Today marked the one-year anniversary of the collapse of Lehman Brothers and the collapse of the financial markets. Lehman Brothers was a company that the Federal Government allowed to fail without leaping to their rescue (as opposed to AIG and Citigroup). This is a decision that many historians will go back and review the ramifications of for a long period.
So much happened during this one year, the financial crisis was exacerbated by the collapse of Lehman Brothers, unemployment numbers went up to numbers we have not seen for years, home values continued their decline, credit and financing froze. Many Americans lost their confidence in the financial systems.
www.Smartmoney.com put a list of major key factors and measures of our economy today vs. a year ago. These factors highlight the impact of the financial crisis:
Unemployment rate
Aug. 2008: 6.1%
Aug. 2009: 9.7%
Source: Labor Department
People working part-time for economic reasons
Aug. 2008: 5.7 million
Aug. 2009: 9.1 million
Source: Labor Department
Dow Jones Industrial Average close
Sept. 12, 2008: 11,422
Sept. 11, 2009: 9,605
Price of gold
Sept. 12, 2008: $750.25 per ounce
Sept. 11, 2009: $1,006.40 per ounce
Consumer Confidence Index
Aug. 2008: 58.5
Aug. 2009: 54.1
Source: The Conference Board
President’s approval rating
Sept. 8-11, 2008: 31%
Sept. 5-8, 2009: 51%
Source: Gallup
Price of a gallon of gasoline
Sept. 15, 2008: $3.867
Sept. 7, 2009: $2.519
Source: Energy Department
Price of a gallon of milk
July 2008: $3.96
July 2009: $2.99
Source: Labor Department
Average price of a SanDisk 2-Gigabyte Secure Digital Card
Sept. 9, 2008: $13.10
Sept. 9, 2009: $11.38
Source: PriceGrabber.com
Manufacturer’s suggested retail price of a new Ford Focus
2009 model: $15,520 (up 7.8% from 2008 model)
2010 model: $15,995 (up 3.1% from 2009 model)
Source: Consumer Guide Automotive
S&P/Case-Shiller home price index for 20 U.S. metropolitan regions
June 2008: 167.69
June 2009: 141.31
Source: Standard & Poor’s
President Obama marked the anniversary by appearing in Wall Street touting today the lessons to be learned from Lehman and its aftermath. The President was reminding us that the measures taken by the Federal Government and Federal Reserve led to the stabilization of our economy. However, beware of the illusion and false sense of security. Let us not forget how we got here, and learn from our mistakes. These mistakes cost us as American Taxpayers billions of dollars.
The Fear and Greed are two emotions that drive most investors. A year ago, you could not get most sophisticated investors to stay in the stock market and invest in equities. Today with the stock markets at year to date highs, we should be careful from our greed sweeping us back in our old habits.
Monday, September 14, 2009
Sunday, September 6, 2009
SAVE MORE and set up an emergency fund:
Happy Labor Day Weekend everyone. In the spirit of the long holiday weekend, and the retail sales going on all weekend, I encourage you to save more. Pay yourself first, before going out this weekend and spending it all on the great sales out there.
President Obama announced this week that he would like us to save more, and so do I. The IRS will take certain steps effective immediately to make it easier for Americans to save more.
For years, studies told that our saving rate is virtually Zero. It is true; we spend what we don’t have. We live above our means, and are OK with spending using our credit cards, home equity loans, and even taking loans against our retirement plans if we are able to.
As Americans, who believe in the American Dream, we want it all and we want it now. This is what we call instant gratification. We have instant payday shops to get an advance on our paychecks, credit cards companies extend our credit card limits and increase it on a regular basis to amounts beyond our means, our home values (we thought) go only one way (WAY UP). Even our banks extended us home equity loans and lines of credit, interest only mortgages and several cash out refinance options.
Simply, frugality was out of style and saving for a rainy day was unnecessary.
For starter, we know that we need to save between 3-6 months worth of living expenses as an emergency fund. As financial planners for years, we told our clients that they could use their home equity lines of credit as their emergency fund. Wait a minute, now we have to adjust this theory, since most banks and mortgage companies are scaling back on their mortgage default exposure. These banks have reduced the home equity lines if not completely shut it down. This happened to me personally; I got a letter from my bank indicating that they believe my home value is much lower than it was few years back and I longer have access to my home equity line of credit. Now, I am saving for emergency out of necessity.
Currently, the saving rate is at 4%. This is great news we are saving more, but we should be saving at least 10% of our income. Cease the opportunity and don’t waste time, start saving now. You should start saving systematically by setting up a direct deposit from your checking account into a money market account. I know these accounts currently pay virtually no interest, but this will ensure, you won’t have to use your credit card and pay at least 13% in interest on the balance.
President Obama announced this week that he would like us to save more, and so do I. The IRS will take certain steps effective immediately to make it easier for Americans to save more.
For years, studies told that our saving rate is virtually Zero. It is true; we spend what we don’t have. We live above our means, and are OK with spending using our credit cards, home equity loans, and even taking loans against our retirement plans if we are able to.
As Americans, who believe in the American Dream, we want it all and we want it now. This is what we call instant gratification. We have instant payday shops to get an advance on our paychecks, credit cards companies extend our credit card limits and increase it on a regular basis to amounts beyond our means, our home values (we thought) go only one way (WAY UP). Even our banks extended us home equity loans and lines of credit, interest only mortgages and several cash out refinance options.
Simply, frugality was out of style and saving for a rainy day was unnecessary.
For starter, we know that we need to save between 3-6 months worth of living expenses as an emergency fund. As financial planners for years, we told our clients that they could use their home equity lines of credit as their emergency fund. Wait a minute, now we have to adjust this theory, since most banks and mortgage companies are scaling back on their mortgage default exposure. These banks have reduced the home equity lines if not completely shut it down. This happened to me personally; I got a letter from my bank indicating that they believe my home value is much lower than it was few years back and I longer have access to my home equity line of credit. Now, I am saving for emergency out of necessity.
Currently, the saving rate is at 4%. This is great news we are saving more, but we should be saving at least 10% of our income. Cease the opportunity and don’t waste time, start saving now. You should start saving systematically by setting up a direct deposit from your checking account into a money market account. I know these accounts currently pay virtually no interest, but this will ensure, you won’t have to use your credit card and pay at least 13% in interest on the balance.
Friday, September 4, 2009
Ready, Set; Convert into a Roth IRA post #2.
Conversions into Roth IRA’s in 2010 should be considered by all individuals unable to convert in 2009, note that partial conversions of your prior employer retirement plans into Roth IRA’s are also possible.
If you are a young professional with a long career ahead of you, chances are you are in a lower income tax bracket now than the tax rate during retirement. You probably also have significant tax deductions including mortgage interest as well as dependency exemptions.
If you are retiring in the next few years, or already retired with significant IRA and qualified retirement assets, it is not too late for you either. You can still consider the conversions for your later retirement stages as well as building an income tax free legacy to your future generations.
Planning points: your strategy should be to convert into the Roth IRA as much as possible without increasing your income tax rate. You should convert your retirement plan early in the year, and extend your tax return to October of 2011. This will allow you to monitor your converted Roth IRA since you can change your mind and re-characterize or undo your conversion. As always, when considering income tax decisions, reach out to your tax advisor to address your specific circumstances.
As we mentioned in my prior post http://thetaxchick.blogspot.com/2009/08/traditional-ira-conversions-into-roth.html#links that starting in 2010, the $100,000 adjusted gross income limitation will no longer apply. Anyone regardless of the income limit can convert into Roth IRA’s.
Five Reasons why you should convert into a Roth IRA:
1) Most retirement accounts are currently trading at lower values than few years ago given the current stock and bond market conditions. Yes, this statement still holds true even with the recent stock market uptick in 2009. Upon the conversions to Roth IRA, the IRS will tax you on the “lower” value of your IRA or retirement plan.
2) Suspension of the required minimum distributions at age 70 ½ provides you with a significant advantage and control over your tax situation now and in the future.
3) Income tax liability should be paid from outside funds (ie, non-IRA/ Retirement Plans), to ensure a successful conversion. Paying the income tax liability on the conversion will reduce your taxable estate and your estate tax liability as a result.
4) The IRS is allowing you to pay the taxes over the following two years, so your first tax bill will be due April 15, 2011 and the next one will be due April 15, 2012.
5) It’s better to die with a Roth IRA than with a traditional IRA…….Grim, but true. Your beneficiaries will also benefit from the income tax free distributions from your Roth IRA as opposed to paying the income tax at their ordinary income rates (up to 35%).
We can run all sort of fancy analysis and calculate the impact in the end on conversions to Roth IRA’s vs. keeping the IRA and other ERISA plans as is. In most circumstances, you come out ahead with the Roth IRA conversion. The factors to consider are income tax rates now vs. in the future, your growth rate on the account, your time horizon as well as the available funds to pay for the income tax.
You can convert the following accounts into a Roth IRA: Traditional IRA’s, 401(K) Plans starting in 2008, 403(B) Plans, Government plans also known as 457 Plans and Profit Sharing Pension Plans. So in general ERISA & Non ERISA plans can be converted directly into a Roth IRA. You can also convert Inherited Pension Plans into a Roth IRA, but not Inherited IRA’s. You also cannot convert Educational IRA known currently as Coverdell Savings Accounts.
If you are a young professional with a long career ahead of you, chances are you are in a lower income tax bracket now than the tax rate during retirement. You probably also have significant tax deductions including mortgage interest as well as dependency exemptions.
If you are retiring in the next few years, or already retired with significant IRA and qualified retirement assets, it is not too late for you either. You can still consider the conversions for your later retirement stages as well as building an income tax free legacy to your future generations.
Planning points: your strategy should be to convert into the Roth IRA as much as possible without increasing your income tax rate. You should convert your retirement plan early in the year, and extend your tax return to October of 2011. This will allow you to monitor your converted Roth IRA since you can change your mind and re-characterize or undo your conversion. As always, when considering income tax decisions, reach out to your tax advisor to address your specific circumstances.
As we mentioned in my prior post http://thetaxchick.blogspot.com/2009/08/traditional-ira-conversions-into-roth.html#links that starting in 2010, the $100,000 adjusted gross income limitation will no longer apply. Anyone regardless of the income limit can convert into Roth IRA’s.
Five Reasons why you should convert into a Roth IRA:
1) Most retirement accounts are currently trading at lower values than few years ago given the current stock and bond market conditions. Yes, this statement still holds true even with the recent stock market uptick in 2009. Upon the conversions to Roth IRA, the IRS will tax you on the “lower” value of your IRA or retirement plan.
2) Suspension of the required minimum distributions at age 70 ½ provides you with a significant advantage and control over your tax situation now and in the future.
3) Income tax liability should be paid from outside funds (ie, non-IRA/ Retirement Plans), to ensure a successful conversion. Paying the income tax liability on the conversion will reduce your taxable estate and your estate tax liability as a result.
4) The IRS is allowing you to pay the taxes over the following two years, so your first tax bill will be due April 15, 2011 and the next one will be due April 15, 2012.
5) It’s better to die with a Roth IRA than with a traditional IRA…….Grim, but true. Your beneficiaries will also benefit from the income tax free distributions from your Roth IRA as opposed to paying the income tax at their ordinary income rates (up to 35%).
We can run all sort of fancy analysis and calculate the impact in the end on conversions to Roth IRA’s vs. keeping the IRA and other ERISA plans as is. In most circumstances, you come out ahead with the Roth IRA conversion. The factors to consider are income tax rates now vs. in the future, your growth rate on the account, your time horizon as well as the available funds to pay for the income tax.
You can convert the following accounts into a Roth IRA: Traditional IRA’s, 401(K) Plans starting in 2008, 403(B) Plans, Government plans also known as 457 Plans and Profit Sharing Pension Plans. So in general ERISA & Non ERISA plans can be converted directly into a Roth IRA. You can also convert Inherited Pension Plans into a Roth IRA, but not Inherited IRA’s. You also cannot convert Educational IRA known currently as Coverdell Savings Accounts.
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