JoeTaxpayer

Free FICO Score

JOE — Wed, 14 May 2008 12:00:22 +0000

Last September I wrote about a zero interest credit card offer I took advantage of. I took the money and bought a CD, pocketing $1000 interest in 6 months time. I received a few comments and questions, centering around how this would impact my credit score. I offered a chart showing how the score is impacted, in general, but couldn’t say for sure the precise impact of any one action on the score. That would take regular access to the score itself, which through MyFICO, would cost nearly $50/yr. Now, I discovered a free way to have regular access. It seems that WAMU (Washington Mutual) offers such access to their credit card holders. The card has no annual fee, and you just click through a link to see your score. They offer an option to get email notification if your score moves by more than 20 points. Combine this with a regular request for your full credit report, and you have a good plan to monitor your credit health

Joe

401(k) Loan bad for your (financial) health?

JOE — Mon, 12 May 2008 12:00:54 +0000

The June Kiplinger’s magazine ran an article, “Raiding your 401(k).*” It advises against borrowing from one’s 401(k) and cites a T. Rowe Price study suggesting that someone borrowing $10,000 for 5 years (at age 35) will be short $145,000 at retirement even after paying back the loan. At 10%, $10,000 would grow to $131,100 in 27 years, that’s just math. Maybe they think this guy will retire at 63, not 62. But he did not take a withdrawal, he took a loan. My 401(k) charges 6.5% for a loan, credited back to the account. This means a 3.5% hit to the return on that borrowed $10,000. The account will come up short about $900 for having had the loan outstanding. Still using the 10% return, the retiree may find he is short nearly $13,000 at age 62, certainly not $145,000. Someone at T Rowe hit the wrong key, and none of my friends at Kiplinger’s catch this?

Think about this, though, the story cannot just end there. I can make the case that what matters is where that $10,000 loan went. Did the person buy a plasma TV and sound system? Or did he pay off all his credit card debt (at 24%) and start fresh? I can add to this - perhaps he was paying $288/mo and would have done so for 5 years to pay off the cards, but now is able to pay only $196 to the 401(k) loan, and use the extra $92 as an addition monthly deposit to his account. He is in the 25% bracket, and deposits a full $123 (which is the gross amount that nets him the $92) to his 401(k) and it’s matched by his employer, dollar for dollar, so at the end of year 1 he has nearly $3000 more in his account which more than makes up for the $350 hit he has from the loan itself. By staying on this path, he’s actually ahead by over $150,000 at retirement time.

As with any example, your mileage may vary. There is just one point I’d like you to take from this post. In finance, there are few absolutes. For every person who uses their 401(k) loan wisely, there may be five who blow the money and run up their credit cards again. But just as I take issue with Dave Ramsey’s statement that ‘ responsible use of a credit card does not exist’, I feel that there are wise ways to use loans, 401(k) or otherwise. While I admit that a short article appearing in a magazine cannot cover every possibility, the one missing (and most important question was ignored - what does the borrower do with the money?

Joe

*The article is not yet available on line. As soon as I am aware it’s accessible, I will link to it.

UPDATE - I made an error here. (I prefer to leave the error in tact, above, but add this footnote.) In fact, the article did state “assume contributions stop for the life of the loan, as usually occurs”. This would make the math work, although I still take issue with these assumptions. I plan to revisit this subject in a future post.

George Will needs to read more

JOE — Fri, 09 May 2008 12:00:25 +0000

George Will had an article in the May 5 edition of Newsweek titled “ Questions for Obama“. One question was;

“You favor eliminating the cap on earnings subject to the 12.4 percent Social Security tax, which now covers only the first $102,000. A Chicago police officer married to a Chicago public-school teacher, each with 20 years on the job, have a household income of $147,501, so you would take another $5,642 from them. Are they undertaxed? Are they rich?”

I have a question for George - Do you know the $102,000 FICA withholding cap is per person, not per family? If a couple each makes the same income, their current total cap is $204,000. So your Chicago couple would need quite a few raises before they even come close. In 2005 (last census numbers) shows that only 2.67% of households made more than $200,000. Now, how does that impact your view on eliminating the FICA withhold income cap?

JOE

Inflation’s Little Parts

JOE — Wed, 07 May 2008 12:00:49 +0000

The New York Times continues to impress me with how they manipulate data that may otherwise just be a sea of numbers, and transform it into a beautiful chart and/or graph. Click on the image below to launch the Times’ interactive version of the chart, where you can clearly see how each item comprising the government’s shopping list adds to the reported inflation number.

Joe

Food on the Rise

JOE — Mon, 05 May 2008 12:00:32 +0000

I’m starting to see more articles supporting my fears regarding the conflict between BioFuel and BioFood. The tragic unintended consequences of corn based ethanol is that the cost of food, starting with the grains, corn, wheat, and rice, has increased dramatically over the past year. Here is a chart from the World Bank illustrating this unfortunate price rise

Liz Ann Sonders (at Charles Schwab and Co.) recently wrote a piece on this topic titled “ Beast of Burden: A Global Food Crisis Erupts.” An excellent discussion on this topic.

Joe

No Recession Yet?

JOE — Fri, 02 May 2008 12:00:50 +0000

The Q1 number is out and it appears we are not yet in an official recession.

This may be just as bad. 0.6% for two quarters now, and consumer sentiment at a low. I believe those shouting “depression” are a bit over the edge, but I do believe the Q1 number, which is subject to a revision or two, will show that we are now officially in the midst of the “ mild bagel“.

Joe

RSS Awareness Day

JOE — Thu, 01 May 2008 12:00:15 +0000

Most blogs you may read are starting to offer an RSS feed, a way of reading the blog through a reader. I use Feedburner and in the left sidebar offer links so you may access my blog through Google or Yahoo’s RSS feature. Few non-bloggers use this feature, and May 1st has been declared RSS Awareness Day.

So, if you are enjoying my blog, or any other blogs you read on a regular basis, consider become a “reader” through an RSS feed.

Joe

Inherited IRA rules and complications

JOE — Wed, 30 Apr 2008 12:00:16 +0000

Now that you’ve Taken a Breath, and are ready to roll over an IRA you inherited, there are a few important things you must know. Enough that I’ve written my May feature article, “ Inheriting or Bequeathing an IRA” which you can read a day early. I believe the article highlights the importance of properly setting up one’s IRA with named beneficiaries on the account as well as the proper method for those inheriting so as to minimize the tax hit. For a deeper discussion, I recommend the book, “ Parlay Your IRA into a Family Fortune” by Ed Slott

Joe

On my Death, Please, Take a Breath

JOE — Mon, 28 Apr 2008 12:00:44 +0000

I recently became aware of a situation that was pretty upsetting, even though it happened to someone I don’t know and never met. A friend of a friend passed away and left her brother a sum of money in a trust. The brother, disabled, and not working, panicked, and took the money out. Now, when I first heard this, I thought that since it was in a trust, he may have some capital gains due, but that should be minimal. What happened was that the trust held the deceased woman’s IRA, so every last cent was taxed as ordinary income. Even though he had no other income, his tax bill was well over $40,000. A peek at Fairmark tells me that in 2008, one can have $8950 income not be taxed at all (this figure is the sum of the single exemption and standard deduction). The next $8025 is taxed at 10%. So this poor soul could have withdrawn $16,975, rising a few hundred each year, and paid about $800 in tax. The interest alone on the $40,000 would pay his taxes each year. It’s unfortunate that he started asking for advice well after the withdrawal was made, as he could have rolled this money into a beneficiary IRA within 60 days of the withdrawal.

The lesson here, when a loved one passes away, take a breath, don’t panic. Mourn, and take some time. Ask questions and understand where the money, stock, real estate is, before making any decisions you are likely to regret. I hope you can learn from this person’s mistake.

Joe

Getting a TAN

JOE — Fri, 25 Apr 2008 12:00:51 +0000

When I wrote about The Next Bubble two weeks ago, I didn’t mention any of the companies involved in solar power. Part of my reason for that is I am not really a stock picker, and randomly suggesting companies in the industry would do my readers no justice. Last week I saw an episode of Fast Money on CNBC which brought to my attention that an ETF was introduced which “tracks solar and clean energy stocks.” It is the Clayton/MAC Global Solar Index, and trades on the NYSE under the ticker symbol TAN.

The top 5 fund holdings are:
First Solar - 8.77 %
Renewable Energy Corp - 7.45 %
Q-Cells - 6.44 %
Suntech Power Holdings - 6.19 %
JA Solar Holdings - 5.25 %

I am not recommending or discouraging purchase of this ETF, but it is a good alternative to trying to pick individual stocks when you believe a particular industry is ripe for appreciation.

Joe