Chicagoan in the Desert

Blog move

noreply@blogger.com (ChicagoInTheDesert) — Tue, 14 Apr 2009 18:17:00 +0000

This post is slightly belated, but the Many Things Finance blog has moved to http://www.FoothillsPlanning.com/ffpblog. Please check it out, and thanks for following here.

Quick Update: Deductibility for Arizona 529 plans

noreply@blogger.com (ChicagoInTheDesert) — Sun, 14 Sep 2008 18:09:00 +0000

A key provision of the Arizona 529 deductibility is that it applies to investment in ANY 529 plan, not strictly plans sponsored by Arizona. This element allows Arizona residents to select the best plan they can find nationwide and still enjoy a tax deduction. Of course, the relatively new Arizona option managed by Fidelity is a pretty good option for savers who are looking for a new 529 plan.

529 state tax deductibility in Arizona

noreply@blogger.com (ChicagoInTheDesert) — Sun, 30 Sep 2007 05:45:00 +0000

Better late than never. Several months ago, Arizona passed legislation that allows for a state income tax deduction for contributions to Arizona-sponsored 529 plans, starting in 2008. The downside is that it is capped at $750 for individual taxpayers, and $1500 for couples filing jointly. Generally, the amount that is deductible pretty much runs the gamut from no deduction to a maximum equal to the taxpayer's adjusted gross income for the year. Arizona's max falls at the low end of the spectrum, but it's better than zero.

Important note: the deduction is subject to recapture in the event of a non-qualified distribution, which essentially means that the funds are not ultimately used for approved educational purposes.

PMI deductibility

noreply@blogger.com (ChicagoInTheDesert) — Fri, 09 Feb 2007 21:31:00 +0000

At the start of 2006, I talked about some important new limits for tax deductions and retirement planning purposes. That was useful information for planning purposes, but may once again be helpful, now that we're in the middle of the tax prep season for the 2006 tax year.

I wanted to hit on one additional item: there has been a fair bit of media discussion regarding the deductibility of Private Mortgage Insurance (PMI) premiums, but there is very little "official" documentation of this development. The deduction stems from the Tax Relief and Health Care Act of 2006, which was passed by Congress and signed by the President late last year. For key provisions of that act, see the White House fact sheet. In any case, the reality for PMI deductibility seems to be that a) right now it is only in effect for 2007, and b) it only applies to loans originating in 2007. In other words, existing mortgages that are subject to PMI do not qualify. The fact that it it is set to expire for 2008 is probably less of a concern, as these laws are often renewed. For the sake of PMI payers, let's hope that this does get renewed, and in the process that renewal includes existing PMI policies.

Nervous about the game

noreply@blogger.com (ChicagoInTheDesert) — Sun, 04 Feb 2007 21:18:00 +0000

Kickoff is in a couple of hours, and I'm getting nervous about the Super Bowl. It's been a long time. I can't believe the Bears are in it. I really hope the secondary came to play, and I hope the Bears protect the ball and run aggressively.

[Chicago Bears]

Real Estate capital gains tax break

noreply@blogger.com (ChicagoInTheDesert) — Sat, 03 Feb 2007 23:52:00 +0000

My parents recently sold their home, and the tax implications of that sale came up as I was preparing their taxes, so I thought I'd issue a reminder of the current tax law with regard to the sale of your primary residence. It is pretty straightforward: taxpayers filing singly are entitled to $250,000 in profit without paying any tax, and married filers are entitled to $500,000 in profits tax-free. There is no longer any requirement to roll gains into a more expensive home, either. Again, this only pertains to the sale of a primary residence...rental homes don't apply. That generally means that one would have had to live in the home for two of the previous five years to qualify, even if those two years were not consecutive.

Dell revisited

noreply@blogger.com (ChicagoInTheDesert) — Fri, 02 Feb 2007 18:05:00 +0000

I posted about Dell back in August. At the time, it was trading between 21 and 22, and I thought its negative press was a reason to do some further analysis. So many companies are getting bombed by the media these days that bad PR is a new trigger for me to look at a company.

For better or worse, I did not buy Dell at that time, mostly because I prefer smaller, lesser known companies who don't have an army of analysts covering them. Dell closed over 27.60 last month, though, which would have been close to a 30% gain since that post. In fairness, a lot of stocks had good runs in the latter part of last year.

Dell is headed back down now. Keep an eye on earnings and look for buying opportunities.

Go Bears

noreply@blogger.com (ChicagoInTheDesert) — Fri, 02 Feb 2007 17:58:00 +0000

I guess it's a good time to verbalize the obvious:

GO BEARS!!!!!!!!!!!!!!!!!!

Savings Rate Illustration

noreply@blogger.com (ChicagoInTheDesert) — Sat, 04 Nov 2006 17:32:00 +0000

This chart provides a simple, powerful view into the importance of saving as much as is feasible, particularly if a comfortable retirement is an objective. It also furthers the point about the power of compounding.

The chart reflects the difference between saving $15,000 per year, which is the current maximum 401k contribution limit, and saving $7,500 per year. Each assumes a horizon of 20 years, and an 8% growth rate. After 20 years, $7,500 per year becomes $343,215. Over the same period, $15,000 per year grows to $686,429. The thirty year period is even more powerful, as compounding has that much longer to work: $7,500 per year becomes $849,624 and $15,000 per year becomes almost $1.7 million.

Compounding Illustration

noreply@blogger.com (ChicagoInTheDesert) — Thu, 28 Sep 2006 19:01:00 +0000

The chart embedded here is a simple illustration of the power of compounding. It reflects the difference over time between an 8% growth rate and a 10% growth rate. Additional assumptions include a 30 year time horizon, and a starting amount of $100,000, with no additional contributions.

At the end of thirty years, the $100,000 grows to:

- $1,006,266 at 8%
- $1,744,940 at 10%

- $2,995,992 at 12%! (not shown in the chart)

This illustrates a couple of basic tenets of wealth-building: start early, and select investments with high growth rates. The latter is far less predictable, but it can be buffered by the former in the sense that the longer your investment time horizon, the more room you have for error.

Real Estate Classifieds

noreply@blogger.com (ChicagoInTheDesert) — Mon, 28 Aug 2006 21:48:00 +0000

Yesterday I spent some time reading the Real Estate section of the Chicago Tribune. I did this a lot when I was younger, in high school and college, as an educational process. I used to pay a lot of attention to the small picture ads and even the classified listings to try to get a feel for values in various sectors of the metro area. Does anybody do that anymore? Read the listings, I mean. It hit me yesterday that the section looks pretty much the same as it did twenty years ago, even though the Trib has a pretty stout internet presence. Haven't sites like realtor.com, not to mention the Tribune's own real estate search capability, rendered the printed listings obsolete?

Just seemed kinda odd to me.

Time to buy Dell?

noreply@blogger.com (ChicagoInTheDesert) — Fri, 25 Aug 2006 23:44:00 +0000

Headline yesterday on thestreet.com: "Why Dell's no longer a star stock". This is the point when I usually start getting interested in a stock. In truth, Dell has been on my radar all along because I work in technology, I'm a customer, they're high profile, etc. Let's ignore that for a second, though. We'll also ignore Dell's fundamentals for the sake of this argument, although I may come back to them in a different post.

Look at a chart for Dell over any period going back about three years, and it looks pretty bad. Environmental factors don't look so hot for them. HP has regained strength and has become a much more formidable competitor. Margins for Dell's core business are in perpetual compression mode. The SEC has taken an "informal" interest, apparently in some aspect of the company's approach to revenue recognition, or whatever. Now the batteries they buy from Sony are spontaneously combusting, and some airlines (Qantas, anyway) are apparently treating them differently than laptops from other companies, i.e. as security risks. Clearly, these are not the characteristics of a company that would attract customers looking to make a quick buck. Unless, perhaps, that investor is thinking of shorting the stock.

The question that I think is pertinent here is: has Dell, the icon of operational efficiency until a couple of quarters ago, really lost its ability to compete? Should it be 40% lower than it was a year ago? Or has it hit some rough spots that a rational investor can reasonably expect to be addressed by a management team that has demonstrated competence for years.

At the end of the day, financial characteristics - particularly earnings growth - should drive, or at least inform, any investment decision. However, seeing a well-managed company getting bludgeoned in the press, especially over short-term issues like combustible batteries, should be a trigger for further investigation.

My gut tells me that Dell will continue to drop in the near future, particularly if the SEC investigation becomes more serious and/or HP continues to take market share. However, I suspect some patient and prescient investors will buy low and profit nicely by riding out these storms.

Cubs...OUCH!

noreply@blogger.com (ChicagoInTheDesert) — Mon, 29 May 2006 19:41:00 +0000

Well, the Cubs are approximately 5-22 since my last blog. That hurts. Dusty received the dreaded vote of confidence the other day. The "dreaded" part is certainly apropros. Yeah, the injuries have been horrific, but 5-22? I read yesterday that this is shaping up to be their worst May in ~35 years. The Cubs need a catalyst. Despite his clutch RBI single in the bottom of the 4th against the Reds today, Kerry Wood's return does not appear to the boost to which I refer. Perhaps Prior will wow 'em in Class A today, much like Wood did on his path back to the mound. Don't think that will do it, though. The catalyst the Cubs need is a Lou Piniella or Bob Brenly sitting on the bench. My vote is for Ditka, but take that with a grain of salt. I've been a fan of the Cubs for 37 years, after all.

It recently came to my attention that Dusty has topped at least one list of baseball's worst managers - 'Nuff said.

Cubs in 2006

noreply@blogger.com (ChicagoInTheDesert) — Sat, 29 Apr 2006 21:47:00 +0000

The Cubs got spanked today, 16-2, by the Brewers. It's hard to view that as anything but brutal. Nonetheless, they're 13-9 right now and keeping pace with the division, despite having just two legitimate major league starters and losing Derrek Lee. Oh yeah...Carlos Zambrano has zero wins.

These are not the results I would have expected, given the circumstances. However, it is hard to believe that Cubs' management thinks they can proceed this way indefinitely. It is certainly conceivable that Ronny Cedeno and Matt Murton can hold their own and be solid contributors throughout the season. It's even becoming believable that Sean Marshall can win a few more games and at least give the Cubs some good innings this year. I can be persuaded to buy into the idea that the bullpen can hold its own. And of course Maddux appears to be working on a vintage year while preserving innings. Nevertheless, it remains difficult for me to envision the team progressing much further without picking up another quality starter. I've never been much of a Clemens fan, though I must acknowledge that he has undoubtedly been the best pitcher of my lifetime. I could get over that, though, if the Cubs could find their way to making him an offer he can't refuse. Granted, this grandiose concept probably sounds like the product of your average deluded Cubs fan, but why alter my behavior now? I'd be even more excited about a trade to bring Dontrelle Willis back into the fold, by the way.

Oh, and one other thing...the Cubs need a new plan against lefties.

Gift Taxes and 529s

noreply@blogger.com (ChicagoInTheDesert) — Sun, 22 Jan 2006 21:18:00 +0000

In response to a comment by one of the legions of followers of this blog, 529 plans have a unique benefit that allows for significant one time contributions without paying gift taxes. As with any gifts, $12,000 per year can be gifted to another individual tax-free ($24,000 for a married couple). For example, a couple can contribute up to $24,000 per granchild each year without generating tax implications for either side.

The benefit that is unique to 529s is that the same married couple can contribute $120,000 in one year to an individual, tax free. (Note that the maximum is $60,000 for an individual making the contribution). This amount would then be treated as if it had been contributed in equal payments over five years, and no further contributions can be made during that period if the full amount is contributed initially. This provides some handy estate tax benefits. Even though the contributor could be the account owner, and thus controller of the account, the gift reduces the estate by the amount contributed. It also allows the earnings on the investment to begin compounding tax free earlier than would otherwise be the case.

Some Important New Limits for 2006

noreply@blogger.com (ChicagoInTheDesert) — Sun, 01 Jan 2006 03:13:00 +0000

This is a brief list of selected limits which may be relevant in the quest to reduce your tax bill and maximize your wealth in 2006. Please comment if there are questions about or proposed additions to this list.

401k contributions

For 2006, the maximum 401k contribution is now $15,000. For individuals who turn 50 before the end of 2006, the law allows for an additional $5,000 to be contributed! This is called the “catch-up” limit.

IRA contributions

The maximum IRA contribution in 2006 remains at $4,000. Individuals who turn 50 before the end of 2006 can add another $1,000 under the catch-up limit. This applies to regular IRAs as well as Roth IRAs.

Income limits for contribution to a Roth IRA are as follows (in other words, if your income exceeds these levels, you cannot contribute to a Roth IRA):

$110,000 if you file as a single taxpayer
$160,000 if you are married filing jointly

Income limits for Traditional IRA deductibility

If you are covered by a retirement plan at work, you can take a deduction for traditional IRA contributions if your income does not exceed:

$60,000 for taxpayers filing as single or head of household
$85,000 for married filing jointly

Annual Gift Tax Exclusion

In 2006, you can give a gift of up to $12,000 (per gift recipient) to another individual without incurring any tax consequence to the giver or receiver. For instance, parents can gift a maximum of $12,000 to each of their children without the parents or children having to pay tax on the gift.

Child Tax Credit

The maximum credit remains at $1,000 per child for 2006, subject to the following income limits (i.e. the credit is not available if your adjusted gross income exceeds these levels):

$110,000 if you are married filing jointly
$55,000 if you are married filing separately
$75,000 if you use another filing status

529 Plans

noreply@blogger.com (ChicagoInTheDesert) — Wed, 28 Dec 2005 06:40:00 +0000

Becoming a parent for the first time has caused me to give much consideration to paying for college. There are many programs that facilitate this process, but I believe the best college savings vehicle for most situations is the Section 529 plan, so named because the tax benefits that result from the plan are identified in Section 529 of the Internal Revenue Code. It is important to note that, although 529 plans were “created” by the federal government, they are run by all 50 of the individual states (at the time of this post, anyway…rumor has it that Wyoming is mulling the consolidation of its plan with Colorado). As such, the plans are not all created equal, and general statements about the plans may or may not apply universally.

Keeping in mind the above caveat, there are essentially two types of 529 options: prepaid tuition and a more general savings plan. Today I am going to focus on the general savings plan, and will address the prepaid approach in a future post.

The general savings approach within a 529 allows for substantial funds to be set aside to grow on a tax-free basis, as long as the funds are ultimately used toward educational purposes. I say “substantial” rather than a specific dollar limit because the maximum allowable contribution varies by state, as do many of the terms of these plans. If the money set aside in the funds is not used for education purposes, income tax will be assessed on the earnings when they are withdrawn, and a 10% penalty will be levied. Some notable aspects of the plans include:

Unlike prepaid programs, these general savings plans allow for the funds to be used at any legitimate educational institution. By way of example, Nevada allows for a maximum of $250,000 to be saved, and Arizona allows for $289,000.

The owner of the account, who is also typically the primary contributor, controls the account. This generally means that the beneficiary does not have much control. A key control feature is the ability for the owner to change beneficiaries on an account. For example, if a given beneficiary graduates high school and decides to pitch for the Cubs instead of going to college, the account owner can shift the funds to the budding Cy Young’s younger sibling without paying any penalties.

Residents of any state can typically invest in 529s from any other states, but some states provide a tax deduction to residents who use the state plans. For instance, Illinois offers a state tax deduction for contributions of up to $10,000 per year, or $20,000 for taxpayers who are married and filing jointly. For residents of states that offer the deduction, that is the first place to look, in my opinion. The deduction may not overcome a poorly managed plan, however.

The tax free withdrawal benefits conveyed by these plans are currently covered under the tax law through 2010. It is generally assumed that these benefits will be extended, but it’s definitely not guaranteed. Nonetheless, the average 18 year old beneficiary, who will be responsible for the taxes, will typically be in a lower tax bracket than the contributor. Thus, the benefit remain would remain, although it would be dramatically reduced.

What to look for in a 529 plan

In choosing a 529 plan for my children, I evaluated options based on several criteria. Some that I think are particularly important include:

Ability to take advantage of state tax deductions for residents. I live in Arizona, which does not offer this perk, but it would definitely be a key consideration if I lived in a state like New Mexico, which offers full deductibility.
Investment performance.
Low fees and expenses. This is key, as these expenses reduce the investment return. I’m not a financial advisor and suffer from no conflicts of interest, so I can freely state that I like Vanguard mutual funds because they tend to have low expenses. Many 529s either use Vanguard to run the program, or leverage their funds within the plan.
Several investment options. Many plans offer age-based portfolios, which simply provide asset allocation that is appropriate given the number of years remaining before a beneficiary hits 18 years old. Basically, the longer away 18 is, the higher the allocation to risky financial assets, i.e. stocks. As college approaches, the fund shifts to less risky assets. This is a nice feature for people who are not particularly inclined toward asset allocation theory.
Minimum contribution levels that are appropriate to a given situation. If a new parent wants to start saving for college with $100, and a plan requires $3,000 to open an account, the plan is obviously not a good fit.
Maximum contribution. The higher the maximum contribution limit, the better.

Research is required to decide which plan to adopt for a given situation, but a few caught my eye. The College Savings Plan of Nebraska is considered by some to be the best in the country. For the most part, its expenses are very low, and the breadth of investment options is impressive. It offers a stingy tax deduction for residents, but something is better than nothing. The Utah Educational Savings Plan (UESP) Trust has low expenses and a contribution limit of $315,000. Nevada offers several well regarded 529 options, including The Upromise College Fund, which is managed by Upromise Investments, and leverages Vanguard funds. This is the plan that I selected, because it works seamlessly with the Upromise program, which I also recommend. For those who have not consumed the Upromise Kool-Aid, as I have, Nevada also offers The Vanguard 529 Savings Plan, which is also managed by Upromise and has similarly low expenses, with an even wider choice of investment options. I also think Illinois’ Bright Start College Savings Program, which is managed by Citigroup Asset Management, is solid, particularly for Illinois residents.

Initial post

noreply@blogger.com (ChicagoInTheDesert) — Wed, 28 Dec 2005 03:23:00 +0000

This is my initial post. I was going to discuss something marginally interesting, such as Section 529 plans. I think I'll hold off on that, though, and simply test the water. I'm using the editor on blogger.com for this, but I've downloaded the add-in for Word, which I'll try next. That will be a bit more powerful, I assume, but this looks pretty solid. All for now...go Bears!