Naked (uncovered ) puts are a useful way to earn some money with low risk if you intend to purchase the stock anyway and don’t need to get in immediately.

You are “naked” when you sell a put (the put guarantees you will buy X shares on contract at the strike price if exercised) without a corresponding short position in the stock.

This scenario is exposed to “risk” because if the stock drops below the strike price and the option is exercised you will be forced to buy the stock. Therefore you would have to lay out capital on a stock that has decreased in price and could be a dog.  If the company has a catastrophe you would be stuck with shares that may never recover. 

But what if you want to buy the stock anyway?  Then being forced to buy at a lower price might not be a “risk” after all.

So here’s the deal:

If you’ve found a stock you want to buy at its current price and have done all of your homework, consider selling a front month naked put at an out of the money strike price.

You will have the premium deposited into your account and you have essentially agreed to purchase the shares at the strike price if the option is exercised.

You already have the desire to buy the shares and wouldn’t mind getting them a little cheaper.

Most major Canadian discount brokers will not let you trade uncovered.  After looking around, TD Waterhouse and ETRADE are your best bets for the discount brokers.

Here is an example:

You like the proposed infrastructure spending that the US has pledged to undertake.  Steel will be a significant component of the spending and commodity prices might be poised for a rebound next year.  So you’re thinking Nucor Corp (NUE), Andrew provided an overview back when they were really booming,  which is currently trading at $39.19 with a 52 week high of around $83 and a low of $25.

The March $37.50 put has a price of $2.50. 

1)You sell 5 puts (Total Potential Purchase of 500 shares x $37.50 = $18750 if exercised) and pay associated commissions (ETRADE will be a max of $19.95 per order plus $1.75 per contract) of $28.74.

2)$1250 is deposited to your account (500 shares x $2.50)

3) Waiting game begins. Do your best not to check Yahoo Finance every 5 minutes.

4a)It is getting close to March 20 and the stock price has stayed steady around $40. The option will not be exercised and you keep your premium. 

4b)The stock drops to $35 and you are required to buy 500 shares at $37.50 on or around March 20.  Keep in mind that you have collected $2.50 per share in premiums and paid $37.50. So unless you spent the $1200 on a gold-plated iPhone, your cost basis is $35.  You have then bought the shares at market price after an 11% drop in the stock price over a month.  If you bought before the drop you are now down 11%.

5a)Repeat the next month until you get exercised and keep the premiums while you wait.

5b)Hold the stock as per your bullish take on steel and infrastructure and you have now bought Nucor for $35 when you were ready to buy at $39.19.

There’s no time like now to find some great stocks you wouldn’t mind buying for below current levels.  Consider naked puts as a way to get into those positions when Mr. Market permits and be paid to wait in the process.

Risks are present, but if you like a stock and are ready to buy at current levels, go naked and sit around for a while instead!

So by now everyone is asking how they can open a TFSA and every financial institution is loving the attention. However, there are some important things to note before opening up your account.  

• Some banks charge fees for account transactions while others do not 
• It is more than just a “Savings” account
• Know the rules regarding deposit and withdrawal
• Know the tax benefits to assist in the RSP / TFSA debate

In my previous post I discussed the greatness of the TFSA but lacked the operational details because it was only March 2008.Now that the banks are unveiling the full set of info, its time to dive in.

1. Fees

The major banks are offering these accounts with varying fee structures. The fees consist of an annual administration charge because of the record keeping and such required for reporting purposes. Withdrawal fees are triggered when you withdraw money from the account.

For GIC’s, Savings Accounts, and Mutual Fund activity only major banks will not charge you for administration or withdrawal. In fact TD Canada Trust branches are the only ones that have a free withdrawal limit (1 per month, $5 per withdrawal after that). TD Mutual Funds do not have a withdrawal limit however.

For Stocks and activity requiring use of a brokerage (full service or discount) at the major banks the fee structure changes for the worse.

No Fees at all:RBC Direct Investing, Scotia McLeod Direct Investing, and HSBC Invest Direct.

Some Fees:BMO InvestorLine is a discount brokerage and charges a withdrawal fee of $25 per transaction and an admin fee of $50.  The admin fee is waived for the first year of an account and/or if you have over $100,000 in assets with BMO.BMO Nesbitt Burns is a full service entity and has an annual admin fee of $50 and a $15 withdrawal fee. TD Waterhouse has a $50 annual admin fee, waived if you have over $100,000 in total assets. You can also eliminate fees at TD if you use the electronic statement option for your billing.

Verdict: Watch out for the fee structures especially if you don’t bank at a major institution.  These admin fees are equal to 1% of the annual contribution limit, which is kicking you while you’re down if you’re also invested in mutual funds (and paying MERs). Ask about the fees and if you’re not happy go somewhere else.  It is easy to open up the accounts and transfer money, so this is no time for loyalty in the face of high fees!

2. Investment Options 

The name Tax Free Savings Account is being taken too literally.  Looking at CIBC offering the wonders of a “Tax Advantage Savings Account” with “a guaranteed high interest rate tax free” sounds like a dream doesn’t it! The truth is that banks are pushing high interest savings accounts and GIC’s really hard for the TFSA accounts (can’t blame them because they’re attractive in today’s market).  Some offer different accounts altogether depending on what you want. However, you can invest in the same things as your RSP. Tim Cestnick, who writes for the Globe, offers a great outline of the more specific ones outside of funds, bonds, and stocks. For instance, you can hold options, shorts, and private company shares (this one is detailed further by Tim).  The highest taxed forms of investment income are a sure bet to go into your TFSA. These include interest generating investments, foreign dividends, and options and shorts whose gains may be treated as regular income. 

3. Deposit and Withdrawal  

It looks like you can deposit up to $5000 per year, yeah, “we knew that already”. But many banks are offering a monthly contribution plan, so it appears that you can contribute at any frequency until you reach the $5000.

Withdrawal is the same.  You can withdraw money at any time. Money taken out of your TFSA frees up that amount of “room” so it can be put back in later. 

Example: You deposit $5000 on Jan 15, 2009.  You withdraw $1000 in Dec, 2009.  You now have $1000 of cap room you can use in 2010 on top of the $5000 annual limit.  So you would now be able to put $6000 in during 2010.

4. Tax benefits

 This is a critical factor.  The decision of RSP / TFSA, if you have to decide, comes down to what you predict your income tax rate will be upon retirement.  Because your RSP money is taxed at retirement age, it is most advantageous to contribute now if you think your annual income will be lower than your current level.

If you expect your annual income to be higher than current levels, the TFSA offers an advantage. You would be giving up the tax benefit of the RSP now and putting the money into your TFSA.  Upon retirement, you could withdraw from the TFSA tax free and at a higher marginal tax rate this represents substantial savings.  In this situation, if you had your money in an RSP, the annual withdrawal would be taxed at the full marginal rate.

In the event that you can maximize both TFSA and RSP contributions, by all means.

If you’re unsure about your future tax situation, it might be best to straddle the line and put a similar amount in your TFSA and RSP. Tim Cestnick provides a similar, yet more detailed, analysis.

Overall, the TFSA presents a new investment opportunity with substantial benefits.  Just make sure you ask a few questions before you open one.

I have put together a series of posts on the Rent versus Buy decision that many people face, especially in times of softening property markets.

I have found a useful tool on Yahoo Finance that lists key variables and will allow you to calculate the value of buying.  Be sure to account for all expenses like cable and other utilities that you pay for when owning.

Check out my posts for some qualitative information and then use the calculator to assist in the process.

Part 1, Part 2, and Part 3 are currently available.

Hope this helps you make a more informed decision.

Here is the continuation of my quest to produce a systematic tool for identifying if you should buy or rent. Keep in mind that when you combine these insights with some diligent research, you should feel confident in making a decision.

The previous post discussed your Plans for Savings and % Down Payment as key indicators. Below is the complete list.

Key Variables affecting the Rent vs. Buy decision:
• Level of Financial Education
• Plan for Savings
• % Down Payment
• Property Market
• Stock Market
• Nature of Income
• Location

4. Property Market
If you consider the purchase of your home to be an investment, it would be wise to investigate the current status of the market for such an investment. In case you’ve been living in a bubble for the past year (actually, you couldn’t because it burst a while ago…..), you’ll know that the US Real Estate Market is tanking. This is a macro trend that doesn’t apply to all areas however. Certain markets in the US are still strong due to good fundamentals. See my post outlining the fundamentals.
Buy or Rent? Let’s account for the status of the property market before making our decision. A large assumption in our calculations is an annual rate of increase in house prices for your area. After researching historical performance, it is important to calculate the average annual increase for the last 5,10, and 25 years.

Combine this with a sustainability check. If you’re seeing rates over 20%, your market is bound to see come cooling in the near future (gradual or otherwise).

If you’re seeing high rates that are not likely to continue, renting might be a good option until you’re able to understand what form the cooling will take.

However, if prices are crawling at 2-4% a year and the area has good fundamentals, buying now is probably a better choice than renting. Either you might see more rapid price increases in the future or continued steady increase. Both are great conditions to be a homeowner in.

In the event your market is experiencing a long decrease there will clearly be some reasons behind it. Examine the fundamentals, and if they look really bad, prices may not reverse themselves in your lifetime! Renting would then be the way to go. In this case, make sure you get your Financial IQ up because you won’t be able to make your money from a primary residence.

In the event that your area has been depressed for a while, but could be on the “up and up” in terms of community development and steady population increases, you may be getting in a little ahead of a boom. Make sure you review the fundamentals thoroughly to ensure things are as good as they appear. Buying in an improving area is every homeowner’s gravy train, so this would clearly be a green light special.

In short, if the fundamentals in your area look strong and price increases have stayed reasonable (0-12%), buying is a good choice, all other factors being equal.

If the fundamentals look bad or your market has been really hot (Hello Saskatoon, or Calgary 2 years ago) with increases well over 20% for 3-4 years straight, find a good rental and wait for things to cool down.

Keep in mind that you should perform a forward looking cash flow and balance sheet analysis for the next 5 years to make sure that your favored option does indeed work out better.

Again, if you’re going to rent, you need to keep piling the savings into investments to truly realize any advantage calculated. Buying cars and trips with the cash will provide no lasting value to your balance sheet.

On a scale from 1-5, give yourself a 1 if the Market in your area is stable or “coming around” with solid fundamentals. You would score a 5 if your area is getting more like a ghost town all the time (bad fundamentals).

5. Stock Market
The other key assumption going into a Rent vs. Buy decision analysis is an expected rate of return on money invested. Your ability to generate a decent return will, along with all the other factors, be critical if you choose to rent. When renting, areas for growing your money are generally equities / funds / derivatives, starting a business, and buying an income property. I suspect most people would favour the first area because it seems easier (just click “BUY” and you’re good to go).

With relevance to the big decision, volatile markets or those that are clearly unstable require a high financial IQ to navigate. Obtaining the required return outlined in Part 1 of this series would therefore be difficult. This means that buying a house would be easier to handle and to count on a stable return.

In times of low volatility or sustained growth, it might be possible to achieve some steady, solid returns. This may give the illusion that renting is the way to go even for those with low Financial IQ. However, keep in mind the required rate of return to match the BUY scenario outlined in Part 1.

Give yourself a 1 in this category if the Stock Market is extremely volatile or going sky-high. A score of 5 would correspond to a market that is just out of a recession and has encouraging fundamentals to drive future growth (see: CHA CHING!). I think currently we’d be around a 3, because we are clearly in the middle of a recession, but there are plenty of good buying opportunities.

The Property and Stock Markets are going to have a large influence on your decision because they are the source of your 2 biggest assumptions in the balance sheet calculations. Your cash flow analysis will not really be affected by these variables as an increase in the value of your home or stock will not put cash in your pocket. Now if you plan to buy an investment with some type of payout (dividend or income trust distribution) be sure to include it in your cash flow analysis.

We’re moving along in the decision making process and I’m sure most of us already have an idea of whether Renting or Buying would be best.

We’ll finish up the analysis next time when we total the points up and look at the Nature of Income and Location.

Here is the continuation of my quest to produce a systematic tool for identifying if you should buy or rent.

The previous post discussed the Level of Financial Education as a key indicator. Below is a complete list of the key variables.

Key Variables affecting the Rent vs. Buy decision:
• Level of Financial Education
• Plan for Savings
• % Down Payment
• Property Market
• Stock Market
• Nature of Income
• Location

2. Plan for Savings
Following up on my previous post, the next factor in the Rent vs Buy decision concerns your plan for savings. A large portion of savings is generally used to purchase a personal residence, tieing up a large amount of capital in the process.

Ask yourself what you would use the down payment money for if it didn’t go toward a house? If your answer would be to buy a car or some other consumable, buying a house is likely right for you because it would force you to put the money “away”.

However, if you can see yourself using the capital to purchase an investment property, start a business, or invest it in a great company, then you should at least consider renting. Definitely perform a detailed cost analysis with cash flows and equity projections to compare the 2 scenarios.

As for scoring, if you would spend your savings on shopping, travel, cars, etc. before investing it, give yourself a 1. If you would leverage it in real estate or through another investment, give yourself a 5. If you would plan on dumping it into a mutual fund give yourself a 3.

3. % Down Payment
My post regarding COCR / ROI variation with down payment amounts highlighted that lower down payment amounts are better for investment cash flow but worse for equity or a quick sale. These rules will be different for a primary residence and require more description.

Down payment amounts affect the rent versus buy decision because a low down payment will increase the mortgage owed. By putting down less than 20%, one would either be able to afford a larger property by using all of their savings or find one in their budget but use a small portion of their savings. Either way your expenses will be higher than putting down 20% or more to reduce your mortgage amount.

Complete a cash flow analysis because the higher mortgage payment might make renting substantially better. Then calculate the money you would save by renting and compare it to how much you would gain in “appreciation” if you owned. This number should give you an indication of the true winner in the debate.

Score yourself from 1-5 once again. A score of 1 would mean you intend to put down as little money as possible to get into a house (5%). Score yourself a 5 if you plan on putting down 20% or more.

Stay tuned for the next post outlining the Property and Stock Markets and their influence on the Rent vs, Buy decision.

I’ve heard varying opinions on the Rent vs. Buy topic. These opinions come from people with all types of education (financial and otherwise) and all levels of income. One will say “We bought because a house is the best investment you can make”, while others will back it up with “We bought because we were throwing money away by renting”.

The rent crowd looks to maintenance, utilities, and taxes (those other fees that come with owning!) when they say that “You’re throwing away money paying operating costs which can be almost as much as my rent”. One friend who is financially savvy rents because it gives him more cash (from reduced expenses and use of savings) to use in the markets. He figures he can beat whatever return a house/condo would provide. Whether he actually does I am not privy to.

There are valid points on both sides, but the argument still hasn’t been settled once and for all.

Firstly, I’m going to be like every other person that has touched this subject and say that the answer (Rent or Buy) will be different for everyone because there are too many variables to issue a blanket answer. However, I don’t intend to cop out and leave it at that. There are some clear principles one can use to make a decision.

Key Variables affecting the Rent vs. Buy decision:
• Level of Financial Education
• Plan for Savings
• % Down Payment
• Property Market
• Stock Market
• Nature of Income
• Location

Let’s take a look at the parameters and discuss how they could impact your decision.

I will use a scorecard approach to each variable, assigning points based on your status. Add them up and compare your score to the chart in the final post in this series. It should give you an idea about what option would be better for your situation.

1. Level of Financial Education:
I think this one is obvious, but it is definitely worth explaining. The Rent vs Buy decision hinges on your ability to do something with your savings to earn a decent return. If you consider dumping it into a GIC to be a “good move”, this is a signal that buying is probably right for you. Here’s why:

GIC: Assume a GIC will be paying 5%, I’m feeling generous. So you rent and take your down payment money (assuming 20% of purchase price if you were to buy) of $50,000 and put it into the GIC. After year 1 your GIC is worth $52,500, for a gain of $2500 (5% return).
Condo or House: You use your $50,000 to purchase a house worth $250,000, leaving you a $200,000 mortgage. Assume your house appreciates at 5% (make this most accurate by researching property price increases in your area for the previous quarter) After year 1 your house is now worth $262,500 for a gain of $12,500 on your investment of $50,000 (25% return).

Comparison: The return on your money is 5 times higher by buying the house. Now, the gain on your place of residence is tax free, so your return is even higher relative to the GIC gain which is fully taxable as interest income.
But you’re not done yet. This is where the homework comes in. You need to subtract all of your related expenses from these gains.

GIC: Subtract your rent, tenant insurance, and any other expenses not common to buying a house. For example, don’t subtract internet if you will be paying the same for it whether you rent or buy.

Condo or House: Subtract your mortgage, taxes, insurance, estimated maintenance cost, and utilities.

Now compare the GIC and Condo or House numbers, which now don’t look nearly as good!

For fun, project the numbers out for 5-10 years to get an idea of their behaviour over time. Does this change the scenario?

Some people with a high level of financial education will look at a housing purchase as tying up a large portion of their savings. Putting $50,000 -$100,000 in their home (although you could likely convince your bank to let you take out some equity in your house if you really wanted to get into an investment) eliminates their ability to participate in other investments.

If you’re likely to use the money to buy some deep in the money calls, a great dividend stock, or want to put money into a company with a great long term story (see Sandvine, SVC:TSX) you may be able to generate a great return.

Let’s say that Johnny or Jane expert averages 25% a year for a 3-5 year period. Are they better off renting? Well if we take the $50,000 and it generates 25% in year 1 we would have $62,500 for a gain of $12,500. This would be a capital gain, so therefore taxed at half of your personal income tax rate.

If you bought a house for $250,000 as in the above scenario and it appreciates at 5%, you end up with a gain of $12,500 also.

Therefore, you would need a gain greater than 25% a year on your non-house investment, but accounting for the capital gains tax you will pay upon sale (30% bracket) 15% of the $12,500 in tax. This is equal to $1937.50 and decreases the return from 25% to 21%.

It would seem that you need to be realistic with your investment performance.
In order to match the gain on a property by using an investment, here’s a quick guideline:

E.g. Property Appreciation Rate (P) = 5%, Income Tax Rate (I) = 30%, Down Payment Amount (D) = 20% Required Rate of Return on Other Investment (IRR)=?

So to calculate the rate of return required to keep up with a house we do:
IRR = P / (D/100) / (1-(I/2))

For the example, you would need a return of 29% to equal the return on your house purchase. This would take a high level of financial education.

Scoring: 1-5 Give yourself a 1 if you think a high interest savings account is a great place to put your money. Give yourself a 5 if you can read a financial statement effectively and have successful experience with a variety of investment products.

Stay tuned for Part 2 where I’ll get into Plans for Savings and % Down Payment and how they will impact the Rent vs Buy decision.

If you’re thinking RRSP is some new acronym, you definitely need to read on. Even if you know what it is you could likely use a refresher on the fundamentals.

A Registered Retirement Savings Plan is a vehicle setup by the government (Canada Revenue Agency) that allows Canadians to defer taxes on amounts earned inside it until you begin earning RRSP retirement income. All money contributed to an RRSP can be used as a deduction from your earned income, meaning you’ll pay less income tax by contributing. Think of an RRSP as a box with special rules governing all investments held inside.

You can setup an account with any major financial institution, credit union, or investment service provider. Grant Thornton LLP’s Smart Tax Tips recommends that you get a self directed plan because it is the most flexible for control and tax planning strategies.

The maximum amount you can contribute while still being able to deduct it from your taxable income is equal to 18% of your earned income up to a maximum of $20000 for 2008. If you are a member of a Registered Pension Plan or Deferred Profit Sharing Plan the rules are different so consult your company advisor. Earned income includes the following: Salaries, profit sharing income, business income, and rental income. It also is reduced by business losses, rental losses, and employment expenses. It should be noted that investment income, capital gains, and business income earned as a limited partner are not classified as earned income.

Your RRSP contribution limit will also appear on your Canada Revenue Agency Notice of Assessment. This represents the amount in addition to your contribution limit for the current tax year (18% of earned income) that you could put into your RRSP and receive the tax benefits.

As an example: If your Contribution Limit from your 2007 Notice of Assessment says $10,000, this means you can contribute a total of $10,000 + 18% of your earned income.

Why contribute to an RRSP?
1) Present Tax Savings: Your contribution is tax deductible – which results in greater savings for those in higher tax brackets
2) Future Tax Savings: Income / Gains generated are only taxed on withdrawal
3) Income Splitting: All or a portion of your contribution can be made to a spouse or common law partner’s RRSP.

If you are an employee and have no other possible deductions or tax credits, it is critical to contribute to an RRSP if you want to pay less tax.

We’ve covered the principles behind putting money into your RRSP. What about taking money out?

Why keep your money in an RRSP once you’ve contributed?
According to Fidelity, any money taken out will be subject to a withholding tax ranging from 10-30%. The amount you pull out will also be added to your taxable income for that year.

Note that contributing to an RRSP will serve to increase the equity you have. In terms of cash flow, it actually decreases the amount of cash that is readily usable or liquid because you are adding money into “the box”. Taking money out is not worthwhile, it is better to not contribute in the first place. Your cash flow will increase at year end because an RRSP reduces your taxes owed, resulting in a larger refund or smaller tax payment. However, the cash you put away throughout the year will yield its savings in the following April. You may need to use this cash before April, thereby reducing this advantage.

Depending on your investments of interest, the cash flow impact may not be an issue.

What investments can be held inside an RRSP?

In your RRSP you can hold many types of investment. This list is from accounting firm BDO:
Cash
GIC’s
Government Debt and Corporate Debt listed on Canadian Stock Exchanges
Shares or units in Canadian based mutual funds certified RRSP eligible by the Canada Revenue Agency (I suspect Mr. Hedge Fund got left out of the party)
Options on the purchase of qualified investments (puts and calls baby!)
Shares of any Canadian public corporation
Shares listed on the TSX-V, TSX, and MX
Shares listed on most foreign stock exchanges

There are some quirks I would like to talk to my accountant about. For example, if I were to invest in a privately held Canadian company which proceeded to go public, how would it be treated by the CRA? The status of my investment would have moved from non-qualified to qualified.

 How much will one save by contributing to an RRSP vs. a regular investment account.  I’ve never seen anyone actually quantify the benefits.  I will seek to do that over the next few weeks and let you know the results.

Anyways, we’ll save the special situations for another day. I hope I’ve provided the RRSP basics for you. Now get out there, open up your self directed RRSP account, and start buying!

In a recent post I reviewed a number of different online brokers while making a decision on which to open an account with. I came to the conclusion that I was going to open an account with Bank of America in order to keep all of my money in one central location and to take advantage of their low trading costs. If you recall I stated that when you have account balances of $25,000 or greater they waive the fees for online equity orders. I was under the impression that the $25,000 included the money that you have in the actual investment account. However, this is not true. The $25,000 must be in a checking, savings, or money market account. This is unacceptable for me because there is no way that I want to have $25K just ’sitting’ around in a savings account earning a lousy 0.2% interest. There are better things I can think of to do with that money. So knowing this I decided to go back to the drawing board and rethink my decision.

In the previous post I said that both Scottrade and TD Ameritrade ranked high on my list of online brokers. However, I do have some concerns about both sites. Scottrade has very low fees and great customer service, but the main complaint from current customers was that their stock research left something to be desired. As for TD Ameritrade all the online reviews stated that their research and trading tools were superb, but it seems that some are only available to their Apex customers. To qualify one has to average 5 trades per month or maintain an account balance of $100,000. Most average investors will not meet either of these criteria, which means they can’t take advantage of some of the more sophisticated features offered by TD Ameritrade.

In many of the online reviews a site called TradeKing was consistently near the top of the ratings. Everything I read about the site seemed to be very positive. They’ve only been around since 2005 and already they have become quite popular among the discount online brokers. Their fee structure is a flat $4.95 for online equity and options trades (plus a modest $0.65 per options contract), there are no account minimums, and no hidden fees. They have good research and trading tools which are available to all customers, not just the ones with the most money. They offer streaming quotes, options and stock screeners, an ETF center, and in-depth technical analysis. So after further review I decided to open account with TradeKing. Although I’m sure I would have been happy at either Scottrade or TD Ameritrade I chose TradeKing because they have low fees and seem to be a no nonsense outfit when it comes to providing their customers with quality research and a smooth trading interface with good features.

I am currently awaiting an funds transfer between my checking account and my TradeKing account. I will be keep you updated with an purchases that I make and how I like the TradeKing platform. Stay tuned for more updates coming soon.

Here is a great link to Consumer Search that provides links to a number of reviews of online brokers including Barron’s, JD Power & Associates, and Kiplinger’s.

So as you may know I recently relocated from Canada to the US for a new job. In the process I was advised to liquidate my equity positions in my Canadian bank account for tax purposes (don’t want the Canadian tax man trying to get a piece of my US income). Now that I’m settled in the US and I’ve got a bit of money to invest thanks to my international relocation package (that drive across the boarder was quite the financial burden), its time to look into opening an online brokerage. Since I’m just starting to put money into an investment account, the following factors are important to my decision:

1) Low transaction fees. If I’m dealing with smaller transactions I don’t want to be minimizing my return by paying huge transaction fees. My Canadian account had $30 fees each way (buying and selling). That means that you have to return $60 before you even brake even and that’s if you only buy once. The smart way to invest is work your way into a position slowly and add to it as the price increases (hopefully) and $30 fees makes it very tough to do this.

2) Good trading tools and user interface. I want to make sure the interface is easy to navigate and that trades are easy to execute.

3) Low minimum account balance and no damn hidden fees. Some accounts you need to have a billion dollar balance to get the best commission rates and have all these hidden fees. I hate hidden fees. Why not just tell me what I have to pay up front? There’s nothing worst than thinking you’re paying one rate and then realizing that its actually much higher.

So there is my search criteria. Lets see how some of the most popular online brokers stack up.

E*Trade Financial. E*Trade is probably the best known online broker. So naturally its the first site that I went to when I started doing research. Unfortunately E*Trade is quite expensive in terms of fees and commissions. If have less than $50,000 in your account and make less than 30 trades per quarter, which is pretty typical for the casual investor, you pay $13 a trade for stocks (same for options plus $0.75 per contract). You also have to pay $40 each quarter that you don’t make any trades on your account (subject to a bunch of other conditions). So although they have a awesome user interface and great stock ideas based on technicals and fundamentals, the cost for me is just to high. Plus their stock is in the dumps and they’ve got some serious management issues which can’t be good for the customer.

TD Ameritrade. The guy from Law and Order can’t be wrong can he? Actually TD Ameritrade seems like a pretty solid option. They have flat rate $9.99 commission for stock and option trades (+ $0.75 per option contract), no maintenance fees or minimum account balance. Here’s a chart of how TD Ameritrade stacks up against some of the other sites. They offer a load of account features, most of which are included with any level of account. So TD Ameritrade gets my thumbs up.

Scottrade. Scottrade was recently earned the JD Power and Associates award for “Highest in Investor Satisfaction With Online Investing Services.” They were ranked highest in investor satisfaction in a study that looked at information resources, cost, trade execution and Web site capability. Commissions are a flat $7 for stock and option trades (+ $1.25 per option contract). You get free streaming quotes, real-time account updates and wireless trading. The minimum to open an account is $500 and there aren’t any account maintenance fees. They have 326 brick and mortar branch offices nation wide creating a low cost/high service option. Thumbs up from me.

While Scottrade and TD Ameritrade both seem like very good options, they finished a close second in my decision. In the end I decided to go with Bank of America’s new Online Investing. I decided on Bank of America for a couple reasons. First of all, I do my banking at Bank of America, which means that I can manage all my money online in one place. I don’t have to worry about having money scattered over a number of institutions. Also, Bank of America gives you 30 commission free online equity trades per month for customers with at least $25,000 in their Bank of America accounts. They also wave the $50 semi-annual account maintenance fee for customers who bank at Bank of America. They have a number of investment and analysis tools available and there doesn’t seem to be an account minimum. So for the ability to have all my money in one place and for the $0 commission rates, I have decided to go with Bank of America Online Investing. Once I become familiar with the tools and interface I will let you know how the site performs.

Here are a few other options that seemed interesting but I couldn’t find enough info on.

Zecco. 10 free online equity trades with accounts of at least $2,500 and only $4.50 options trades plus $0.5 per contract. I couldn’t find any opinions online from people who had used the site.

Two other sites that seem to be fairly popular are OptionsXpress and TradeKing.

If anyone out there has some online broker experiences they would like to share (good or bad) feel free to leave a comment.

In honor of this past weekend’s UFC event UFC 78 Validation I decided set up my own card to settle once and for all the dispute between two of today’s more popular retirement plans. More and more Americans these days are beginning to realize that their company pension plans and Social Security will not be adequate to provide for them during retirement. Instead of playing the cynic and blaming Congress for failing us in our time of need we need to realize that it may be up to us as individuals to fund our retirement accounts. Hey, if you want something done right you’ve got to do it yourself. In this post I’ll focus on one of the most popular and flexible options for retirement savings; the Individual Retirement Account or IRA. For you Canucks out there an IRA (especially the Traditional variety) is very similar to a Canadian RRSP. Although there are a number of different types of IRAs (11 at last count), the two most popular seem to be the Traditional IRA and the Roth IRA. Many people are unclear on the differences between these two options and which plan is best for them. To settle the dispute we’ll match the two plans up in the octagon to see which option taps out first. Just no eye gouging, head butting, or low blows please.

Tale of the Tape

The maximum contribution for both plans in 2007 is $4000 (in 2008 this value increases to $5000) so there is no advantage or disadvantage here. The contribution can be made in whatever increments you like (i.e. $333.33 per month for 12 months or a $4000 one time payment, both max out your contribution). There is no minimum contribution requirement either, so you don’t need to max out your plan every year. Both plans are very versatile in that they can be used to purchase a variety of investments such as stocks, bonds, options, and even real estate in certain cases. For both plans withdraws can begin at age 59 ½, however, with a Traditional IRA they become mandatory at age 70 ½ whereas with a Roth IRA there is no mandatory distribution age. Advantage Roth. A Traditional IRA is available to anyone regardless of their income. In contrast, a Roth IRA is only available to single filers making less than $95,000 or joint filers making less than $150,000 annually. Advantage Traditional. If you withdraw any funds from your Traditional IRA before you turn 59 ½ (including the principle contributions) you will be hit with a 10% penalty plus any applicable taxes. The 10% penalty also applies to your Roth IRA but in this case only to the gains from the investment. This means that you can take out your original contributions without penalty. Advantage Roth. The main difference between the two plans is when you incur the tax savings. With a Traditional IRA the contributions are tax deductible meaning that you get the tax savings up front. With a Roth IRA the contributions are not tax deductible but all withdraws (earnings and principle) are 100% tax free as long as the IRA has been open for at least five years and you are 59 ½ or older. So who gets the advantage here? To find out lets match the two plans up head-to-head.

Let’s Get It On

Let’s say that you’re 25 and you have $4000 (the max contribution for 2007) that you want to put into an IRA plan. If you put the $4000 into a Roth IRA your investment will be worth $59,141 when you turn 60 (assuming a modest 8% return). Not too bad, and the best part is that you can now take that money out tax free. If you put that same $4000 into a Traditional IRA your investment will still be worth $59,141 but you’re going to have to pay tax when you withdraw the money. Assuming that you’re in the 25% tax bracket you’ll have to pay Uncle Sam $14,785 dropping your net to only $44,356. So the Roth wins hands down right? Not quite. Remember we got a tax deduction with the traditional IRA. So the $4000 deduction saves us $1000 in the 25% tax bracket. That $1000 invested with an 8% return would grow to $14,785 by the time you turned 60. Assuming a 15% capital gains tax rate on the $1000 investment, you’re total takeaway including the IRA money would now be $56,924. Still over $2000 less than the Roth IRA and that’s assuming that you’re disciplined enough to invest that $1000 tax savings rather than putting it towards that new LCD. Let’s be honest, it’s hard enough to put the initial $4000 away never mind the money you eventually save on taxes.

Some people might argue that when you take the money out of the Traditional IRA you will be in a lower tax bracket making the Traditional plan more appealing. In the above analysis we assumed that you were in the 25% tax bracket at the time of contribution and withdraw. If you dropped down to the 15% tax bracket that would mean that you’re annual income would have to be under about $32,000. I don’t know about you, but choosing a retirement plan based on making less money when you retire isn’t the deciding factor for me.

The Judge’s Decision

For me it’s unanimous. As long as you meet the annual income requirements I think the Roth IRA wins hands down. It’s a great option for young adults who are just starting out with their retirement savings. Most likely you’ll be in a lower tax bracket anyway so the tax savings with a Traditional IRA won’t be as great. Even if eventually you end up exceeding the annual income levels the money that you contributed up to that point can continue to grow tax-free. Unlike a Traditional IRA you can leave your money in the plan as long as you like. If you choose you can even pass along the tax-free IRA plan to your heirs. If during retirement you are also pulling money from a taxed source such as a 401(k) or Social Security a Roth IRA plan gives you more flexibility for managing your withdraws and the taxes you pay on them as compared to a Traditional plan. Technically, the better plan is determined based on what your tax bracket will be during contribution and during withdraws. However, it’s pretty hard to predict which bracket you will fall into throughout your lifetime. In my opinion the Roth IRA is simpler and requires less discipline in that you don’t need to worry about investing all your incurred tax savings from your contributions. Having access to a chunk of tax-free cash at retirement is always going to be a good thing.

Some links…

A great article on The Motley Fool comparing a Traditional vs. Roth IRA. The entire section All About IRAs is a great resource on IRA plans in general.

An interesting calculator that allows you to visualize the difference between the two IRA plans. The calculator also assumes that you invest the incurred tax savings from the Traditional IRA plan.

A great article on I Will Teach You To Be Rich about retirement savings and IRA plans including a Q&A with a CPA.