Technorati Tags: Euro Crisis, European Union, Financial Ideas, Investing strategy, Retirement

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I assume you’re at least a bit read up on how conversions work or you wouldn’t have this question, but since I really shouldn’t assume anything, a brief review is in order first. If you don’t think you need the review and just want the question answered, skip down seven paragraphs….at your own risk, of course. ?.

Prior to 2010, converting from a Traditional IRA or an old company 401(k) was severely limited, in that if you, or you and your spouse, depending on how you file your taxes, made anything in excess of $100,000, conversion was not allowed. As of 2010, that restriction has been removed, so that effectively means that anyone can convert. The next question is whether or not converting makes sense for you. In 2010, as it has always been since the creation of the Roth IRA, you are allowed to make a conversion from your Traditional IRA….if you are willing to claim all of those converted dollars as additional income. That’s not different this year. What is different is that, for tax year 2010, while you convert the money and start growing it tax-free, you don’t have to claim the income right away. Wow, that’s huge! (Okay, it’s huge to me, but that’s because I’ve done the long-term math).

Don’t get too excited, because you DO have to claim the income though. The cool thing is that you get to wait until tax year 2011, due in April 2012, when you have to claim ½ of the total converted amount. Then, you get to wait until tax year 2012, due in April 2013, when you have to claim the other ½ of the total, even though you can have the benefit NOW. That can significantly reduce the amount of tax you have to pay each year, depending on your other possible sources of income and deductions, and it’s (as of this writing) NOT TRUE for any year after 2010. Okay, now that we’ve gotten past the cool things that current law allows, let’s figure out if you can and should finance the tax payment from your Traditional IRA or 401K.

The simple answers are that yes, you can, although, no, you probably shouldn’t. Here’s why. If you finance the tax payment, what you’re really doing is taking money from your existing retirement savings to pay a current bill, and that should raise a big red flag for you. Unless you really have no other choice due to economic hardships, paying any current bill from retirement funds means you probably can’t afford it and need to take a hard look at your budget. There are a few rare exceptions, but they go beyond this topic by a long way.

In the final examination of any conversion, you have three options:

1) Leave the Traditional IRA alone. This means no conversion taxes, and IF personal tax rates don’t go up very much, the maximum possible distribution in the future.

2) Convert the Traditional IRA to a Roth IRA, and as the subject of this article addresses, “finance” the tax payment by taking a distribution of the account value. Yes, this does pay your taxes, but it does two very negative things. It reduces the amount you have saved for retirement, which reduces the amount of compounding that will happen between now and retirement, no matter how old you are. It can also mean that you will have to pay a penalty of 10% on TOP of the taxes, if you’re taking this distribution prior to being age 59 ½. Oh yeah, and it also means that you give up most of the conversion benefit because by taking the distribution now, those taxes and penalties are added to 2010, which hopefully is NOT your objective.

3) Convert the Traditional IRA to a Roth IRA, and pay the taxes from outside the IRA. This is almost always the best option, because your retirement account balance doesn’t get reduced by a distribution (there being no distribution), and THAT means no penalty no matter your age. So, why not pick choice 3? Well, if taxes don’t go up, then the tax advantage of having the money to withdraw tax-free is probably reduced, plus you’re out the money from some other source now. What makes that risk considerably less is the possible gain you get in 2010 from being able to defer those taxes a few years. This is a pretty complicated topic for most of us, but fortunately I have a tool that can create personalized answers for you.

If you’re serious about considering this, and would like to know specific details about what you should consider doing, call me. Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Email me: John@FinancialIdeasBlog.com

Technorati Tags: Convert My IRA, federal, IRA, IRA Conversion, Roth IRA

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You should know that generally speaking I think that starting a small business is a great thing.  After all, this country was founded by entrepreneurs running their own printing presses or stables or whatever, and now only about 2% of Americans have their own businesses.  Most of us think quite wrongly that we have no choice but to work for “the man”, but guess what?  “The man” is just one of us who has already figured it out.

While there are distinct advantages to being a W-2 employee instead of being a 1099 contractor or your own boss, for many people it’s just not the fulfillment or the freedom that they were looking for.

Okay, with that disclaimer out of the way, the answer to the question in the first paragraph might be one of the following:

1. Like in the disclaimer, I just want to be my own boss and be in charge of my own day.   Nobody but me depends on me, so it’s okay for me to get this figured out.
2. I have a family, but neither I nor my spouse/significant other is happy in the corporate world.  So, we’ve agreed that I’m going to take a few years to make it work, and once I’ve made it happen (whatever it is), then he/she can take leave to make a go of it too, either in what I’m doing or in something else they’d prefer.
3. I’m the stay-at-home part of the couple, and the kids (or cats or dogs) are settled down a bit or even grown, and now I’d like to do something I’ve always wanted to do, like sell flowers or carve boats or whatever it is I love.

If your answer is number one, then we need to talk, because it’s very important to do all the critical thinking and due diligence in order to make it work and not have you get burned.  I certainly wouldn’t want to see you soured on the idea when it’s something your soul tells you is right for you.  You need to have the right long-term strategies and the right expectations, and you need to have enough money put aside to dedicate to doing this thing right.

If you’re more like number two, then all the ideas above still apply, but you also have to have the proper plans in place to take care of your loved ones, and you need to have protection in place in case something totally unexpected happens, the protection that you might be giving up by going out on your own.

Then, if you find yourself most like number three, all of the above may still apply, but it’s likely that you have a lot more flexibility in making this work in a particular time frame.  Even in that case, you still want to make sure the business is protected and your family interests are kept separate.

Now, in all cases including those above and any others you might feel are appropriate, you really need to know how two big things can benefit you.  First, how you can turn your efforts into rewards in the tax world, and there are many possibilities for that, and second, how you can benefit and attract employees if you have them, while also benefiting yourself.

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

John@financialideasblog.com

Technorati Tags: Small Business

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Back up...What did you say?!?

As in, United States Department of Agriculture?
We’ve heard of USDA Prime Steaks, but USDA Sub-Prime Loans?
What are you talking about?

We’re talking about a previously almost unknown and little-used program founded in 1949 to encourage the development and sales of homes in mostly rural parts of the country by, see if this sounds familiar, not requiring any down payment on the loan.

Just like the “low-doc” and “no-doc” and “interest only” loans of the mid-2000s, over which we still have a major hangover and which have certainly contributed to the record number of foreclosures we’re seeing, any loan which requires no down payment means nothing at risk for the borrower except the possibility of bankruptcy or having a foreclosure on their record, and lots of people don’t know how bad those can be unless they’ve been through it.

When the program was first founded it made a lot of sense, but even in the current market, where lots of plans to increase business by not requiring down payments has all but completely blown up in the past two years, this program was bound to be discovered and amplified in a way that was never intended, so that since we began the financial crisis which seems to be trying to end, the program has attracted interest way beyond what it ever had before.  Through September of this year, we’re looking at almost four times the number of USDA-guaranteed loans than were approved for all of 2007.

What does all of this boil down to for us?

DON’T DO IT!

Yes, I know, if you live in an expensive part of the country it takes forever to save up a down payment.

If you go bankrupt, it takes ten years before that’s no longer on your record, too.

That’s all you need to know about USDA loans.!.

Instead, decide right now to live within your means, which includes saving and investing 20% of your gross income in a combination of your 401K and other market investments, some of which might eventually be in real estate investments if they are appropriate for you.

If your means aren’t enough, you can talk to me to figure out what you might do to increase them, but whatever you do, please be patient.  Good investing is a lot more like watching paint dry than winning at the roulette table.

Too bad that doesn’t make for a very good movie!

To get in touch with me make an appointment @ http://www.whattoinvestinnow.com

Technorati Tags: Debt consolidation, Dept of Agriculture, How to Invest Stock, Interest Only, Prime Loans, Rule of 72, rule of 72, Sub Prime Loans, USDA, young investors

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The numbers are sobering. Over the past year, the level of bank reserves has soared more than tenfold, to $830 billion, and the total amount of credit the Fed has extended to the economy has doubled, to more than $1.6 trillion. Furthermore, the government is projecting that this year’s fiscal deficit will top $1 trillion, the highest level relative to gross domestic product since World War II.

For anyone who has studied monetary theory, those numbers sound ominous. There’s no doubt that inflation is caused by too much money chasing too few goods, and the Fed has certainly created a ton of money.

But look more closely and you’ll find that the situation isn’t as dire as it seems. Monetary theory teaches that inflation is caused not only by an increase in the supply of money, but also by an increase in the supply of money that overwhelms demand. The financial crisis, however, has led to unprecedented demand on the part of banks to pump up their reserves. As long as the Fed is responding to demand, an increase in the money supply is not inflationary.

Plus, when we examine the changes in the amount of money in circulation, the numbers are much less daunting. The actual amount of currency outstanding — those Federal Reserve notes that we all carry in our wallets — has increased by only 7% over the past year. And M2, a measure of the money supply that includes bank deposits as well as money-market mutual funds, has increased by 11%. Much of that came after the Treasury and the Federal Deposit Insurance Corp. guaranteed assets in money-market funds last September and expanded deposit-insurance limits for banks. Bottom line: The Fed’s massive infusion of money was a response to the tremendous increase in demand for liquidity by both banks and the public.

Warning signals. Although deflation is in the headlines today, the Fed has to be alert to inflationary pressures in the future. The value of the dollar, the price of gold and, most important, commodity prices have historically been early signals of inflationary pressures. Commodity prices — particularly oil prices — are depressed now due to the worldwide recession. But traders expect the price of oil to top $60 a barrel by the end of 2010. So once confidence returns, the Fed must act to withdraw excess liquidity and raise interest rates.

Those large projected federal deficits are manageable for now. As the economy recovers, they should be reduced by increasing tax revenues and the winding down of support programs, such as unemployment insurance. The federal government’s debt-to-GDP ratio is now about 70%, not much different than the postÐWorld War II average.

Japan offers a good example of how much debt a developed country can handle without succumbing to inflation. Over the past ten years, Japan has doubled its debt-to-GDP ratio, to 180%, more than twice the average of other developed countries. Nevertheless, by reining in its money supply, Japan has not only avoided inflation but has actually experienced deflation. And the Japanese yen has been the world’s strongest currency over the past decade.

Stable prices. All this doesn’t mean that reckless government spending can’t cause inflation. With Zimbabwe’s President Robert Mugabe printing money to pay his supporters, there’s no doubt that such spending is the cause of his country’s spectacular hyperinflation.

Nevertheless, although President Obama’s stimulus package greatly increases the near-term deficit, the data indicate that developed countries with responsible monetary authorities can accommodate liquidity shocks and absorb debt without yielding to inflation. Current policies won’t spark inflation as long as policymakers keep their sights firmly fixed on their stated long-term goal of price stability.

By Jeremy J. Siegel
From Kiplinger’s Personal Finance magazine, 2009

http://whattoinvestinnow.com

Technorati Tags: Financial Ideas, Inflation, Invest Stock, Rule of 72, What to Invest In

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