Outside Economics

Until 2010, Roth IRAs were available only to those making less than $100,000 a year. That cap has been eliminated.

10 Reasons a Roth IRA is the best decision right now
1.    Your tax rate will be increasing
•      Those who expect to be in the top tax bracket for the foreseeable future, or high-bracket individuals who expect to leave their estates to heirs who are also in the top bracket. 

2.    You are moving to a higher tax state
•      If you now live in a state without an income tax such as Florida, Texas or Nevada and expect to move to a high tax state such as Oregon, California, Hawaii or New York before or in retirement, consider converting now.

3.    You won’t need your IRA at age 70 ½
•      Those who have a large estate and won't need to take distributions to live on. With Roth conversions, there are no mandatory distributions at age 70½. If you don't need those distributions early in your retirement, a Roth will let you preserve your IRA, growing tax free, for when you really need it.

4.    You are leaving money to your posterity
•      If you don't anticipate needing any of your IRA money to live on in retirement, you can save it for children or grandchildren. You can leave the Roth untouched and after your death, your heirs can stretch out tax-free withdrawals over their own lives.

5.    You expect to have a taxable estate
•      By converting, you reduce the size of your estate that may be subject to the estate tax. The federal estate tax kick in on estates valued at $5.12 million per person. Plus, 22 states and Washington, D.C., have their own estate and inheritance taxes.

6.    Your IRA investments have tanked
•      If the holdings in your IRA have plummeted and seem ready for a rebound, converting to a Roth now is to your advantage. This is because if your investments are flat or down when it's time to file your 2013 returns in 2014, you can undo that conversion and not pay any conversion tax.
•      It is suggested you should put a conversion into several Roths, for example, emerging market mutual funds in one, large cap stocks in a second, small caps in a third. Then, you can unwind those conversions where it makes sense as the deadline approaches.

7.    You plan on using non IRA funds to pay for the conversion tax
•      Even if your tax rate will be the same in retirement, you may benefit from a conversion if you can pay the tax on it from funds outside your IRA. This is particularly true if you won't need to use the funds in the Roth for many years.

8.    You have special tax items
•      If you have net operating loss carry-forwards, charitable deduction carry-forwards, a high basis in your IRA (lots of after-tax contributions) or some other situation that can offset or reduce taxable income from a Roth conversion, it's a good time to convert.

9.    You recently lost a spouse
•      Federal tax brackets are more favorable for married couples filing joint returns than for single individuals. If you've just been widowed, you may want to convert to take advantage of lower joint rates available to you now. Later, as a single, you can take the money out tax-free.

10.    Your social security may be taxed
•         Up to 85% of your Social Security retirement check is taxable, but only if your other income is above a certain level. Roth distributions aren't counted as income for the purposes of that count, even though tax-free municipal bond income is. If you will have modest retirement income, a Roth conversion may help you limit the tax on your Social Security check.

Converting to a Roth IRA should be considered after reviewing all its various consequences.  It is not always an easy decision. Run the numbers and see what the challenges are – it just may be to your great advantage to make the move.

Topics: Roth IRA, IRA, Converting to IRA

A Traditional IRA is generally tax-deductible. There are some limitations; for example if you are an active participant in a qualified employer plan those limitations are more restrictive than if you’re not covered by an employer plan. These limitations are called “phase-outs” because the amount you can deduct from your taxes phases out as your income increases on an IRS-set range. 

Contributions to a Roth IRA are not tax deductible like with a Traditional IRA. Money earned in a Roth IRA can be withdrawn income-tax-free on a few conditions: you must have had the account for at least five years, if you're at least 59½, death, disability or a qualified first time home purchase. 

5 Reasons converting to a Roth IRA is not the best option
1.      Lower tax bracket after retirement
·         After retiring many people drop to a lower tax bracket. It is suggested if your tax rate will drop 10% or more it is not a good option to convert right now.
·         Also if you plan to move to a state with a lower tax rate it is better to wait.


2.      Nearing retirement and will spend your IRA
·         If you will be in the same tax bracket after retirement the question to ask is when will you need to use the money in your IRA. One of the benefits of a Roth IRA is you don’t need to take required minimum distributions starting at age 70 ½. If you are near retirement and will be using money soon from your IRA it dose not make sense to convert to a Roth IRA.

3.      Don’t have money to pay conversion taxes
·         If you have to use money from your IRA to pay the conversion taxes it may not be ideal to convert, its best to pay the tax from other sources.

4.      You plan to leave a substantial amount to charity
·         The most tax-effective way to leave money to charity is through a traditional IRA. Money given to charities from traditional IRA’s is typically not taxed.

5.      You need asset protection
·         If you are in a position where you might be sued, such as a physician or retired engineer it is best to consult a lawyer before making the move to convert to a Roth IRA.

Check back next week for the top reasons converting to a Roth IRA will be the best move for you.

Topics: IRS, Roth IRA, Traditional IRA, Tax Bracket

For years as a financial adviser I have recommended to people not to borrow from their 401(K)’s and other retirement plans. However, as this Great Recession lumbers on, which I know has passed, but many people are still suffering from its effects, the number of people who are borrowing from their 401K is growing. The effects of which will not be felt by the borrowers for years to come. Here are t

he problems.

When borrowing from one’s 401K many people don’t consider it a “real loan”. After all, they are borrowing from themselves, right? Yes you may be borrowing from yourself, but it’s the wrong attitude. It is a real loan and must be paid back or penalties will be incurred.  Those penalties are very costly.

The penalties on the unpaid loan balance are income taxes and a 10 percent penalty tax (if you are under 59 ½ ). If you are in the 28% tax bracket, and your unpaid loan is $20,000 that means the cost of not paying back the loan will be approximately $7,600 or 38 percent – this does not include any state income taxes that may be due. If you are in California the amount could easily reach 50 percent or more in combined taxes and penalties.
You may say, "I am one of the 96 percent of borrowers as reported by Fidelity who pay the loan back faithfully, so what is the problem then"? Those who borrow typically reduce their 401K contributions during the years that the loan is being repaid – so they are saving less. If the loan is paid back over 

the typical three years this lower savings rate has an impact on long term retirement savings. If the savings reduction is only two percent for three years for a 40 year old person that can be a cumulative loss of thousands of dollars at age 65.

Another problem is when repaying the loan it is with after tax dollars. So repaying the loan with after tax dollars means that those dollars will be taxed twice. For example: a $20,000 loan paid back with after tax dollars means that you will have to pay taxes on that $20,000 again when it is withdrawn for living expenses during retirement. So you paid taxes to earn the 20,000 to repay the loan and then again when it is withdrawn from the account at some point in the future.

Job cuts can cause you to either pay the loan back within 60 days or it becomes a distribution, subject to the taxes and penalties. This is especially hard when people have lost their jobs and are required to pay extra taxes on what is now income they were not expecting (Distributions are considered income). Or they are required to pay back a loan of any size in 60 days, chances are if they could do that they would not have borrowed the money in the first place.

Some employers, to discourage borrowing, charge loan fees, thus increasing the cost of the loan. Or employers are only allowing one loan at a time and after the loan is paid back they have a six month waiting period to borrow again. Employers are getting wise to the problems of borrowing, so they are limiting loan amounts to only employee contributions – thus keeping their contributions off the table.
There is also a trend that Fidelity has noticed, serial borrowing. Constantly going back to the 401K to borrow money is much a kin to keeping balances on your credit cards. This can be especially bad when trying to develop retirement security. This is what the government does, borrows against future tax revenue; we all know what a mess the government finances are. The idea should be to build a retirement nest egg, and get out of debt and stay out of debt.

A loan of any kind can be trouble, the best thing to do is build the emergency fund and stay out of debt. Remember we create our own emergencies – we are the ones who determine what an emergency is. A broken arm of a child is part of life, the emergency is getting them safely where they can receive proper care. The financial expense is just a part of life we need to plan for, that is why we save money. I have found that when we save for emergencies, we tend to have fewer of them.

Bottom line – be very careful about borrowing from a 401K. Do your best to do without borrowing for any reason and you will have a more prosperous life. I know there are times and circumstances where we as people feel stuck, but really what are they? Can’t the problem be solved some other way?

Topics: 401K, 401K Borrowing, 401K Loans, Great Recession

Topics: United States Constitution, Declaration of Independence, Free enterprise

The HARP Program was designed to help homeowners refinance their mortgages who may have been damaged during the financial crisis or the Great Recession. The Program helps people get a lower interest rate on their mortgage, thus making the home more affordable. In many cases it helps families keep their homes. Below are the basic requirements and our experience of going through the process. 

The requirements are simple: 

1.       The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.

2.       The mortgage must have been sold to Fannie Mae or Freddie Mac before May 31, 2009.

3.       The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May 2009.

4.       The current loan-to-value (LTV) ratio must be greater than 80%.

5.       The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months. [i]

Additionally your mortgage company has to participate in the program. I think it is harder to find a mortgage company that does not participate than one that does. 

Thinking that our mortgage company would be the best place to start with refinancing our mortgage I called them and started the process for the home loan modification, not knowing that I was ineligible because we were always on time with our mortgage. Six months later, we found out that we were declined because we always paid our mortgage and were not in threat of foreclosure. I was pretty angry to say the least, that it took them six months and mounds of paper work, to tell me this. 

A couple months went by and someone from our mortgage company called me to talk about the HARP program and that I should consider applying, I was thinking you have a lot of nerve calling me asking me to reapply after what you had put me through a few months ago. The lady assured me that this program was different and the only paperwork I would be required to deliver were my tax returns. She let me know the requirements and that I clearly qualified and that the rate would be less than 4.0 percent. After an hour of talking, she finally convinced me to give it a try. 

Within two weeks I was approved and it took me longer to get my tax returns from my accountant than to get the loan finalized.  This was really a smooth deal and a no hassle opportunity to lower my rate! They did pull my credit, but mainly to verify my address. A good credit score is not a requirement as she explained to me (not that mine was bad). Saving money is a great blessing!

This was bar none the easiest loan I think I have ever applied for. Perhaps it was my lender, but not sure, as CitiMortgage – a subsidiary of CitiBank – is not always known for being the most efficient or best company to work with. So the bottom line – go get HARPed!! Have you already been through the process if so what was your experience?



[i] Making Home Affordable -http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx

Topics: Great Recession, Homeowners, HARP Program, mortgages

This week Fed Chairman, Bernanke. made comments about tapering back the stimulus towards the end of the year. These comments have sent the market into a tailspin these past few days. What was once a background supporting role, has now become front and center, and the lead player on the markets worldwide stage. It is now the case if Bernanke sneezes the market gets a cold. The Fed’s tapering plans may be good to get out in the public because maybe the market can focus back on what is really important – the fundamentals of the company stocks that are traded daily rather than the Fed’s involvement. Understanding the tapering is important to the long term investment strategy. There are a few points that are important to know.

Bernanke said that tapering is contingent on continued improvement in the economy and the jobless rate. He described it as easing up on the throttle once the auto reaches cruising speed. This will not happen “until the outlook for the labor market has improved substantially.” The target jobless rate he wants is 6.5% vs. the current jobless rate of 7.6%. 

The next big discussion point was the interest rates – he expects to keep interest rates close to zero for a long time. Currently they are around 25 bps. Bernanke said, “The current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded.” This will keep borrowing cost very cheap for borrowers and will continue to squeeze bank margins as competition for new loans continues to heat up. The hope here is that companies will find reasons to borrow and expand their payroll. 

Additionally, the tapering plans will be postponed if the economy doesn’t improve as expected in 2014. The target date for the 6.5% unemployment is mid-2014. At the same time 14 of the 19 FOMC members don’t expect to raise interest rates until sometime in 2015 at the earliest. 

This leaves QE3 in place much longer than Wall Street believes making perhaps the fed a new permanent player. There may always be an economic hic-up that causes the Fed to stay involved in some way, keeping the markets artificially propped up. 

Yesterday’s major sell off caused havoc around the glob – making the Fed’s comments and policies the major player not just on Wall Street but in the world. It may be soon that the Fed Chairman becomes the most powerful man in the world instead of the President. After all, most people are more worried about their pocket book then who is president.  

While the market is the great predictor of what it expects to happen in three to six or nine months from now; the current mayhem seems to be an overreaction.  If the underlying economy is truly doing as well as reported from all the government agencies and the company quarterly reports, then things should continue for the next several months to a year moving forward. If the info is not strong and stable, well then, we will see another major move down. What are your thoughts about the economy?

Topics: Fed, Fed Chairman, Market, stimulus

The IRS Administrators apologized for the inappropriate targeting of conservative political groups during the 2012 election. It’s amazing that when the American Public does something wrong they get slapped with fines, jail time, and other penalties, but when a government official (high level or low level) does something wrong they get to apologize. 

Here is the rub; according to an AP article by Stephen Ohlemacher, a few weeks ago, he states, “Learner said the practice was initiated by low-level workers in Cincinnati and was not motivated by political bias. Agency officials found out about the practice last year and moved to correct it, the IRS said in a statement.”

Now, I have not worked for the IRS, however I did a recent stint with the SBA, Office of Disaster Assistance, writing loans for Hurricane Sandy victims, and if the IRS, being a government agency operates anything like the SBA, also a government agency, then never do “low-level” people initiate anything. Everything was initiated by Washington.

When a new policy was handed out it was done with consultation with those in charge in Washington or the folks in Washington sent out the policy for distribution. If you were not given the authority to do something you never did it. Period. So for Learner to say that this was initiated by low-level workers, is simply an incomplete truth (not sure I want to call it a lie at this point, because using the word “lie” to me is very serious). 

Low-level workers want to keep their jobs they are not by nature going to stick their neck out to do something risky, against the policy, on their own. The instruction to do something would come from someone higher up, much higher up. Each and every job in the government has a detailed job description, that job description tells you what you can and cannot do, what authority you have and where to go if you need something approved requiring more authority. This is what is supposed to keep them, the federal employees out of trouble. Particularly in an agency that the public relies on for detailed information. 

Additionally, most things that are requested, the low-level workers need to gain approval from people with greater authority. Nothing gets approved without someone else reviewing the entire package to make sure all the “i’s” are dotted with the right size dots. The bigger the approval or more authority sought, the higher up it goes to get approval. 

There are only two options here, if it is true what Learner said that senior officials did not know about the targeting, then 1. They should be fired and fined and jailed, just as any American is for dealing wrongly with the federal government; or 2. They should be fired, fined for negligence on the job. (Not sure I would jail someone for negligence, which is like incompetence, perhaps they simply did not know they were incompetent? In that case it may not be completely their fault.)

The damage done to the IRS and the country because of their actions is enormous. It used to be that you could trust the people who worked for the government, maybe not the politicians, but the employees could be trusted, not any more. For the IRS to have such a monumental breach of trust, they may just as well close it down, and start over. It seems they forgot that liberty is based on trust.

However someone will still be required to collect the taxes – getting rid of the IRS as many are calling for does not get rid of the need for people to be trusted to properly collect the taxes due; but at times getting rid of a federal agency and thinning the ranks, is a very good thing, that we need more of in our country. 

Maybe a flat tax would do much to solve this problem and as Steve Forbes says the tax return should fit on a post card. It would certainly take fewer employees to process a post card than the many multi-page returns we file now. What do you think – should the IRS be abolished?

Topics: IRS, IRS Scandal, IRS Administrators, conservative political groups

You would think that two metropolitan cities only 92 miles apart are close enough to be almost sister cities and what happens in one would almost insure that the same thing would happen in the other. Not so …  

Today the Chicago Purchasing Manager Index (CPMI) came out with a large jump from 49.9 to 58.7 – a reading above 50 indicates expansion. At the same time, 92 miles to the north, the Milwaukee Purchasing Managers Index (MPMI) came out with a larger than expected drop – the index fell to 40.7 down from its reading in April of 48.8. This sure adds some volatility to the markets as well as uncertainty to the area.

Chicago is basically saying we are doing well and actually expanding; while Milwaukee is saying just the opposite, we are hurting and contracting. The indexes are comprised of production, new orders, and order backlogs from surveys of many manufacturing industries and companies. 

All of this comes as the Commerce Department reported that household purchases declined 0.2% in April after a 0.1% rise in March. This slowing of consumer spending will ultimately hurt if it continues through the summer months. The countered by the consumer-sentiment index rose in May to 84.5 the highest level since July of 2007, just before the meltdown. This was a huge jump from April’s reading of 76.4. 

This combined with the housing numbers from Case Shiller’ Home Price Indices for the first quarter of 2013 it is a wow – the numbers were strong with ten months of consecutive gains. The National Association of Home Builders reported that their builders confidence rose in May as well all showing the economy gaining steam. 

What do these indicators mean … perhaps that for some folks things are recovering and gaining steam, while others are still lagging, or perhaps retreating? This sort of confusion adds a lot of volatility in the market, as it considers these indices in its movements. The indexes are a little like the liars club – no one knows who to believe as they try to describe their view of the economy. Economic strength in any sector is welcomed good news for all of the country, as it all helps. Now if we can get the federal government to stop borrowing so much money and expand their tax and spend policies, maybe we can get some real growth and more economic stability.

Topics: Metropolitan cities, Miles, Chicago, Milwaukee, Purchasing Managers Index