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Roth IRA Conversion

I’m a big fan of the Roth IRA. I think it’s one of the best retirement savings tools available to the individual investor, and I always try to take advantage of it when I can. But, there were times when I couldn’t contribute.

Back in May of 2006 there was a pretty significant change to the tax laws involving converting a traditional IRA to a Roth IRA. One of those changes included the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA to be eliminated come 2010.

Essentially, this now means that almost anyone with a Traditional IRA, regardless of income level, can convert their Traditional IRA into a Roth IRA beginning this year (see IRS rules).

I mention this only because, although I try to contribute the maximum amount to a yearly Roth IRA, I’m one of those folks that (fortunately) borders on the cusp of earning too much to qualify for a contribution. There were a couple of years (2005-06) where I wasn’t able to contribute to a Roth IRA, and knowing that conversion income limits were going to be rescinded in 2010, I contributed to a non-deductible Traditional IRA instead.

Now is when that strategy pays off. Taking advantage of the recent stock market pullback, I converted my Traditional IRA into a Roth IRA today.

Nothing has changed about my investment except it’s characterization. I still have my savings invested in the same mutual fund (VTTVX) through Vanguard. But, because it was a non-deductible IRA, and because the price of that mutual fund has fallen in tandem with the markets, I shouldn’t owe any taxes (or minimal taxes) generated from this conversion.

Posted 08 February 2010 † Guzzo § Commentary § Market Timing § Personal Finance ‡ Comments (0) ° Tagged:

Weekly Wrap

It’s been a while since I’ve written a weekly wrap or actually discussed what I’ve been doing with my portfolio, so I thought it was time to let anyone who cares know what I’ve been doing (or not been doing), and what’s been going through my mind lately.

As we all know, this week ends the fourth straight week with weekly stock market declines, capping off the year with approximately a 4-6% decline in the big-three stock indexes (DJIA: -4.0%, Nasdaq: -5.6%, S&P 500: -4.4%).

So what do I make of this recent market decline?

You’ll find all kinds of speculation as to specific causes, but I chalk it all up to investor uncertainty and performance anxiety.

No one wants to be stuck holding the bag when the market pulls back, and conversely, no one want to be left behind when it takes off. The volatility exhibited in the markets this past few weeks (especially on Friday), expresses just how anxious investors are about an economic recovery.

But that’s all it is.. fear and anxiety driving investors to “do” something.

Albeit a slow one, I really believe our economy is in a recovery phase. The market has been a tear for so long that it would be foolish and irrational to expect continued market gains without periodic pullbacks, and that’s what’s happening now, a temporary decline.

While unemployment has been the biggest cause of investor anxiety, I still believe it’s remnants of a lagging indicator and will turn around soon, but slowly. Mainstream media has a tendency to sensationalize the numbers, but rates have fallen since I first wrote about unemployment reaching a peak back in October of last year.

Other aspects of our economy showing signs of improvement. GDP has grown over the past two quarters, corporate profits have exceeded expectations, exports are rebounding, personal income is up, consumer spending has increased, consumer confidence is at a two-year high, and the ISM index has reached it’s best level since 2004. IMO, these indicators as a whole point to a recovery.

But don’t take my word for it, track the results yourself.

Concerns are sure to persist that the economy’s momentum could fade, but the way I see it, if you search the minutia hard enough to find a problem, eventually your going to find one. I’m still continuing to sit on my hands with my retirement portfolio, but I may buy some select stocks if investor anxiety continues to cause the markets to decline.

Related Links – The Vanguard Group: Economic Week in Review

Posted 06 February 2010 † Guzzo § Commentary § Economic § Stock Market ‡ Comments (2) ° Tagged:

Money Market Fund Reform

The Securities and Exchange Commission (SEC) just adopted new rules to their oversight of money market funds — revisions that include increasing credit quality, improving liquidity, shortening maturity limits, and requiring the disclosure of a fund’s actual “mark-to-market” net asset value, known as a “shadow NAV,” on a delayed basis.

This SEC action grows out of the financial crisis of 2008 and the weaknesses revealed by the “breaking of the buck” of the Reserve Primary Fund in September 2008. Those events precipitated a full-scale review of the money market fund regulatory regime by the SEC.

According to a recent SEC press release:

Washington, D.C., Jan. 27, 2010 – The Securities and Exchange Commission today adopted new rules designed to significantly strengthen the regulatory requirements governing money market funds and better protect investors.

“These new rules will have substantial benefits for investors and are an important first step in our efforts to strengthen the money market regime,” said SEC Chairman Mary L. Schapiro. “These rules will help reduce risks associated with money market funds, so that investor assets are better protected and money market funds can better withstand market crises. The rules also will create a substantial new disclosure regime so that everyone from investors to the SEC itself can better monitor a money market fund’s investments and risk characteristics.”

Although the SEC says that the new rules will have substantial benefits for investors, there are many significant questions and concerns from the individual investors who use money-market funds to store their emergency funds and as brokerage account sweeps, for ease of use and liquidity.

There is also concern about how these new rules will affect already low yields and whether or not, with lower yields, it would be wiser to keep those funds in an FDIC-insured bank or credit union savings account.

See what the wise individual investors in the Bogleheads Investment Forum have to say about these recent, and any possible future, SEC rule changes. It’s all good food for thought.

These new rules are effective 60-days after their publication in the Federal Register. Mandatory compliance with some of the rules will be phased in during the year. The final rules, including compliance dates, will be posted on the SEC website as soon as possible.

Posted 04 February 2010 † Guzzo § Economic § Investment ‡ Comments (0) ° Tagged: , ,

To Catch a Dollar

Muhammad Yunus banks on America, trying to establish a “trickle-up” effect – a 2010 Sundance Film Festival premier documentary.

Documentary Spotlight:

What prevents poor people from getting ahead? Banks refuse to give credit without collateral. Where commercial banks see insolvency, Nobel Prize–winning economist Muhammad Yunus sees opportunity.

His groundbreaking Grameen Bank was built on the radical notion that if you loan poor women money within the context of peer support, not only will they repay and sustain the bank, but they’ll elevate their communities in the process. With millions of microloans to rural entrepreneurs in developing countries, Grameen is now audaciously importing its methods to the bastion of first-world capitalism: the U.S.A. First stop: Queens, New York.

With an intimate camera capturing both buoyant and despairing moments, To Catch a Dollar chronicles the evolution of the tiny new branch. Will the solidarity principles translate to a diverse group of inner-city women? As the banking industry collapses, will these intrepid social-justice financiers succeed? One thing’s clear: we need new models to ensure prosperity for all. “Trickle-down” economics doesn’t seem to be working.

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Who is Muhammad Yunus and what motivates him?

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Posted 01 February 2010 † Guzzo § Commentary § Economic ‡ Comments (0) ° Tagged: , , ,

Fear the Boom and Bust

In this entertaining economic video presentation, Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there’s a “boom and bust” cycle in modern economies and good reason to fear it.

Fear the Boom and Bust is brought to you by EconStories.tv, a place to learn about the economic way of thinking through the eyes of creative director John Papola and creative economist Russ Roberts.

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Posted 29 January 2010 † Guzzo § Economic ‡ Comments (0) ° Tagged: ,