Reader Questions and Answers

by David D. Holland


Do you have financial, investment or retirement questions? Send them to me along with your first name and the city where you live. I’m no “Dear Abby,” but I’ll answer as many as I can:


“I read your article about diversifying stock and found it interesting. What kind of stock do you recommend nowadays – the top picks without breaking the bank? I have a retirement plan and stock where I work. I’d like more information from an expert.” – Steve, Daytona


My “top picks” will always be diversified portfolios built with no-load mutual funds, ETFs and index funds. The S&P 500 Index (a basket of five hundred of the largest, U.S. based publicly-traded corporations) is up 19% year-to-date. Similar indices that track publicly-traded medium-sized and small companies are up 21% and 24%, respectively. I tend to shy away from picking a lot of individual stocks because the risk of loss is more concentrated, and the potential damage to your portfolio could be greater than the potential improvement. With that said, a few carefully selected and monitored individual stocks can add some spice to the mix.


“Could you tell me the difference between a mutual fund and an ETF; what makes some people say mutual funds are a thing of the past?” – Chris

People say all sorts of things. The last time I checked, there were over 26,000 mutual funds! I don’t see them going away. A mutual fund is a basket of stocks and/or bonds managed by a mutual fund manager for a fee. They are distributed through brokers, custodians or directly to the investor. Stocks and bonds held in the fund will change in value during the trading day (based on supply and demand for the security). The value of the mutual funds themselves, however, are not available until after the markets have closed and the ending prices are established for all the holdings of each fund. Mutual funds may invest in a wide variety of securities, depending on the objectives of the particular fund and the fund manager’s investment strategy.


Exchange-Traded Funds (ETFs) are similar to mutual funds, but have a couple of key distinctions: 1. they typically track a stock or bond “index” (as opposed to a group of specifically selected securities); 2. they are priced and traded during the day; 3. they typically don’t have minimum purchase requirements (mutual funds usually do); and 4. they can have lower costs due to their passive nature (you’re not hiring a manager to pick winning stocks). If you follow my columns, you won’t be surprised that I include ETFs as part of a diversified portfolio to reduce fund manager risk and to reduce cost.


“I understand that I can draw money from my 401(k) accounts without penalty since I’m over 59½, but I don’t understand the taxing rate and how that works. Is the money taxed at the current bracket that I fall into at the time of withdrawal? Once I go on Social Security, what will the tax rate be at that time?” – Sara


Withdrawals from 401(k)s, IRAs, and other qualified retirement accounts (DROP money, 403bs, 457 plans, lump sums from pensions) are all considered ordinary income for tax purposes in the year you take distributions. Those distributions could increase your total taxable income (income, less deductions and exemptions, equals taxable income). For 2013, a single taxpayer will pay 10% on the first $8,925 in taxable income, 15% on the next $27,325 (the amount between $8,925 and $36,250), 25% on the next $51,600 (the amount between $36,250 and $87,850), and so on and so forth, all the way up to the 39.6% tax bracket that applies to taxable income over $400,000. Distributions for qualified retirement accounts don’t increase the tax you already pay on other income, but do increase your overall tax bill. Depending on your other sources of income, those distributions could be taxed at a significantly higher rate than your other income.


When you add Social Security into the mix, keep in mind that those benefits could also be subject to tax. Depending on your total income, you may have to pay tax on as much as 85% of your Social Security Benefits. Just like distributions from your retirement accounts, the payments you receive from Social Security could put you in a higher tax bracket.


David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to