Wednesday, February 25, 2009
So say IRA and tax guru Ed Slott and other experts who've been thinking about ways to shelter as much of our collective $4.5 trillion Individual Retirement Account savings as possible from what may be higher taxes ahead. You can't cut a $1 trillion-plus federal budget deficit in half without squeezing somewhere, the mavens reason. And despite promises to the contrary, you can't count on just the other guy getting squeezed.
But you can minimize the damage. A whole bunch of recent tax changes make it a lot easier to convert traditional IRAs into Roth IRAs, but just in 2009 and 2010. The costs of converting are low now too, thanks, if that's the word, to the way the markets have whacked many of our retirement savings.
Here's how it works. IRAs give you two choices. You can put $5,000 ($6,000 if you are 50 or older) into a traditional IRA and deduct that contribution if you are willing to pay income taxes on the money when you pull it out. Or you can forget about the deduction for now, put the money in a Roth and pay no taxes when you withdraw it.
You also can convert your traditional IRA to a Roth, though you will pay taxes on what's in the account when you make the switch. It's not much consolation if your retirement savings have taken a 25 percent or greater hit, but markets like these really trim the tax bite if you convert.
There is even one-time break for taxpayers switching soon, say contributors Michael Slemmer and Ben Norquist to the FPA Journal. Taxpayers who convert in 2010 can delay recognizing part of their additional taxable income until 2011 and 2012.
There are a slew of details to wade through to see if converting makes sense for you specifically. Your friendly tax professional or financial advisor will be glad to help you sort things through. They want the work too.
Monday, February 23, 2009
Here's the deal. About 30 states, including Missouri and soon, Kansas, pay unemployment benefits by loading the weekly benefits onto reloadable debit cards instead of mailing checks to our houses. It's pretty nifty when the system works.
But growing numbers of jobless workers are getting steamed because ATM and other fees that banks charge all card users also apply to the unemployment cards. Those typically range from $2 to use an out-of-network ATM up to maybe $20 if the equivalent of bounced-check coverage is offered. It's not a fortune, but unemployment benefits don't leave room to waste even a little money. Now, some fees apparently are headed higher too.
You can get out of paying many of these fees, however. As often is the case when money's tight. you can spend time and shoe leather instead.
I'll go past maybe a half dozen ATMs in our neighborhood to reach one that won't charge me $2 for a withdrawal. I also pull out enough cash to cover a group of planned purchases such as gas and groceries instead of using the card at each stop. Retailers can freeze part of your account to cover purchases you make. That can cause you headaches if they don't re-thaw them before you need to buy something else.
This isn't rocket science, but you may need to read some of that boring terms-and-conditions fine print more closely than usual to figure out what will work best for you. Kay Bell and the always helpful contributors to Bankrate.com outline some of the things to look for. The specific bank or financial instituition your card actually comes from can tell you online where the free ATMs are.
Friday, February 20, 2009
Financial planners and budget counselors I know generally recommend budgeting about 1 percent of your home's value for maintenance and repairs, plus about 2 percent more if you plan significant remodeling. That's between $1,970 and $5,910 for a national median $197,000 home, or $1,440 to $4,320 at Kansas City median prices.
Spending $75 million to clean up those 9 million shaky mortgages works out to a bit less than $1,140 apiece if you divide it among the rest of the nation's total 75 million homeowners who don't have troubled loans. It goes way lower if the nation's 36 million renters kick in too.
Now look at what the money potentially buys. Reuters reportsRick that a record 64 percent of recently surveyed homeowners report that nearby defaults have eroded their own homes' values.
Realty Trac found that 3 in 10 potential buyers of foreclosed homes expect to pay about half price for the property. Avoiding that has got to be at least as profitable as recouping maybe 85 to 90 percent of what you spend remodeling a kitchen or bath.
Thursday, February 19, 2009
And it is getting weird. A Fed economist in San Francisco predicts we're on the way to losing more jobs than anytime in the last half century. But surprisingly many people seem to believe losing a job will never happen to them.
More kids go to school sick because Mom or Dad doesn't want to risk a pink slip. And psychologists, who are still employed, but Lord knows why, come up with fancy names for the shock, fear and pain they think we feel.
We've talked before about some of the immediate things to do if you lose a job. I'd say, bet it will happen and map out what you'll do next. Then, even if you keep your job, you're still better off than before.
Wednesday, February 18, 2009
Or so it seems after reading a recent Parade magazine piece about some wildly differing estimates of where middle class begins. No way our household income will hit even the bottom rungs of some of the definitions that relief efforts use.
We aren't alone, of course. Retail maven Howard Davidovitz predicts things will get worse before they get better and he sees a sea change ahead for a long range foreseeable future as we realize we can't have it all.
If he's right, anyone lucky enough to have money may find tough going too. One new challenge of financial planning may be dealing with changed relations with your less fortunate friends and acquaintances, Business Week suggests.
But there is always hope. And, according to contributors to Forbes, there are always ways to make a buck investing in downsizing too.
Monday, February 16, 2009
But what if, as appears to be happening in California and almost happened in Kansas, the tax collectors send us IOUs instead? That can't be good for economic stimulus.
We always get a lot of advice this time of year about how to use refunds prudently. We ignore a lot of it, of course. Tax time windfalls can be too sweet not to splurge on something. And as J.D., a blogger I watch at GetRichSlowly.org, showed a while back, you can make a case for not following conventional prudent advice too.
If you are really counting on that money, your most likely individual choice now will be to tough it out, just as you do when your paycheck shrinks. You can try to catch up when the money does come. But all our bills could be bigger by then, and the money may just vanish in the sand the way last year's $300 and $600 stimulus checks seemed to.
Maybe the Crazy Ike Furniture Outlet, Discount Phone and Mattress stores can help. They are on the air now screaming helpful suggestions about using our tax refunds. And they often advertise no-money-down, no-interest-now outside tax season. Just moosh the two ads together.
Sunday, February 15, 2009
But love it or hate it, that Form 1040 can be as useful as a Swiss army knife in putting your own long range personal financial plan together. Best of all, you don't need sophisticated green eye shade skills to get started. Common sense, some online calculators, and knowing what's going on around your house will take you a long way.
Here are a few things I've learned from planners I've talked with for 20 years:
- Even your mailing address at the top of the form may flag some tax savings. You may qualify for additional tax deductions if you moved because of your job. And if you sold your old house, you may need to plan how best to use one-time shot income from the profits.
- Gross income on line 7 is one of the easiest numbers to calculate and one of the most important to look at. At a minimum, you need to be sure your living expenses are lower or that you can make them so. Gross income also is a good beginning to gauge how much retirement income you need.
- Look at your sources of income too, which are all the numbers you fill in between about lines 8 and 22. If you are relatively young and saving for a distant retirement, ask yourself if too much money from interest and dividends means you are too conservatively invested to hit long term goals. Check out any capital gains or losses you report, either on line 13 or a Schedule D. They may indicate a need to rebalance or streamline your investments if the numbers surprised you.
- Beware of big mortgage deductions. Getting potentially more money back is nice, but not if you overextended to get there.
- Look at any IRA or retirement plan withdrawals you report on lines 15 or 16. If those are bigger than you planned or you paid penalties on any of the money, fixing that needs attention immediately.
Friday, February 13, 2009
It may be that is how the stimulus plan being nailed together in Washington is supposed to work too. One of the interesting quirks of the new plan, according to one Wall Street Journal report, is the delivery of $500 to $1,000 Making Work Pay tax credit that wage earners are to receive.
The money apparently will be doled out one $20-bigger paycheck at a time for six months or so, instead of shipped in lump sums as last year's $300 to $600 stimulus checks were. The prevailing theory is that too many of us saved those earlier checks or paid bills which pooped out the hope for stimulus. We are more likely to fritter away the extra $20 dabs in our paycheck and jolt the economy to health, Mensa wannabes figure.
Maybe, maybe not. You need a paycheck to get the extra money. That is still a problem for more than 7 percent of us. We're still looking for more advice on saving money than spending it. And even at $20 a pop, far more of us currently plan to save the money than spend it, according to voluntary poll on the fivecentnickel.com personal finance blog.
Thursday, February 12, 2009
But if stretching the truth to squeeze out a few more refund dollars sounds tempting, check out a Forbes rundown by Janet Novack and Ashlea Ebeling of some the ways IRS may catch you. Bottom line - fibbing about stuff that isn't reported on a W-2 or 1099 isn't as easy as you think.
Also your chances of raising auditor's eyebrows appear to go up when your income does. IRS calculates your chances of an audit are just less than one in a hundred for us working schlubs, but one in 18 for folks with seven figure incomes, who presumably can hire better defense help.
Your odds are approximately:
|Income||Field audit||By-Mail audit||Any Audit|
|Under $200,000||1 in 519||1 in 133||1 in 106|
|$200,000 and higher||1 in 83||1 in 58||1 in 34|
|$1 million and higher||1 in 32||1 in 41||1 in 18|
Also, IRS expanded on its plans to clamp down on overly-erring filers in a 100-page outline IRS published about 18 months ago.
Surveys show that most of us think it's wrong to cheat on our taxes. But in real life many of us do it anyway, especially if we buy on line, cross a state line to where sales taxes are lower, swap out work with someone or even hire yard work done, Jim at bargaineering.com points out.
Wednesday, February 11, 2009
My first thought ...stock up on Forever stamps. You can buy them at 42 cents now and use them later when procrastinators pay 44 cents.
Then I thought about why stamps are going up. More people are going online, fewer pieces of mail hit the system, and the doubledomes at the top of the organization say they have only two choices --raise prices or cut service.
It's no big stretch to see similarities to a business I used to be in. Newspapers also are struggling with the changing economics of delivering dead-tree products door to door.
The two problems may even be feeding each other. Higher mailing costs and reduced service hurts newspapers, which use the Post Office to reach distant customers. So, they mail fewer papers, which helps push rates and strain on the system higher.
Newspapers aren't the only businesses feeling this pinch. It's just a thought, but what happens with the credit crisis if we all need more money and another day to mail payments in on time?
Tuesday, February 10, 2009
But, at Tuesday's news of another 10,000 General Motors workers hitting the unemployment line underscores, time can be as tight as money in the current economy. Sometimes you need to come up with new numbers fast. You don't need to lose a job to do it. You may only want to get a firmer grip.
Guest blogger Erica Douglass at Get Rich Slowly recently posted a 10-minute plan for wrangling your household budget into submission. It also reminded me of things that some Kansas City area financial planners shared with readers of The Kansas City Star's old Moneywise section, when we asked them how average folks could tune up their finances in just a couple hours.
- Start with broad numbers and don't try to fine-tune them, said financial planner Sandi Weaver in Prairie Village. First, check how much emergency savings you have and how comfortable you are with that amount. Next, check your retirement savings, college funds and other big expenses you anticipate. Checking amounts against your comfort level will point out your priorities, Weaver said.
- If you aren't already tracking expenses, pull together a few months of check stubs, credit card receipts, pay stubs and other records to see where your money goes, suggested Jeff Sheets, then with Consumer Credit Counseling Service in Kansas City. It may be an eye-opener.
- Divide those expenses into three categories - fixed expenses you have to pay, such as rent or mortgage; variable expenses you also must pay, such as utilities, and discretionary expenses, which could be used for something else, suggested Stewart Koesten of KHC Wealth Management in Overland Park. Measure those against income, then decide what to cut, Koesten said.
- Re-examine your insurance coverage too, added Leon Torkelson, a financial planner and insurance specialist in Atchison, Kan. That seems like a lot of ground to cover, but the key question is whether the policies protect you from financial losses that would be devastating if you had to pay.
Monday, February 9, 2009
Free money is fun, but if your employer is among the growing number who are ending their matching contributions to workers' 401(k) plans, you can live without the extra cash.
But try to increase your own contributions to the plan to make up the difference. Remember, your goal here is to save for retirement. As some fellow personal finance bloggers discussed recently on bargaineering.com, even a non-matching plan may be better than an IRA, Roth IRA or other choices.
Here briefly are the key points to consider, experts say.
You can put more money, up to $16,500 currently, into a 401(k) than an IRA or Roth, now capped at $5,000 for many people. But 401(k)s usually offer fewer investment choices, which may be a bigger drawback in times like these.
Plus there is one gotcha to plan for. If your employer offers a plan, but you don't participate, your ability to deduct IRA contributions may be more limited.
Reducing your contribution should not be an option, except in maybe the most extreme circumstances.
So how do you come up with extra cash to do all this? Money maven Anthonty Delgado on e.how lists some popular ideas. Standup comic Vince Barnett on YouTube offers some alternatives using empty boxes, wheel chairs and other tools.
Friday, February 6, 2009
Big surprise, but consumers will be the biggest losers. Basically, they will go blind trying to find one of three credit scores their lenders are looking at.
Briefly, Experian next week is ending an agreement with Fair Isaac that allowed MyFICO.com customers see the same credit scores that Experian and the other two biggest keepers of your credit history, Equifax and TransUnion, provided to lenders.
After Feb. 13, MyFICO customers can still see their credit scores based on their Equifax and TransUnion histories at myFICO, but will need to go to Experian's site to see that score there. What's also new is that the Experian score you see may be different from the one Experian gives to lenders. Some of those three-for-one credit reporting deals we've been buying online may be affected too.
The timing of all this is horrible as lenders raise lending standards for everything from credit cards and auto loans to home mortgages.
Fair Isaac has posted some frequently asked questions to help us through the roughest spots.
Free annual credit reports - credit histories without scores - from all three companies are still available. Checking each of those for accuracy once a year will help you spot potential trouble, but won't show you clearly how a lender sees you.
Thursday, February 5, 2009
That's what it looks like Washington is doing, but even the best sounding ideas have problems when you try to apply them real life personal finance.
Take the $15,000 home buyers tax credit for which the Senate voted Wednesday. It's a much sweeter deal than the current plan - twice as much money and you don't have to pay it back. But if you are out of work or thinking twice about shopping for anything, a new mortgage seems like a no-sale.
Washington is looking for ways to stimulate auto sales too. One idea floating around is a federal tax deduction for the state sales tax you pay on a new car. It would cut maybe $1,300 off the cost of a $25,000 mid sized car. Sounds good until you realize that probably isn't even three payments on a new car loan.
Or there's the cash for clunkers idea. The government issues vouchers to help absorb the cost of replacing your old gas hog with an environmentally friendlier new model. Again, it sounds nifty, but higher financing, insurance, licensing, property tax, depreciation and other costs may make it cheaper just to drive the clunker into the ground.
Another suggestion? Provide federal insurance for car loans to help kick start auto financing again. It sounds like a TARP plan, but with fewer zeros on the potentially bad loans. I think the really interesting question about this approach might be --who do you suppose might do the repo work if a loan went bad?
Wednesday, February 4, 2009
Small wonder. $20,000 and a $25,000 coupon for an unsellable vehicle of your choice isn't much of a deal when you push a pencil on it.
The first problem? That's all taxable income - including the coupon - and potentially enough to kick you into a higher bracket. Your working spouse may need to change some withholding from his or her check to absorb some of the tax shock. And you may face tricky tax calculations a year from now, when you go from having a big shot of extra income to having much less than before.
The second problem? Twenty grand really doesn't go far any more. We'd pick it up if we found it in the parking lot, of course. But it would only last maybe three to four months in many median income Kansas City area homes.
There's a third problem too. That coupon gets to be pretty expensive when you add in the higher property taxes, insurance costs, tags and other new vehicle costs that the coupon doesn't cover. A new 2009 Malibu listing for just less than $22,000 will cost you more than $37,000 over the next five years, the auto wizards at Edmunds.com calculate. Click here to find what it might cost to own something you like better.
So, if you are an auto worker, weigh your choices carefully and start working on a Plan B now. That goes for the rest of us too.
Tuesday, February 3, 2009
And now the company may have handed rival H&R Block Inc. unexpected ammunition in the two companies' fight for the allegiance of filing-from-home taxpayers - and their money - writes Fortune 500 marketing guru Rafael Grillo.
Grillo's take? Intuit, publisher of the TurboTax income tax preparation software that accounts for 80 percent of money consumers spend for those products, hiked prices early in the filing season without sweetening the deal with enough new features to mollify consumers. Block, in contrast, basically held the line on prices and added features to its TaxCut software.
Nobody likes paying income taxes much, especially in a recession, so Block this year may end up knifing off a big slab of Turbo Tax's four-times-larger market share, all because of a few dollars price difference Grillo says.
Early season filers noticed enough of a difference to swing about 4 percent of sales through December into Block's coffers, trend watchers report. But December sales are so small and so early in the season that even Pennsylvania groundhogs run up better forecasting records.
TurboTax understandibly disagrees with Grillo's assessment. The company already has changed those December pricing policies and only about 25 percent of its expected customers
will shell out more money to file, because they previously hadn't filed electroinically, Bob Meighan, Turbo Tax's vice president, wrote in a reply to Grillo's post.
"Whether your return is simple, or complex, TurboTax has a solution that's right for you, from free on up," Meighan wrote.
Block, meantime, continues to bet it will win more customers by providing more value at competitive prices, said spokeswoman Denise Sposato.
Ultimately, "we're a tax company and they are not," Sposato said. "They are a software company.
Monday, February 2, 2009
Good riddance, say some consumers in different parts of the country who apparently found bargains they could resist. The fact is, going-out-of-business sales can present tricky challenges to consumers trying to stretch a dollar to the snapping point. Organizers use some of the same tricks as sharp garage-sale operators to part us with our cash, but with more zeros on the price tags.
There are some good reasons to avoid such sales entirely, suggests Jeffrey Strain at TheStreet.com. We tend to buy things we don't need just because we get a heck of a price. The deals may not really be that good, if promoters jacked up original list prices in order to make a profit selling at a purported 75 percent off. And all-sales-final, cash-or-check-only rules often wipe out many of the usual consumer safeguards we might depend on.
Even so, you can find real bargains, if you work at it, reports Fivecentnickel.com. Do your homework before you go. Don't put much faith in extended warranties - you are basically buying from guys with pushcarts. Pay with plastic rather than cash if possible, because your credit card company offers some safeguards if you get a lemon.
I can see the reasoning, but don't entirely agree with that last recommendation. If I'm that worried about buying a possible lemon, I'm going to be tempted to save the money and spend a few bucks more someplace else to get something that works or that the seller stands behind. I've already got bargain-price doorstops.