Media such as TV, radio, magazines, and newspaper makes money by reporting bad news. We have dedicated news TV channels such as CNN, CNBC, MSNBC, and Fox News that makes more money when more people watch them and reporting bad news makes good money. Economic data such as unemployment data and housing starts are very disturbing. I think that we can correlate any speech on the economy from President Obama, Treasury Secretary Geitner, or Federal Reserve Chairman Bernanke with a drop in the stock market. Perhaps they should change topics to the Weather or Sports.
We actually had some good data that was not given much notice:
* January retail sales were unexpectedly positive
* January index of leading economic indicators was unexpectedly positive
* January home refinancing rate was higher than expected
* January home affordability index has improved making it possible for many people to become first time home owners.
Why would we have any positive news? Money is going into the economy from such things as people who are refinancing their mortgage saving money, Social Security recipients got a 5.8% pay increase, and lower gas prices.Recent actions by the government are very positive. The actions by the Federal Reserve to increase consumer credit is critical for large dollar purchases. All politics aside, the stimulus package is positive on almost all fronts and while the government officials on the federal level were giving it bad reviews almost all state and local government officials were thankful to have funds to meet commitments. We do need money for things like schools and unemployment benefits.
One major issue remains, underwater or negative equity mortgages on homes. Historically, homes appreciated at a 4-5% annual rate. So when home prices were run up at a much higher rate, in parts of the country, and then people were given a 2nd loan up to 125% of the home value it created a very speculative bubble. The average home price in these areas of the country has further to decline to get back to levels expected by projecting historic values. This is the very difficult issue to be solved by the Treasury Department and TARP. A method that was used in the 1980's, during the Savings and Loan debacle, the government took over some banks for a short time. I recently heard Bill Seidman, FDIC Chairman during this period, discuss this on CNBC. In essence, they were nationalized for a short time like is being debated now. The government did the difficult work of removing, repackaging, & repricing the toxic assets within bank. When a bank is taken over by the government, the investors lose money. The depositors are taken care of according to the FDIC rules. What this means is that investing in bank stocks, especially Bank of America and Citigroup, should be avoided until TARP actions are known.
Smile, enjoy your family and the important things of life. A steady diet of bad news, especially during meals, is bad for your health.
Sunday, February 22, 2009
Monday, February 16, 2009
IRA Terms
It is important to know the lingo when involved with an Individual Retirement Account, IRA.
Here's the plain-English guide to some of the terms you'll likely encounter as you set up and manage your account.
1. Adjusted gross income, or AGI -- Used to calculate federal income tax, your AGI includes all the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses, interest penalty on early withdrawal of bank CD certificates and payments made to retirement plans such as SEP and SIMPLE IRAs.
2. Contribution -- IRA contributions are limited to $5,000 for the 2008 tax year if you're younger than 50. If you're 50 or older, you can contribute as much as $6,000 for the 2008 tax year. The limits are the same for 2009. Contributions are classified as either tax deductible or nondeductible.
3. Deductible or nondeductible -- Contributions to a traditional IRA are tax-deductible if you are not covered by your employer's retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible.
4. Education IRA -- Renamed Coverdell education savings account, in honor of the late Sen. Paul Coverdell, this is not strictly an IRA, since it doesn't finance retirement. Instead, you can make annual contributions, of up to $2,000 per child, to an account that's exclusively for helping to pay education costs. The money you put aside in a Coverdell account doesn't count against the annual retirement IRA contribution limits for you or your child. You can't deduct the Coverdell contributions from your income taxes, but earnings are tax-deferred and qualified withdrawals are tax-free.
5. Individual retirement account, or IRA -- IRAs are retirement accounts with tax advantages. You may contribute up to $5,000 in 2008. Or, if you're 50 or older, you can put aside up to $6,000 for that tax year. But your contributions can't exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59½. Take money out before then and you will usually get hit with a 10-percent penalty unless you meet certain specified requirements.
6. Modified adjusted gross income, or MAGI -- For the purpose of determining your contribution limit, some people use their MAGI. Some modifiers include foreign-earned income, housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.
7. Required minimum distribution -- Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70½. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.
8. Rollover -- This is the term used when transferring assets from one tax-deferred retirement plan to another.
9. Roth IRA -- The most notable thing about a Roth is withdrawals are tax-free if the account has been open for at least five years and you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax-deductible. You can withdraw your contributions anytime you want, no penalty or taxes. You can also withdraw earnings for a qualifying event if the account is at least 5 years old. Qualifying events include: death or disability of the account holder and a first-home purchase.
10. Tax and penalty-free withdrawals -- You can take money out of your IRA tax-free and penalty-free as long as you repay the full amount within 60 days, but may only do it once in a 12-month period. The withdrawal proviso was intended to make IRAs portable.
Here's the plain-English guide to some of the terms you'll likely encounter as you set up and manage your account.
1. Adjusted gross income, or AGI -- Used to calculate federal income tax, your AGI includes all the income you received over the course of the year, such as wages, interest, dividends and capital gains, minus things such as business expenses, contributions to a qualified IRA, moving expenses, alimony and capital losses, interest penalty on early withdrawal of bank CD certificates and payments made to retirement plans such as SEP and SIMPLE IRAs.
2. Contribution -- IRA contributions are limited to $5,000 for the 2008 tax year if you're younger than 50. If you're 50 or older, you can contribute as much as $6,000 for the 2008 tax year. The limits are the same for 2009. Contributions are classified as either tax deductible or nondeductible.
3. Deductible or nondeductible -- Contributions to a traditional IRA are tax-deductible if you are not covered by your employer's retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible.
4. Education IRA -- Renamed Coverdell education savings account, in honor of the late Sen. Paul Coverdell, this is not strictly an IRA, since it doesn't finance retirement. Instead, you can make annual contributions, of up to $2,000 per child, to an account that's exclusively for helping to pay education costs. The money you put aside in a Coverdell account doesn't count against the annual retirement IRA contribution limits for you or your child. You can't deduct the Coverdell contributions from your income taxes, but earnings are tax-deferred and qualified withdrawals are tax-free.
5. Individual retirement account, or IRA -- IRAs are retirement accounts with tax advantages. You may contribute up to $5,000 in 2008. Or, if you're 50 or older, you can put aside up to $6,000 for that tax year. But your contributions can't exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59½. Take money out before then and you will usually get hit with a 10-percent penalty unless you meet certain specified requirements.
6. Modified adjusted gross income, or MAGI -- For the purpose of determining your contribution limit, some people use their MAGI. Some modifiers include foreign-earned income, housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.
7. Required minimum distribution -- Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70½. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.
8. Rollover -- This is the term used when transferring assets from one tax-deferred retirement plan to another.
9. Roth IRA -- The most notable thing about a Roth is withdrawals are tax-free if the account has been open for at least five years and you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax-deductible. You can withdraw your contributions anytime you want, no penalty or taxes. You can also withdraw earnings for a qualifying event if the account is at least 5 years old. Qualifying events include: death or disability of the account holder and a first-home purchase.
10. Tax and penalty-free withdrawals -- You can take money out of your IRA tax-free and penalty-free as long as you repay the full amount within 60 days, but may only do it once in a 12-month period. The withdrawal proviso was intended to make IRAs portable.
Retirement, 20- and 30-Somethings
The question is what should someone who is in their 20's and 30's do to prepare for retirement? Here is a common sense approach.
Start Early
When debt from student loans and credit cards is hanging over your head, it’s understandable that saving for retirement often gets put on the back burner. But failing to do so will hurt you significantly come retirement. According to human-resources consulting company Hewitt Associates, close to one-third of 30- to 39-year-olds don’t even have a 401(k) yet. At this age, says T. Rowe's Ritter, people should be stashing at least 10% to 15% of their annual salary in a retirement plan to maintain their current lifestyle when it comes time to stop working.
Get All of Your Employer’s Match
Most employers match 50 cents for every dollar you invest up to 6% of your pay, according to Hewitt Associates. Fail to invest enough to get your employer's full company match and you'll miss out on free money. Even if your employer stops its matching program it's still important to save as much as you can. When the recession ends, it’s possible that these companies will start offering a match again.
Don’t Try to Time the Market
One of the biggest mistakes investors in their 20s and 30s could make is to pull all their money out of the market, and then try to time when the market will rebound so they can put it back in. Historically, some of the biggest gains in the stock market have occurred in the months following significant losses. If your money isn’t in the market when that occurs, you could miss out on recouping your losses -- and possibly earning some sizable gains. Keep in mind that the 10% you’re putting into your 401(k) today is buying more shares than it would have bought a year ago since shares are so cheap. Plus, those contributions will have a longer time to grow and multiply.
Pick the Proper Risk Level
One of the most basic rules of investing is: The longer your time horizon, the more risk you can take. For those in their 20s and 30s, that means investing a majority, or all, of your portfolio in equities. Ideally, the mix should include about 60% in large-cap stocks, 20% in medium- and small-caps and 20% in international companies. If you don't feel comfortable picking your own holdings, try a target-date fund. These mutual funds are specific to the date you plan to retire and become more conservative as the investor nears retirement.
Put Extra Cash in a Roth
Already put enough of your salary in your 401(k) to meet your employer's match? Then consider stashing some money in a Roth 401(k) or Roth IRA. While you won't get an upfront tax deduction, the account does grow tax free. Plus, any withdrawals taken during retirement aren't subject to income tax, provided you're at least 59 1/2 and you've held the account for five years or more.
Start Early
When debt from student loans and credit cards is hanging over your head, it’s understandable that saving for retirement often gets put on the back burner. But failing to do so will hurt you significantly come retirement. According to human-resources consulting company Hewitt Associates, close to one-third of 30- to 39-year-olds don’t even have a 401(k) yet. At this age, says T. Rowe's Ritter, people should be stashing at least 10% to 15% of their annual salary in a retirement plan to maintain their current lifestyle when it comes time to stop working.
Get All of Your Employer’s Match
Most employers match 50 cents for every dollar you invest up to 6% of your pay, according to Hewitt Associates. Fail to invest enough to get your employer's full company match and you'll miss out on free money. Even if your employer stops its matching program it's still important to save as much as you can. When the recession ends, it’s possible that these companies will start offering a match again.
Don’t Try to Time the Market
One of the biggest mistakes investors in their 20s and 30s could make is to pull all their money out of the market, and then try to time when the market will rebound so they can put it back in. Historically, some of the biggest gains in the stock market have occurred in the months following significant losses. If your money isn’t in the market when that occurs, you could miss out on recouping your losses -- and possibly earning some sizable gains. Keep in mind that the 10% you’re putting into your 401(k) today is buying more shares than it would have bought a year ago since shares are so cheap. Plus, those contributions will have a longer time to grow and multiply.
Pick the Proper Risk Level
One of the most basic rules of investing is: The longer your time horizon, the more risk you can take. For those in their 20s and 30s, that means investing a majority, or all, of your portfolio in equities. Ideally, the mix should include about 60% in large-cap stocks, 20% in medium- and small-caps and 20% in international companies. If you don't feel comfortable picking your own holdings, try a target-date fund. These mutual funds are specific to the date you plan to retire and become more conservative as the investor nears retirement.
Put Extra Cash in a Roth
Already put enough of your salary in your 401(k) to meet your employer's match? Then consider stashing some money in a Roth 401(k) or Roth IRA. While you won't get an upfront tax deduction, the account does grow tax free. Plus, any withdrawals taken during retirement aren't subject to income tax, provided you're at least 59 1/2 and you've held the account for five years or more.
Saturday, February 14, 2009
Stimulus Bill - Change Happened
The President will sign the Stimulus Bill on Monday 2/16/2009. Many Personal Finance rules will change on Monday and it is important that you know the new rules. Many aspects of this bill are very good and understanding its impact is very important.
Personal Finance Tax Changes
* $400 payroll tax credit for workers earning up to $75,000; married couples filing jointly get $800 for income up to $150,000
* Increase in earned income tax credit for working families with more than three children
* Increased eligibility for refundable child tax credit, with all income over $3000 qualifying
* Tax credit of up to $2500 for tuition and college expenses
* Computers and computer technology will qualify for inclusion in tax-advantaged savings plans * A tax credit for first-time homebuyers increases from $7500 to $8000, and will not have to be repaid
* Taxpayers earning less than $125,000 can deduct sales and excise taxes paid on new cars
* $2400 of unemployment benefits will not be subject to federal income tax
* Middle-income taxpayers get an exemption from the alternative minimum tax of $46,700 for an individual and $70,950 for a married couple $69,759
Bottom Line: More money will be coming your way this year. Incentives are in place for cars, first time homebuyers, and education. The bill is pro family. The impact of these changes can be more precisely computed once the specifics are known.
Energy Tax Credits
* 30% cap on tax credit for energy efficiency purchases by homeowners, up to $1500 per residence
* Credit for purchase of residential solar, geothermal, wind and fuel cells
Bottom Line: Before purchasing any major appliance for your home, you need to determine if the appliance qualifies for the energy efficiency tax credit. You can get a tax credit for alternative energy options.
Additional Income
* One-time payment of $250 for retirees, disabled people, SSI recipients, railroad retirees and disabled veterans
* One-time refundable tax credit of $250 for some government retirees not eligible for social security benefits
Bottom Line: Retirees and people who need a little more will get a little more.
Remember a tax credit reduces the amount of taxes owed on a dollar for dollar basis. It is far superior to a tax deduction.
What's missing? Incentives aimed at reducing mortgage rates is missing. Since it is missing, it means that now is a good time to refinance your mortgage if you have a mortgage rate over 5.5%. It is very easy to get a 5.0% rate on a 30 year loan and a 4.75% rate on a 15 year loan.
Personal Finance Tax Changes
* $400 payroll tax credit for workers earning up to $75,000; married couples filing jointly get $800 for income up to $150,000
* Increase in earned income tax credit for working families with more than three children
* Increased eligibility for refundable child tax credit, with all income over $3000 qualifying
* Tax credit of up to $2500 for tuition and college expenses
* Computers and computer technology will qualify for inclusion in tax-advantaged savings plans * A tax credit for first-time homebuyers increases from $7500 to $8000, and will not have to be repaid
* Taxpayers earning less than $125,000 can deduct sales and excise taxes paid on new cars
* $2400 of unemployment benefits will not be subject to federal income tax
* Middle-income taxpayers get an exemption from the alternative minimum tax of $46,700 for an individual and $70,950 for a married couple $69,759
Bottom Line: More money will be coming your way this year. Incentives are in place for cars, first time homebuyers, and education. The bill is pro family. The impact of these changes can be more precisely computed once the specifics are known.
Energy Tax Credits
* 30% cap on tax credit for energy efficiency purchases by homeowners, up to $1500 per residence
* Credit for purchase of residential solar, geothermal, wind and fuel cells
Bottom Line: Before purchasing any major appliance for your home, you need to determine if the appliance qualifies for the energy efficiency tax credit. You can get a tax credit for alternative energy options.
Additional Income
* One-time payment of $250 for retirees, disabled people, SSI recipients, railroad retirees and disabled veterans
* One-time refundable tax credit of $250 for some government retirees not eligible for social security benefits
Bottom Line: Retirees and people who need a little more will get a little more.
Remember a tax credit reduces the amount of taxes owed on a dollar for dollar basis. It is far superior to a tax deduction.
What's missing? Incentives aimed at reducing mortgage rates is missing. Since it is missing, it means that now is a good time to refinance your mortgage if you have a mortgage rate over 5.5%. It is very easy to get a 5.0% rate on a 30 year loan and a 4.75% rate on a 15 year loan.
Tuesday, February 10, 2009
Federal Reserve To The Rescue - TALF
Today the government announced the game plan for the economy. The total amount being thrown around was a staggering $3 Trillion. About $1 Trillion each for Treasury, Federal Reserve, and Legislative branch.
Treasury: Separately, Treasury Secretary Timothy Geithner outlined plans for spending much of the $350 billion in financial bailout money recently cleared by Congress. (TARP)
Federal Reserve: It announced it would commit up to $1 trillion to make loans more widely available to consumers. (TALF)
Legislative: The vote was 61-37 in the Senate to pass the stimulus, with moderate Republican Sens. Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania joining Democrats in support. The total was $830 Billion.
Treasury: One element of the administration's approach calls for using as much as $100 billion in federal bailout funds to give banks, hedge funds or other investors the incentive to purchase so-called toxic assets carried on the books of other financial institutions. The goal is to return struggling banks to health so they can resume making loans, and an administration fact sheet said the amount of government and private funds combined will be "on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion."
Federal Reserve: The Federal Reserve announced it would commit up to $1 trillion to purchase bonds or other assets backed by consumer loans. The Treasury will guarantee a portion of the Fed investment by putting up $100 billion, an increase from a $20 billion commitment that Bush administration had announced.
Of all of the news, having the Fed announce a commitment of $1 Trillion in the TALF program to back consumer loans was the best. This will have the greatest impact in creating growth. While the news from the Treasury and the Legislative branch makes good headlines, it will not be as effective.
The stock market had a big drop today which was supposedly related to a lack of clarity by the Treasury. While this makes headlines and lots of press coverage it makes little difference to a long term investor.
Treasury: Separately, Treasury Secretary Timothy Geithner outlined plans for spending much of the $350 billion in financial bailout money recently cleared by Congress. (TARP)
Federal Reserve: It announced it would commit up to $1 trillion to make loans more widely available to consumers. (TALF)
Legislative: The vote was 61-37 in the Senate to pass the stimulus, with moderate Republican Sens. Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania joining Democrats in support. The total was $830 Billion.
Treasury: One element of the administration's approach calls for using as much as $100 billion in federal bailout funds to give banks, hedge funds or other investors the incentive to purchase so-called toxic assets carried on the books of other financial institutions. The goal is to return struggling banks to health so they can resume making loans, and an administration fact sheet said the amount of government and private funds combined will be "on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion."
Federal Reserve: The Federal Reserve announced it would commit up to $1 trillion to purchase bonds or other assets backed by consumer loans. The Treasury will guarantee a portion of the Fed investment by putting up $100 billion, an increase from a $20 billion commitment that Bush administration had announced.
Of all of the news, having the Fed announce a commitment of $1 Trillion in the TALF program to back consumer loans was the best. This will have the greatest impact in creating growth. While the news from the Treasury and the Legislative branch makes good headlines, it will not be as effective.
The stock market had a big drop today which was supposedly related to a lack of clarity by the Treasury. While this makes headlines and lots of press coverage it makes little difference to a long term investor.
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