401k Loan Double Taxation Myth
I don't know who started it. Suze Orman certainly helped spread it. She says that you shouldn't borrow from your 401k (or 403b) plan because you will be double-taxed. I did a Google search and I found 5 priceless money-saving tips by Suze Orman:
"Also, never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don't pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time."
This allegation is all over the place — MSN, USA Today, The Motley Fool, Moolanomy blog. It is a myth because there is NO double taxation. It's a mind trick similar to that well-known "where's the missing dollar" puzzle. » Read more …
Stories from Strapped: Paycheck
This is part 2 in the Strapped series. See also:
Chapter 2 in Strapped: Why America's 20- and 30-Somethings Can't Get Ahead is Paycheck Paralysis. It says the younger generation can't get ahead because they don't get good jobs. They have become Bouncers, Jugglers, Tempsters, and the Pajama Class. The stories are as good as the ones in the previous chapter.
Alternatives to a High Cost 401k Or 403b Plan
This is a common problem: you have a 401k or 403b plan at work, but the plan isn't very good. All the investment options in the plan have high expenses. The plan itself may also have some hidden fees. If the plan has a match, you contribute enough to get the full match. That's a no-brainer, because the match will more than compensate for the high costs and hidden fees. But then what? Any additional money you contribute to the plan won't get any more match. Or perhaps the plan doesn't have a match to begin with or your employer contributes to the plan regardless whether you contribute or not. In these cases, should you still contribute to the high cost 401k or 403b plan even when there is no [additional] match? I made a spreadsheet to compare the alternatives.
1. Roth IRA. If you are eligible, contributing to a Roth IRA is a good alternative to a no-match 401k or 403b. Because a Roth IRA is under your own control, you can buy low cost funds in your Roth IRA. The lower your costs, the more investment returns you get to keep.
2. Non-Deductible IRA. If you are not eligible for contributing to a Roth IRA, you are still eligible to contribute to a non-deductible Traditional IRA. The contributions are not tax deductible but the investments grow tax deferred inside the IRA. Under the current law, there is an opportunity to convert a non-deductible Traditional IRA to a Roth IRA in 2010 and thereafter. This 2010 Roth conversion issue is beyond the scope for this post. See Should I Contribute To A Non-Deductible IRA? Part 1, Part 2 on My Money Blog for more information. For the purpose of this post, I assume the non-deductible IRA is going to stay as-is and not converted to Roth.
A New Look
If you read my blog on the blog website thefinancebuff.com, you may have noticed a different look. Don't worry, it's not been hijacked. It's still me, doing the same thing. I just moved the blog from Google's Blogger service to the open source WordPress platform.
All the old bookmarks should work as before. If you read from the RSS feed, the feed should work the same as well. I will still tweak a few things here and there but everything should work just like before. If you notice something not working, please send me an e-mail or leave a comment. Thank you.
Stories from Strapped: College Education
Because I looked at the book The Two Income Trap on Amazon, Amazon suggested that I also read Strapped: Why America's 20- and 30-Somethings Can't Get Ahead. It's a popular theme lately. They say that the younger generation today are worse off than their parents in the 1970s. Other books with similar thesis include Falling Behind, The Big Squeeze, and (Not) Keeping Up With Our Parents. So I decided to check it out and see what the buzz is all about.
The author Tamara Draut is a Director of the Economic Opportunity Program at Demos, a national think tank in New York City. The main theme of the book is that young adults, born between 1971 and 1987, are worse off than their parents a generation ago because of these usual suspects:
- high costs for college education (tuition rose much faster than inflation)
- low starting salaries, especially for people without a college degree
- high student loan and credit card debt
- high rent and home prices, especially in big cities on the coasts
- high costs for child care
Who Really Robbed FDIC $6 billion
I asked on Monday who robbed FDIC $6 billion from the IndyMac Bank failure. Too bad more of you didn't chime in. Come on, don't be shy. It's not fun if it's just me yapping all the time. Anyway, here are my thoughts.
1. Defaulted Borrowers. IndyMac took in deposits and lent out the money as home loans. That's what a Savings & Loan does. Every borrower signed a promise saying they will make payments by the payment schedule. Not all borrowers are fulfilling their promise though. Because of these defaulted borrowers, IndyMac collapsed. Since FDIC has to make the depositors whole, the defaulted borrowers in effect took money from FDIC. Some borrowers may not have wanted the money in the first place. They've been marketed to by IndyMac, misled by realtors, mortgage brokers and what not, but that doesn't change the fact that they took the money from IndyMac and they are not paying the money back as promised. In the end, they took and kept the money from FDIC. Imagine if all IndyMac's loans were current, the bank would not have failed.
A related interesting question is, will FDIC do wholesale loan modification for IndyMac's borrowers? Sheila Bair, the head of FDIC, often criticized banks for not doing loan modifications fast enough. Now that FDIC owns IndyMac's mortgage portfolio, will it foreclose on defaulted borrowers? If it doesn't, will that become an open invitation for more defaults? Or will it forgive loan balances and keep the borrowers in their homes? If FDIC doesn't do anything differently than another bank, then all the criticisms on other banks are just empty talk. Other banks must be watching closely what FDIC does to IndyMac's loans now that FDIC's own money is on the line.
Embrace the Bear Market with Overbalancing
After two false starts in January and March 2008, the stock market finally crossed over into bear market. The bear market is great because everything is cheaper. I quoted Warren Buffet in How Low Can It Go? Part 2 in January. It's worth repeating:
"If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." — Warren Buffett, Berkshire Hathaway Inc., 1997 Chairman's Letter
Who Robbed FDIC $6 billion?
On the way back from work last Friday, I heard on the radio IndyMac Bank was closed by authorities and taken over by FDIC. IndyMac Bank had $19 billion in deposits. This failure is the largest in recent history. It matched in size the Bank of New England failure in 1991.
In previous bank failures, FDIC usually let other banks bid for the failed bank and pick a winner to take over the failed bank's assets and deposits. For example when NetBank failed, it was given to ING (see previous post NetBank Shuts Down, ING Takes Over). This time it's different. No other bank raised their hand. I guess nobody wanted IndyMac's questionable mortgage portfolio. FDIC set up a brand new bridge bank. It will manage the assets and liability itself until it can find an acquirer later on.
According to FDIC's press release, this IndyMac Bank failure will cost FDIC $4 to $8 billion.
TIPS Auction Step By Step: Read the Results
[An updated version of this article appears in my new web site Explore Bonds, together with many other articles on investing in bonds.]
This is the fourth installment in my TIPS auction series. The previous posts in this series were:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Read the Announcement
- TIPS Auction Step By Step: Place Order
TIPS Auction Step By Step: Place Order
[Updated on July 11, 2008: added related posts in the series.]
This is part three of the TIPS auctions series. Other posts in this series are:
- TIPS Auction Step By Step: Know the Schedule
- TIPS Auction Step By Step: Read the Announcement
- TIPS Auction Step By Step: Read the Results
If you are interested in TIPS but you don't want to be bothered with auctions, you can buy TIPS in a mutual fund or ETF. See Individual TIPS Or TIPS Mutual Fund.
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