Archive for the ‘ Finance ’ Category

Toss Out Traditionalism: Roth me hard!

2010 has leveled the playing field for Roth IRAs; the federal government has eliminated the income limit for converting a traditional IRA to a Roth IRA. This will benefit millions of Americans making $100,000 or more whom were previously unable to take advantage of a Roth IRA or convert their traditional IRAs into a Roth. The new law repeals previous income limits for conversions; however, income limits still apply to Roth IRA contributions.

We must always think of Uncle Sam since he, too, benefits from the taxes that will be collected on capital gains that were accrued pre-conversion.

What’s the difference?

Those whom are younger than 50 years of age can contribute up to $5,000 annually to an IRA. NB: If an individual is older than 50 years of age, they can contribute and additional $1,000 in retirement catch up, totaling $6,000 annually.

There is no mandatory age at which someone must stop contributing to a Roth, compared to 70 ½ with a traditional IRA. If an 80-year-old grandmother wants to open a Roth IRA, she can do so.

Any income earned on a Roth IRA is tax-free when a consumer withdraws after age 59 ½ as long as it has been five years since the Roth’s inception; however, all withdrawals from a traditional IRA are taxable as ordinary income.

Tax you very much!

The rules for IRA conversion taxation have changed slightly for 2010: and 2010 only! This year, anyone who converts a traditional IRA to a Roth IRA will have the option to spread out his or her tax bill, 50/50, over the 2010 and 2011 tax year. But, be aware that taxes will be on the rise next year because of the sunset provision in the tax act of 2001 – however, this may be overturned with new legislation as this year progresses. Be cognizant of your tax burden and decide accordingly.

Keep in mind; after a certain income level, the IRS prohibits traditional IRA contribution tax deductions.

A Tip:

For those of you that are making more than $120,000 (ineligible to contribute to a Roth IRA), open a traditional IRA and max out your annual contributions, then convert to a Roth immediately. This way, you can take advantage of tax-free growth even if you are ineligible to contribute to a Roth IRA.

Froth Your Roth:

Do not just put your money into a Roth and leave it to rot, take full advantage of the fact you have the ability to grow your money TAX FREE. Trade stocks/options within the account and grow it to the hilt! Many people, well, those of whom actually save, just put their money in these accounts and expect them to grow magically. Not going to happen… be smart.

Fidelity has a great calculator to see if converting is in your best interest: Here

As always, speak with your accountant before making any final decisions.

CARDS Act fun!

Beaucoup De Credit ⓒ Joshua Plant 2008

In 2009, credit card companies collected $22.9 billion in penalty fees from consumers, which is up nearly $4 billion from 2008. On February 22, the latter portion of the CARDS Act of 2009 will be implemented in an effort to help protect consumers and bring an end to erroneous fees. But, what is good for consumers is bad for profit margins; however, this is only good for some consumers and it screws the rest.

The New Rules, as of February 22, 2010:

  • Promotional offers on college campuses and at college-sponsored events are now illegal
  • Persons under 21 must have an adult co-signer to open a new account; exceptions will be made for those whom can provide proof of independent means
  • Death to double-cycle billing
  • Allocating payments: payments over the minimum must be applied to balances with the higher interest rate first, and subsequent balances thereafter.
  • Over-limit fees: consumers must be given the option to opt in for the ability to overdraft one’s credit line

These are just some of the new rules that are coming into play. The former part of the law was enacted in August of 2009, changing several terms of use; including:

  • Universal defaults
  • Extending the mailing period before a bill’s due date from 14 days to 21
  • A 45-day notice must be given before an interest rate hike; and
  • There must be a clear and concise explanation of the Right to Cancel

Same Sheep Different Farm:

Now that the nation’s banks have had $50 billion in revenue ripped off their balance sheets, they have to find a way to make up for the lost revenue. Solution: bombard consumers with fees left and right! The banks are going to, if they have not already done so, charge their customers for “processing” fees for paper statements, swap fixed interest rate cards to variable rates, tack on annual fees and much more!

I am missing the part where this helps the consumer…

Granted, yes, there are several good things to come out of this law, but it does not really protect us. It simply cleans up some ridiculous clauses and fees in our TOS and swapped them for more “transparent” fees.

One must have credit cards to get a good credit score, better interest rates on mortgages, loans, and so on. But, how much are we losing in our profit margins when we are paying out the ass in fees?

For people like myself, many of these new rules are only adding to our costs and eliminating rules that rarely apply. I never overdraft nor do I worry about my interest rates because I tame my credit card use and anything that cannot be paid for in cash, isn’t purchased!

But, now my interest rates are going up from under 10 percent to god knows what Monday morning. Welcome to the land of inevitable annual fees, and variable rates!

All of us “good” customers are being screwed, so the poor can continue to spend irresponsibly and the banks can continue to profit from reckless behavior.

Thanks CARDS Act!

Your Best Line Of Defense:

Call your credit card companies and talk to them. See what you can do to keep your rates low, your fees down and what your standing is with the company. In the past, they have been willing to work with their customers that are in good standing; although, they seem to be alienating them now.

What you should not do is close your accounts! If you close them, your debt-ratio will be out of whack and can do more harm to your credit score than good. Work with the bank the best you can, and tame your use.

There isn’t much else we can do. We are slaves to the banks and that isn’t going to change anytime soon.

Capitalism: A Love Story… right.

Greed

Wall Street’s newest attempt to capitalize on the poor and undereducated is to buy life settlement life insurance plans back from the policyholder(s). After which, they will securitize them into bonds that will be traded like pension funds. The funds generate profit when the former policyholder dies and the policy is paid out – not to mention, the earlier the policyholder dies, the bigger the return.

These exotic options come with an obvious risk – if people live longer than expected, then the fund will lose money. Rest easy, we needn’t worry about the firms, they will still turn a profit by pocketing the sizable fees that are associated with creating, reselling and subsequently trading these bonds.

Goldman Sachs and Credit Suisse have already created these so-called death indices that are traded similar to tradable stock market indices that allow investors to bet on the overall direction of a market without actually buying stocks.

Why?

Why would people be selling their life insurance in the first place, you ask? Some people whom are strapped for cash may sell their policy for a portion of the face value. Other’s simply let policies laps because they no longer have dependants that would require the extra money in the event of their death. Therefore, the insurance companies no longer need to pay out after the former policyholder’s death.

Profit!

This is where Wall Street comes in; they want to capitalize on the $26 trillion of life insurance policies in the US. Rather than letting policies laps, you can sell it to a firm for x amount and then the firm assumes the responsibility of the premiums. Then, upon the former policyholder’s death, the firm collects the policy payout. Same thing goes for those whom are selling them for cash infusions. Sounds innocent, right?

Hardly.

“What’s in a name? That which we call a rose by any other name would smell as sweet…”

This isn’t very different from the subprime scheme. There is no telling where the boundaries would be drawn as to how brokers secure these policies from people. I am sure they will impart the same predatory practices that they used to get people to buy into subprime loans.

This, on the surface, does not directly affect the original policyholder. But, because the insurance companies will have to payout on many more policies that which would have been defaulted — the insurance companies are losing profits. Losing profits means anything from raising premiums on new policies to laying off employees to compensate the difference. As this bubble grows on Wall Street and the policies get more and more expensive as the insurers try and recoup their losses; the bubble will lose stability. Eventually, people will start defaulting on their premiums or not taking out policies at all and with less capital coming in and more capital going out… you understand where I am going with this.

Pop.

These exotic investment options crumble, those uninitiated to Wall Street’s ways that bought into these funds have now been wiped out and we have a life settlement insurance meltdown. “Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements,” said Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers. No one can say when this meltdown will happen or what its impact will be, but it is inevitable.

I would like to believe that the industry will be able to find allies in government, but when Goldman Sachs runs our treasury department, the blocking of these potentially predatory practices is unlikely. We cannot allow greedy brokerage firms to create exotic, and therefore, very risky and unstable investment options that set the stage for meltdowns.

This bubble and burst system has to come to an end. Regulate Wall Street or we will have to endure these financial collapses every 8-15 years until kingdom come.