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 …
A Business That Punishes Its Largest Customers
Here's a Jeopardy question.
A financial service charges no fee if you have less than $100,000 with them. If your account has $100,000 or more, they charge you $100 a year account maintenance fee. If you create multiple accounts, each with less than $100,000, then you will pay no fee for all your accounts.
The answer: What is Legacy Treasury Direct?
"Legacy Treasury Direct is a program in which investors buy Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities (TIPS) directly from the U.S. Treasury, without a broker.
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:
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.
Out of the Market and Meaningless Stats
The stock market had a field day last Thursday (7/12/2007). The Dow rose 284 points, its biggest point gain in nearly five years. It reminded me of the stats about the risk of being out of the market. It goes like if you missed the best X days in Y years in the stock market, your return would've been cut in half or something like that. Let me tell you those stats are meaningless.
There's a chart like this in a recent issue of Schwab's On Investing magazine (sorry, no online link):
$10,000 Lesson On Variable Universal Life (VUL)
Variable Universal Life insurance or in short VUL is sold by insurance agents as a smart investment to unsuspecting people. The pitch usually goes like this:
You invest in VUL. The money in the policy grows tax deferred. You get to choose what you invest in, stocks, bonds, international, you name it. It's like a super IRA, only way better. When you need money after you retire, you can first withdraw what you put in, then borrow from it, all tax free. When you die, your beneficiaries receive money tax free.
Commutative Law of Multiplication
Commutative Law of Multiplication is a fancy way of saying when you multiply two numbers, it doesn't matter which number you put down first and which number you put down second.
a * b = b * a
Payday Loans, Anybody?
No, I'm not talking about borrowing a payday loan. We all know it's very expensive for the borrowers. If you treat the fee as an interest charge, the rate often reaches several hundred percent APR. You know, what's bad for the borrowers must be a good deal for the lenders, right? What about owning a piece of the action? Wouldn't it beat lending on Prosper ten times over?
Before you accuse me of being a cold blooded capitalist lack of morality or ethics, let me get this straight. Payday lending is a legit business regulated by the states. There are payday loan companies publicly traded on the stock market. Chances are you already own them through your mutual funds. For example a company called Advance America, Cash Advance Centers, Inc. (ticker symbol AEA) operates 2,900 payday loan centers in 36 states. The company is traded on the NYSE and it's worth more than $1 billion. Vanguard is a top institutional shareholder of that company.
Second, payday loan transactions are completely voluntary. The lenders provide a service which the customers use by their own choice. If there is a cheaper, better service, the customers will use that instead. If the customers don't seek out the best deals for themselves, it's not the vendor's fault, is it? The value of a product or service is in the eyes of the customers. I may not think a particular pair of shoes is worth $300, or a car is worth $40,000, but a lot of other people apparently disagree. The same goes for payday loans. The customers think the service is worth the price or else the lenders wouldn't be in business.
401(k) Committee Chasing Performance
I received an e-mail from my employer's HR department this week announcing some changes to our 401(k) plan. Here's what they said (emphasis added by me, fund names masked).
The 401(k) Committee decided to remove the ABC Fund from the Plan due to poor performance for several quarters. The committee closely monitors all funds in the plan for the best interest of our plan participants. ABC Fund will be replaced by XYZ Fund. XYZ Fund's 10-year performance is in the top 10% of its Morningstar category through 12/31/2006.
Wow, the 401(k) Committee is tough and impatient. ABC Fund's managers had several quarters of poor relative performance and they were fired by the committee! What happened to investing for the long term?
Picking Stocks Is a Waste of Time
The 2/26/2007 issue of the Wall Street Journal had a special section for stock score board. If you don't have access to WSJ Online, it's worth digging it out from a library. I'm highlighting something I noticed in that section which makes the point for the title of this post — picking stocks is a waste of time.
When you invest in individual stocks, instead of mutual funds or exchange trade funds (ETFs), you can invest in the right stocks in the wrong time, or you can invest in the wrong stocks in the right time. Timing, or better put, luck, dominates any skills you think you may have.
Exhibit A. Chico's FAS (CHS) was one of the best performing stocks in the last 10 years. At the beginning of 1997, CHS traded at about $0.25 a share, split adjusted. At the end of 2006, it was worth over $21 a share. An average return of over 50% per year for 10 years. Fantastic stock! But, there's always a but, it was also one of worst stocks in the last 1-year period. At the beginning of 2006, CHS was worth $43 a share. By the end of 2006, it lost 1/2 of its value. Good stock in the wrong time. Since 2007 began, it went up 9%. S&P 500 was flat to slightly down during the same period. Will CHS continue its long term upward path, up 50% a year for 10 years, or will it continue its downward movement from last year, down 50% in one year? Or will it do something else? Whatever your answer is, are you sure?
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