Personal Finance

Anyone have any thoughts on doing a Roth conversion given the rule changes that begin at the beginning of next year?

Most of the arguments for and against are standard fare (see this article for example), and it obviously depends on your personal financial situation… but are there any interesting or novel angles that have flavored your opinion on the matter?

The more novel things that I can think of…

  • Doing a conversion now, you fund current government spending. As they say, don’t encourage the politicians if you can help it…
  • It is generally better to avoid or postpone taxes as long as possible…
  • It is always possible that the government will change the rules later on. I only foresee this happening if the world (as we know it) is about to end, but something that should at least be acknowledged…

Those who argue that we will definitely see higher taxes in the future would be wise to think about that third point… if higher taxes are such a certainty, maybe you should also factor in a higher probability of the rules changing…

And something to think about from an investor and trader’s perspective… if conversions are popular enough it will definitely skew the gov’t tax revenues and allow for more manipulation of the information and reporting on the federal deficit. In the 90s the Clinton administration was able to claim a budget surplus thanks to the re-characterization rules being introduced… how will the politicians misuse the opportunity this time? It will certainly be fodder for the political pundits, as well as the blindly bullish market commentators.

Just a friendly reminder now that it’s past April 15… you are required by the IRS to keep your tax returns for 3 years from the filing date (April 15th of the next year or your actual filing date, whichever is later).

So if you don’t need to keep your tax returns for other reasons, you can safely shred or destroy your tax returns from tax year 2005 and earlier.

I thought I’d take a look at the housing data for my area… This is from OFHEO data, so it’s not necessarily realistic, but it should give us a flavor of what has been happening.


House sale prices in Durham are definitely falling, and are actually falling faster than in nearby Raleigh/Cary. This chart looks a little scary, until we include other cities into the mix.

As I’ve done in the past, let’s now compare the Durham market to San Diego and Miami…


I think the home owners in Miami and San Diego would love to have the 1.5% growth that Durham has been experiencing. (FYI, the 1.5% changes is the annualized change.)

While house prices may fluctuate, the value of your house does not. As long as you don’t borrow money based on the price fluctuations (and get caught on the wrong side right now), the changes in prices shouldn’t really mean that much to you.

I’m sure you’ve heard about the new nominee for Treasury Secretary, Timothy Geithner and his apparent IRS oversights… here are a few choice quotes from a WSJ op-ed:

Did Geithner have an incompetent accountant? Maybe. A Senate Finance Committee statement reports that he prepared his own returns for 2000, 2001, 2002 and 2005.

We’re tempted to say America needs a Treasury secretary who is smart enough to figure out his own taxes. But such a cheap shot would be beneath us. Instead, we are going to make a serious point: America needs a tax code simple enough for the Treasury secretary to figure out.

Then there’s this explanation of how the taxes got paid (or not):

The IRS audited Geithner in 2006 and discovered the problem for his 2003 and 2004 returns. Geithner paid just under $17,000 at the time, and the IRS waived any possible penalties.

So far, so good. But then there’s this: “A three-year statute of limitations had precluded the agency from auditing the 2001 and 2002 tax returns, a committee aide said.”

So, what can we learn from Geithner’s little tax trouble?

The guy is not as good at finances as he should be. But then again, apparently we don’t really care about our Treasury Department keeping the books straight, so maybe this isn’t such a big deal.

The other thing worth learning — the IRS is serious about it’s 3 year statute of limitations on audits. So, you really can shred all those old tax returns and forget about it… at least until you are nominated to a top-ranking position in the federal government.


Note: The IRS actually has an exception to the 3 year rule for a “false or fraudulent” return. Unlike other tax law, the IRS actually has the burden of proving fraud before the fraud exception can be applied.

It’s worth doing a quick review of personal finance tools…? while it’s fun to talk about the macro-economy, sometimes we just need to make sure our own little micro-corner of our personal finances are under control too.? The established players in the space are our old Quicken and MS Money:

I personally have a love/hate relationship with Quicken.? It is some of the worst software I’ve used, especially with the 2008 version.? It’s so bad that I would have stopped using it if it weren’t so darn useful.? A while back, I went looking for alternatives to Quicken or Money…

The main drawback to almost all of these is that they are online/website solutions.? Can I trust my personal finances to some company’s website?? Beyond the usual paranoia of trusting other people, some of the marketing material leaves me a little curious how serious their security really is.

Anyone tried these out and have some feedback or suggestions?

At the end of last year I found myself banking at a new bank…  the interesting thing to consider is that I copied down the interest rates for my savings account at this bank at the time, which provides for a nice point of comparison.

Here is a quick table of the interest rates back then compared to today.  Mind you, this is only after 3 months time…

Balance Dec 2007 Feb 2008
Up to $1k 2.05% 1.26%
Up to $5k 3.11% 1.31%
Up to $10k 3.49% 1.76%
Up to $25k 3.63% 1.86%
Over $25k 4.26% 2.01%

I can only imagine how low rates are at the big retail banks.

The interest rates to be earned on cash have been cut in half in barely a quarter’s time.  I read in a news article today that the same bank has put thousands of HELOCs on hold (HELOC = home equity line of credit) due to fear of falling real estate values that back the credit. 

The flip side is that you can still get higher rates from the online money market accounts…  ING Direct (3.4%), HSBC Direct (3.55%).  They’re down significantly from previous rates (~5% for HSBC), but not quite as dramatically as retail banks.

And if you’re not too particular (or have complete faith in the FDIC insurance) you can also go to E*Trade for 4.1% rates.

FYI, MM rates on many banks seem to be heading down. NC SECU just changed their MM rate from 4.5% down to 4% even (on 9/20/2007), ING went from 4.5% down to 4.3% (sometime in Sept). Makes sense though, since the banks will need this extra capital as the foreclosures and credit crunch continues to play out and I’m sure the Fed’s dropping of the discount rate helped further justify this drop. I expect a further slide in the coming months ahead. On a positive note, MM funds like Vanguard’s VMMXX are still holding steady and unchanged, promising a returning 4.97% after expense ratio is accounted for…

Ok, so here’s another attempt at a discussion…? feel free to comment below or do your own post as a trackback to this one.

Almost all financial plans promote the concept of building a pool of “safe money” to cover emergencies and unexpected expenses.? This is certainly a good idea, though to think about it critically, we need to look at the real requirement behind the idea.? The idea isn’t just to have cash in a bank account, the point is to have immediate access to funds if/when you have unexpected situations crop up.

The traditional place for safe money would be a savings account or money market account.? Keeping this pool of money in such a safe place gives you many benefits — almost instant access, near zero chance of loss, etc.? You also have the benefit of knowing exactly how much you have available — maybe enough to cover expenses for 3 or 6 months were you to lose your job/income.

In many respects, you can consider your lines of credit (credit cards, home equity loans, etc.)? as part of your cash reserve.? You have nearly instant access to it — in some cases even quicker than getting money out of a money market account.? You have a near zero chance of losing the credit line — unless you sell your house (for HEL) or close your credit card account.? You also know how much you have available in the form of your credit limit (and your credit score can actually benefit from having a lot of unused credit available).? You can also potentially build a larger pool of safe money if you have good credit — in effect having a credit line that exceeds the same amount you can/would keep in cash.

So, allow me to posit a question — is there a real difference in keeping safe money in cash versus keeping the same amount in available credit?? (more…)

The British ONS (Office of National Statistics) has created and made public a Personal Inflation Calculator. As you would expect, it applies and compares the values you enter to the measured CPI in Great Britain, but it’s still pretty darn cool.

The ONS “is fighting back against accusations, fueled by newspaper campaigns, that its inflation index is inaccurate and underestimates the rate of inflation experienced by most people.”

Anyone want to take bets on how long it will take the BLS to create something like this too?

A long time ago, John pointed me to the ETF Investing Guide.? It was originall published at Tech Uncovered before the author founded Seeking Alpha…? but the guide was preserved and is now hosted on the new site.

The ETF Investing Guide provides a sound argument for a simple asset allocation strategy using index ETFs.? It goes into detail on why you should avoid full-service brokers, index mutual funds, and other mainstream financial services.? Ditch all that, and manage your investments using index ETFs, take advantage of tax-loss selling, and enjoy the ride.

While I would argue with a few of the author’s points (e.g., staying away from all actively managed funds), it is a good guide for those who want a low-maintenance investment plan and are happy to earn average returns.

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