How Much Should You Put Into Flexible Spending Account (FSA)?
My company is doing open enrollment again for next year (for more info on what to choose in open enrollment, see previous posts). I'm not going to make any changes except I have to re-enroll for flexible spending account (FSA).
If you use flexible spending account, you should be familiar with the use-it-or-lose-it rule. If you put too much in the FSA, you will lose what you can't use. In the past I always estimated conservatively. I've never lost any money to the FSA. However there is also a cost to that approach. After the money in the FSA is used up, any additional expenses must be paid with after-tax dollars. There has to be a point where losing a little pre-tax money in the FSA is less expensive than paying a lot with after-tax money.
This becomes an interesting math problem.
TIPS During Deflation
[Updated on Oct. 28, 2008. All yields are real yields, after inflation/deflation adjustments.]
While the stock market was in turmoil, the real yields on Treasury Inflation Protected Securities (TIPS) rose to an attractive level. The real yield on 10-year TIPS broke the magic 3% number, a level that hasn't been reached for many years. Many TIPS buyers including myself thought the high real yields in the first few years after TIPS first came out in late 1990s were a fluke. The real yields were high because TIPS were new and illiquid. I thought we'd never see 3% again. It's amazing how fast things change. Back in the spring, the 10-year TIPS real yield was under 1% while the 5-year TIPS real yield was negative (please note all yield numbers for TIPS are expressed as real yield, which is on top of inflation).
It's always hard to explain why the market moved the way it did because previously when the stock market ran into trouble, the bond prices went up (real yields down ). The concern for deflation was raised as one possible explanation for the rising TIPS real yields. A poster on the Bogleheads forum asked whether the real Yield to Maturity (YTM) number quoted when an investor buys a TIPS on the secondary market will still hold if there is deflation instead of inflation.
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 …
Imported Spreadsheets to Zoho
I mentioned in another post that I started using Zoho recently. Zoho offers a suite of "office" software online. They have online word processor, spreadsheet, presentation and many other types of software that traditionally resides on a local computer. Having these software online lets me access my documents from anywhere. It also lets me share my documents with the world without requiring Microsoft Excel. My experience so far has been very good. I have created a few Excel spreadsheets and linked to them on this blog in the past. Zoho's spreadsheet program correctly imported them without glitch. Here they are if you'd like to use or bookmark them:
ESPP Rate of Return – Calculates the annualized return from Employee Stock Purchase Plan (ESPP) purchase and sale. See previous post Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.
A Tale of Two Charts
The S&P/Case-Shiller Home Price Indices came out for February 2008. They showed a year-over-year decline for most cities. The announcement from Standard & Poor's came with the following chart (click on it for a larger size).
RSU Sell To Cover Deconstructed
Ever since I wrote Restricted Stock Units (RSU) Sales and Tax Reporting, I received many questions. They all relate to sell-to-cover, which is the default, and often the only option people have for their restricted stock units (RSU). I must have not been crystal clear in my previous post. Otherwise I would not have received so many questions. I thought of a better way to explain it. So hopefully it is clear this time. For background on RSUs and tax withholding, please also read my previous post Restricted Stock Units (RSU) Tax Withholding Choices.
Let's use this hypothetical example.
Mortgage Interest and Property Tax Deduction for Homeowners Who Don't Itemize
The New York Times reported that Senate Democrats and Republicans reached a tentative deal on the new housing bill. Among the various provisions is a federal income tax deduction for property tax paid by taxpayers who don't itemize deductions. Single taxpayers get a $500 deduction. Married taxpayers filing a joint return get $1,000. [Update: This has become law for 2008 and 2009. See follow-up post $500 Or $1,000 Property Tax Deduction for People Who Don’t Itemize Deductions.] Presidential candidate senator Barack Obama also proposed a "universal mortgage credit" which gives a refundable tax credit to taxpayers who pay mortgage interest but don't itemize deductions.
The rationale behind these proposals is that the mortgage interest deduction and the property tax deduction benefit only the well-off. They say people who don't itemize their deductions don't get those deductions. From Obama's Tax Fairness Plan:
Restricted Stock Units (RSU) Tax Withholding Choices
Ever since the companies are required to expense employee stock options, more companies started to grant the employees Restricted Stock Units (RSUs) instead of stock options. The first batch of RSUs I received will vest shortly. Unlike non-qualified stock options which are taxed at the time of option exercise, RSUs are taxed at the time of vesting. Our stock plan administrator has asked me to choose how I want to pay for the tax withholding when my RSUs vest. I have 3 choices:
1. Same Day Sale. This is the simplest. On the vesting date, I sell everything. After subtracting for tax withholding, I end up with net cash.
2. Sell to Cover. If I choose this option, they will sell just enough shares to cover the tax withholding. I keep the remaining shares and I can sell them myself whenever I want to.
2007 Tax Year AMT Brackets
Congress passed another patch for the Alternative Minimum Tax (AMT) late last year. With that, I can finally calculate the AMT marginal tax brackets for the 2007 tax year. If you are not familiar with AMT, please read my previous post, Tax Deduction Denied.
Because of an exemption phase-out rule, people whose incomes are in the middle of the AMT range pay a higher AMT marginal tax rate than people on either the low or the high end. This is relatively unknown. Many people think there are just two brackets in AMT, 26% and 28%. There are actually four brackets. In addition to 26% and 28%, there are also 32.5% and 35% brackets for people who are in the exemption phase-out range. Unfortunately many people who are hit by the AMT also fall in the phase-out range.
For each filing status, three numbers are pertinent for calculating the AMT brackets.
More On Missing The 10 Best Days
Blogger Nickel at fivecentnickel.com made some great comments to my post about missing the 10 best days in the stock market. I showed in my post that the probability of missing the best 10 days in 10 years is one in 2.8 billion billion billion. Nickel disagreed. Because the comments require a long response, I'm making a new post as opposed to burying it in the comments. First, the comments from Nickel:
"While you're correct that this overstates the problem in that people won't miss just the 10 best days of the market, you're forgetting that the biggest days often come in the earliest stages of a recovery.
"For example, looking over the past 25 years, three of the 10 biggest days came in the week and a half following Black Monday, and two more of them occur in close succession at the very tail end of the dot bomb debacle. Thus, these days are concentrated into periods when people are especially likely to have bailed on the market and not gotten back in.
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