETF's, CEF's and MLP in my Roth IRA, really to keep things simple.
I particular like your small cap pick, I will look at it for my son's accounts, I am not sure that I want small cap in my RA, I am 64.
My Roth IRA is as follows:
ETF's: LQD and DVY good size positions.
CEF's: PAI, SBW, TLI, for bonds, corp's, EM and senior loans
MLP: KMR, pays stock dividend, 6.5%. 
I particularly like that there are ONLY 6 positions!
cheers, and thanks again.

6 Feb, 03:58 PMReply! Report AbuseLike0


COBeeManComments (774)
You can designate a 401k to be a Roth 401k and feed it with after tax money. I've had two employers now that asked me to make that choice. The others defaulted to a traditional 401k (pre-tax).
Personally, at this point in time, I am buying MORL, BDCL, and MLPL in my IRAs on dips.

6 Feb, 04:49 PMReply! Report AbuseLike0


turk617Comments (91)
Check out CEFL....its a portfolio of high divi monthly pay cefs...
I own morl & bdcl as well.