Tuesday, September 18, 2007

Future Programming for Analog TV: Snow

An acquaintance commented last night that her TV broke. When she went to buy a cheap one, there were none to be found. In the group conversation that developed, no one was aware that analog TV broadcasts stop in just 17 months, on Feb 17, 2009. Only digital TV broadcasting will remain after that date. Right now it is illegal to sell a new set that doesn't include a digital tuner.

So what do you do if you have an analog TV set? If your TV reception goes through the cable company, then the issue is up to them. Your existing converter box probably will continue to work. On the other hand, if you use an antenna then you will have to do something yourself.

There is a Digital-to-Analog Converter Box Coupon Program scheduled to begin next year. Under this program, all US households will be eligible to request two $40 coupons towards converter boxes. These boxes are expected to retail for approximately $60 each, but are still under development.

If you use an antenna and want to use your analog set, I recommend that sometime next year you take advantage of this program. You may want to wait a few months for prices to stabilize. Next summer may be the optimum time. If you use rabbit ears you may find that a roof-top antenna is necessary. That has been my experience with a digital TV as I'm in a fringe area. While analog TV degrades into snow and perhaps ghosts, digital TV is perfect and then with degraded signals you might see a bit of pixelization, and a dark screen. Don't wait until the last minute to sort this out.

Friday, September 14, 2007

Reasons For Not Participating in a 401(k) Plan

Occasionally the topic of retirement savings comes up at work. I'm amazed at some of the thinking.

One colleague made the comment that if he had $50,000 he could retire. Being an immigrant, I thought perhaps he was planning to return to his home country and live in a mud hut. But I didn't pursue the topic. Then a couple of years later, he was looking at needing to retire and told me that all he had was Social Security. When I asked about his 401(k) he said that he wasn't participating. When I asked why he said "It might go down". Well, with a 50% employer match and 100% match after 5 years, it has to go down a lot to lose money. And if afraid that "it might go down" the plan offers a money market fund. So he lost out on the employer match for 6 years at this employer. And with the relatively small amount he could have saved, he would pay very little if any taxes on his distributions if he spread it out over a number of years.

Another fellow employee told me that he wouldn't participate because he didn't want his money in our employer's stock. Yes, it's a good idea to diversify. But beginning last year, those who were vested had the option to sell their company stock and chose other investments. After the conversation, I got to thinking that maybe he thought his contribution had to be invested in company stock. Which was never the case, although that has always been an option.

Another colleague who is participating thought that the only way to get funds of the employer match out of the company stock was to pursue our unique option of being able to have up to a certain limit distributed each year -- he wasn't aware of the plan change last year allowing diversification.

Before making decisions about participating in your employer's 401(k) plan, get a copy of the Summary Plan Description and read up on the rules. And if it's been awhile since you've read yours, get a fresh copy because they can be amended periodically, and review the information there.

Any other excuses for not participating?

Tuesday, September 11, 2007

I Wonder if Ray Got a Letter Too

The Federal Trade Commission has published a press release "FTC Warns Mortgage Advertisers and Media That Ads May Be Deceptive". On this page is a link to a sample letter they sent out.

The press release included the following:

For example, some ads touted rates as low as “1%” but failed to disclose adequately:

* that the stated rate was a “payment rate” – not the interest rate – that applied only during the loan’s initial period;
* that low advertised payments applied for only a short period; and
* the loan’s Annual Percentage Rate, the uniform measure of the cost of credit that enables consumers to shop for and compare mortgage offerings.

Some ads promoted only incredibly low monthly payments but failed to disclose adequately the terms of repayment, including payment increases and a final balloon payment

I wonder if Ray Vinson got one about his "No-Spin Mortgage". Perhaps so -- I haven't heard any such ads from him or Bill O'Reilly recently. I was never able to find out any details about his loans on his web site, just an application form. What do you think the chances are that I would have found out if I'd taken the trouble to apply?

While over at the FTC website, you might want to check out their page with links to articles with consumer information about mortgages.

Sunday, September 9, 2007

How and Why I Rolled Over 401(k) Funds to a Roth IRA

Actually I didn’t do this exactly as I’ll explain later. First I’ll discuss the “why”.

As I discussed in this post, you should have some of your retirement funds in tax-deferred savings such as traditional IRA or 401(k) funds. This is because some taxable income is not actually taxed. The taxable income on which you pay no taxes at all is that which is less than your personal exemption and standard deduction. The standard deduction amount is increased slightly for someone 65 or older. This adds up to almost $10,000 for a single person over 65 in 2007, and this amount is indexed annually for inflation.

However, the effective tax rates for a retiree can quickly escalate once taxes are paid. If other income including withdrawals from tax-deferred savings added to 50% of your Social Security benefit exceeds $25000 for a single person, you begin paying taxes on $.50 of Social Security for each $1 of additional other income. With even more income, you pay taxes on $.85 of Social Security for each $1 of additional other income. This can effectively turn a 15% tax bracket into 22.5% or 27.75%, and a 25% bracket into 37.5% or 46.25%. It would be terrible to pay 46.25% taxes on money you deferred at 25%. Also, the $25,000 threshold for testing whether or not some of your Social Security is not indexed for inflation which will result in more and more people paying more taxes on Social Security benefits.

Once you reach the age of 70 ½, the IRS expects you to take Required Minimum Distributions (RMDs) from your tax-deferred accounts. Failure to take your RMDs can result in punishing penalties -- 50% of the amount you were supposed to have distributed but did not.

I have sufficient tax-deferred savings that I’m concerned about ending up in an effectively higher tax bracket due to taxation of my Social Security benefits. I am also concerned that tax rates will increase in the future as right now they are at historic lows. So I am converting 401(k) funds to a Roth IRA, but as I stated earlier I couldn’t do this exactly, or at least not directly. First I had to rollover the 401(k) funds to a rollover traditional IRA and then I converted funds from the rollover IRA to a Roth IRA.

My employer’s 401(k) plan rules allow me to distribute up to $25,000 per year of the company match. Most people probably don’t have this option, but I did. However, you may have funds from prior employers that you’ve either left with them or have already rolled over to an IRA. (If you spent them – shame on you.)

Last year, I created a rollover account at Vanguard which initially was unfunded. Then I contacted my 401(k) plan administrator and asked for a partial distribution with the check made out to Vanguard as the custodian of my rollover account. By having it made out to my IRA custodian I avoided having taxes withheld from the distribution. The check was mailed to me. I then placed it in an envelope with a form I downloaded from Vanguard’s site and filled out with my personal and account information to fund the rollover IRA account I had setup previously.

Later on and before the end of 2006, I converted part of my rollover account to a Roth IRA account which I had previously set up and funded with normal IRA contributions. The part I didn’t convert is still in my rollover IRA. The amount that I converted to Roth added to my tax bill. In order to avoid penalties for underpayment of taxes, I made sure to increase tax withholdings from my salary to exceed the amount I had paid in taxes the prior year, and I went ahead and had enough withheld to cover the taxes on the amount I converted to Roth. I estimated this with a spreadsheet and actually ended up with a small refund due to the telephone tax refund.

In retrospect, I should not have done this with my current employer’s 401(k). I have funds left in a prior employer’s 401(k) plan. I should have started my conversion with those funds. The reason is that if I leave my current employer during or after the year I turn 55, then I can withdraw plan without penalty from my 401(k) sponsored by that employer. I don’t have that option for employer’s I’ve left at a younger age until I reach 59 ½. I also don’t have that option with funds that I’ve rolled over. While taking and spending distributions from my 401(k) is not currently in my plans – well, life happens and it’s good to have options.

I want to reiterate a few points for someone contemplating doing this.
(1) Make sure that you have enough tax-deferred savings or a taxable pension so that when in retirement you use up the standard deduction and personal exemption amount on which you wouldn’t pay taxes anyway.
(2) Make sure the distribution is directly to your rollover account custodian to avoid withholdings.
(3) Plan your income tax withholdings and/or estimated tax payments so that you don’t get hit with a large tax bill and possible penalties the following April.
(4) If you have funds in any traditional IRA which are after-tax, the complexity of your tax returne will increase. Those funds are “non-deductible contributions” to a traditional IRA, see IRS form 8606 that will need to be filed if you do a conversion.
Another consideration is that the funds I’ve converted must remain in my Roth IRA for 5 years or I will pay a penalty.

This year I plan to rollover funds from my prior employer's 401(k) plan and convert them to Roth. I understand that beginning in 2008 that the "two step" won't be required and that 401(k) funds can be directly converted into a Roth IRA. While my employer offers a 401(k) plan with some great funds, I hope they make it even greater by adding a Roth 401(k) option.

Saturday, September 8, 2007

Your Dinner is About to Be Interrupted

Having my evening interrupted with telemarketing phone calls is an unpleasant but receding memory. Many states including my own passed do-not-call legislation in 2002. The fine print is that the registrations for the lists automatically expire after 5 years. After all, many people move and we don't want the person who "inherits" the old number be deprived of the wonderful experience of having their dinners interrupted by someone pitching timeshares. So if you signed up for your state's do-not-call list in 2002, that registration may be expiring if you didn't sign up again. Wisconsin and Pennsylvania are two such states.

The national do-not-call legislation was enacted in 2003 also with a provision for 5-year expiration of registrations, so if you've registered for that list your registration is still in effect and won't expire before next year.

Last year I got a now-rare phone call from a telepest. After giving them a hard time and filling out a complaint on the web site of my state attorney-general, I checked-up on my registration to make sure it hadn't expired. While I was at it, I went ahead and re-registered my phone number protecting me until 2011.

If you haven't registered your phone number on the national do-not-call list, you should do it now. Even if you have already registered, why not re-register it now that you're thinking about it so that you won't have a gap in your protection next year if you forget to renew it?

The registration process is fairly simple. Just go to the National Do Not Call Registry and fill in their form. You will need to give them an email address to verify your registration. Make sure that you follow the instructions in the email to compete the registration process. The web site also offers the capability to verify your registration.

Thursday, September 6, 2007

No 401(k) for Snow

In a recent post, I discussed the Zeroeth Law of Financial Security (spend less than you earn)and gave the example of Tony Snow not being able to make it on $168,000 per year.

Seems it's even worse, according to this editorial. While not the main point of the editorial, it stated:
......., it was clear that he had relied entirely on others to save for his retirement. Snow conceded: "As a matter of fact, I was even too dopey to get in on a 401(k). So there is actually no Fox pension. The only media pension I have is through AFTRA [a union]."

Tony needs to get serious about his own personal finances, or hope that the union pension is lucrative. Even maximum Social Security benefits if he waits until the age of 70 to start them will be less than 24% of the $168,000 he couldn't get by on. And the benefits would be about the same as an average worker makes.

Hopefully Tony will beat his cancer. If so, I expect we'll be seeing him on Faux News for a long time to come.

Wednesday, September 5, 2007

Improving Your FICO Score -- Correcting Errors

FICO scores are determined from data in your credit report. But many credit reports are in error. When I became aware several years ago that you could get a copy of your own credit report free from www.annualcreditreport.com, I pulled a report from one of the 3 credit-reporting agencies. When I saw the errors present in my report, I wrote a letter and had the errors corrected. I also pulled the reports from the other 2 agencies, found errors in them and wrote letters to have them corrected as well.

Since then, I spread out my reports among the 3 agencies, getting a sample from one of them every 4 months to get a heads-up if there's a problem. While I'm not in the market for loans, FICO scores can effect other aspects of life such as insurance premiums, and can even keep you from getting a job.

In my case it was fairly easy to get the errors corrected. Perhaps your situation is a bit more complicated. Check out this MarketWatch story How to Correct Your Credit Report for a six-step guide.

FICO scores are less of a concern. Paying your bills on time and not over-utilizing your credit line will go a long distance to getting you that high FICO score. And correcting errors may help as well.

Monday, September 3, 2007

Which Came First, the FICO Score or the Loan?

How does someone without a credit history obtain a loan? It's sort of like asking whether the chicken or the egg came first. I remember the difficulty I had in getting my first credit card -- and this was after I had obtained a mortgage. I was turned down even when applying as a student, not for a poor credit history but for no credit history. This was around the time FICO scores were introduced.

According to this article in the Kansas City Star, an alternative scoring method is being developed based on an individual's payment history for utility bills, rent payments, and even payday loans.

This alternative scoring method is not yet accepted by all lenders. However it may provide more options to those trying to break through the credit history barrier to get their first credit card.

Saturday, September 1, 2007

Driving a Car to Death Saves You ... How Much?

The headline of this CNN article says that it's $31,000. Compared to the cost of trading in and buying new every 5 years, keeping a Honda Civic EX for 15 years saves you $20,500. The car used in this example is a Honda Civic EX -- the Civic is one of Honda's cheaper models and the EX is a package that adds power windows, automatic transmission, etc. The other $10,300 comes from interest before inflation on your savings, savings at 5% and inflation at 3%. Personally, I prefer to leave inflation out of it -- but the $20,500 of savings is enough motivation. That's over $1300 per year that can be added to retirement savings.

I have a Honda Civic DX which has basically nothing extra, except for air conditioning and a CD player. I don't mind cranking up the windows by hand or shifting the transmission myself. My other vehicle has power windows two of which have required expensive repairs. I get better gas mileage with standard transmission, in the mid 30's around town and easily over 40 mpg on a long trip. The only feature I miss in my basic car is cruise control when on a long trip. I considered Honda's hybrid model, but estimated that the $5000 extra it cost would not be repaid by reduced gas consumption, even with rising gas prices.

In order to keep your vehicle for 15 years, it has to hold up. Regular maintenance goes a long ways, some of which is relatively simple such as checking your fluid levels regularly. The make of the vehicle is a factor: some of the longest running cars are made by Honda. On the other hand, some luxury vehicles such as BMW, Jaguar, and Mercedes are less likely to last 200,000 miles. (Here's the other assumption in the article: driving around 13,000 miles per year.)

I've had my Honda for almost 3 years and have put over 36,000 miles on it. I've had zero problems with it, compared to an American vehicle that required several trips back to the dealer for repairs, the first within 30 days.

Most people make car payments and view the cost of ownership as the amount of the monthly car payment (after you've paid off the note it's free). Their view of the cost to go on a trip is the cost of the gas. I have a different model. I've paid cash for my last two vehicles. I estimate the depreciation as the cost of the car divided by 100,000 miles. Each month I look at the odometer and plug the number into my spreadsheet. The spreadsheet calculates how much I need to set aside to buy the next car. I expect the car to last more than 100,000 miles, but also expect that repairs will be needed more frequently as the miles pile up. And when it's time for a new vehicle, I have the money to pay cash for it. And with my financing model, I think a bit more about the cost before deciding to take a trip.

Perhaps some people look at me as I drive up in my appliance-white small vehicle and assume that I don't have much money. But I don't care about impressing anyone. I get more satisfaction from a higher balance in my 401(k).