During the March 21 showing, there was a quote from Henry Paulson:
SEC. HENRY PAULSON: We place a high priority on the orderliness of our financial markets. Bear Stearns had a liquidity crisis and so we felt it was very important that this be resolved as a way to minimize impact on our economy.
And Gwen Ifill’s comment after:
MS. IFILL: These things often need translation, of course, and fortunately we have David Wessel here to do it for us. So should the average JoeTaxpayer, homeowner, you name it – should they be very afraid, David?
You can see the entire transcript if you wish, but I always appreciate a mention in the press or on TV. (Note, the transcript was removed)
Joe
{ }
There’s a recurring question regarding whether one should rollover a 401(k) from a previous employer to an IRA account (or to the new employer’s 401(k)) or leave it in the original account. One new variable that comes into play is the ability to convert one’s IRA to a Roth IRA, regardless of income, in 2010. How are the two related? When one converts from a regular IRA to a Roth, taxes (at your marginal rate) are due on a prorated basis on the pretax money within the IRA. For example, if you have a $100,000 balance, $20,000 of which is post tax deposits, 80% of any money converted is subject to tax. Now, this presents an interesting opportunity. Most 401(k) accounts will permit IRA money to be rolled back into the 401(k) regardless of the source. So in this example, you might consider rolling the $80,000 in pre tax money into the 401(k) before doing the conversion on the $20,000 post tax money. This two step will avoid any and all tax on that conversion. If you have a 401(k) account, you might consider leaving it for now, and converting it to an IRA only after that Roth conversion is made in 2010.
Joe
{ }
For my first post of this year I wrote an article titled, “Can you save too much, pre-tax?” This is a topic that comes up frequently as one decides whether to choose a Traditional (pre-tax) IRA vs a Roth IRA. I recently had some dialog with another blogger and it’s clear to me that the decision is not so clear cut. Ideally, one makes a deposit pre-tax and withdraws it at a lower rate some time later. But as Mark (the other blogger) reminds me, a Roth has many benefits that shouldn’t be ignored:
- You can withdraw the original deposits at any time with no tax or penalty, as I suggested in my Roth magic post.
- A Roth has no RMDs (required minimum distribution) requirement, which forces withdrawals when they may not be needed or wanted due to other considerations.
- The accounts pass through one’s estate with less impact to estate tax as the funds are denser, and received by the beneficiary with no income tax upon withdrawal.
I think for any retiree there is likely an ideal mix, so they might draw funds from their pre-tax accounts (IRA and 401(k)) and use Roth withdrawals to avoid getting sent into the next bracket or be subject to the Social Security Tax Trap. The issue today is that we can’t know that mix two or three years out, let alone 20 or 30. What I do know, and I hope Mark agrees, is that this decision follows the shape of the Laffer Curve. I know with certainty that 100% of one’s savings in pre-tax accounts misses the benefits I share above. 100% in Roth accounts will miss the benefit of the zero bracket I discussed at length in my article cited and linked above. I don’t know the ideal mix, but I’d suggest this: The lower your savings rate, the more you’ll see the benefit of pre-tax savings, a diligent saver may be best served by leaning toward the Roth savings. A Wall Street Journal article titled “A Cool Million No Longer Buys You a Luxe Retirement” helps back up my position as it states that only the richest 2% of Americans have saved more than $1 million. One would need to be in this exclusive group to even begin worrying about higher taxes on the their retirement savings. I hope to get some feedback, as others’ opinions always help me to see a different side of the issue.
Joe
{ }
In a number of posts, I’ve referenced asset allocation. This week, with the collapse of Bear Stearns, let me remind you that putting all your eggs in one basket is inviting a visit from the black swan. To make matters worse, employees tend to load up on their own company stock, having unconscionable percentages of their 401(k) funds invested in the stock. So for these people, on the same day they find themselves unemployed, their life savings has just been trashed.
I understand the urge to invest ‘in what you know’, as if one can really know every aspect of the company for which they work. I also know that many firms have stock purchase plans where you are permitted to buy company shares at a discount. Lastly, 401(k) matching funds are often deposited as shares of the company stock. Resist this urge, and reduce your risk. If you can’t afford to watch your company stock go right to zero, you have too much. We all should have learned from the tech bubble to limit shares in any one stock (or sector, for that matter) to a small percentage. For many, it’s too late, just make sure you are not next.
Joe
{ }
As illustrated in a beautiful New York Times graphic:
Note: Yesterday the Fed lowered the Fed Funds Rate a further .75% to 2.25% and the S&P rose to 1330.74 up 54.14.
Joe
{ }
