I think the MyRA will be a poor investment option

by

myRA…  Let me start by saying that it looks like is should sounds like it should be pronounced Mira, and that’s not necessarily bad, but it definitely doesn’t look like it should be pronounced “My IRA” like I’ve heard the president say during the State Of The Union address.

Okay, why don’t I like the MyRA option?

To me is seems like a lame “bond” Roth IRA…  mostly because it’s a bond!?!  According to most financial authors, a young worker should not be in bonds!  Bonds are what old retired people use for a fixed income solution, not to be used by workers that need capital appreciation and growth!

Next reason I don’t like it is because it’s guaranteed not to lose value.  I think we’ve seen what happens when the government guarantees things… I’m not even going to mention the big city names that declared bankruptcy lately… Instead look at the prepaid tuition credits offered by state college savings plans, oh wait are there any of those left anymore?

Well at least we have social security and it’s solid… What, it’s not?  Then why doesn’t the government fix that first for the young workers of tomorrow?  Oh, it’s doesn’t make sense financially and the distributions may have to be reduced or some other radical changes made?  Oh… sad…

Since Social Security isn’t quite defunct yet, why have they decided to create something that seems like a poor investment option?

Well at least the Affordable Care Act is solid and error free… what’s that?  Oh in it’s current form, it kind of bites and has unforeseen errors both now and later.  Being in technology, I’m pretty sure on the back-end, there will be more errors discovered (but probably not communicated out to the public).  The front end is just forms for information collection, so if they messed that up, then the back-end must really be crappy.  Based on what I’ve heard the “Affordable” part of the title doesn’t make much sense, but I’m mentally wandering off topic so it’s time to get back to the topic at hand.

Okay, I don’t like myRA and I think it’s a poor investment option, but so what.  There are plenty of poor investment options and this is just another mediocre member of that crowd.  Hopefully most young people will be smart enough not to waste there time on such an option.  Especially where there are plenty of good Roth IRA options that only require a initial investment amount of $1000 or less if you look for them.

I think the guarantee is bad since people should learn to take sensible risks.  You see America was founded by taking risk all the time, practically every company in the USA was created by people willing to take a sensible financial risk.  Risk is part of reward and having an option without sensible risk is teaching young people a bad lesson in my opinion.

Financially, the myRA is better than nothing, but the problem is there is stuff out there already that is way better than nothing!

The Roth IRA is the way to go, and I’m sure anyone reading this article knows that already, but in case you don’t know where is why:

  1. Based on previous history there is a better chance that an investment in an stock index fund will outperform a bond option
  2. If you get in an emergency or some kind of tight bind you can withdraw all the money you contributed (but not the earnings if any) in a Roth IRA both tax and penalty free.  While this is an advantage, you must realize that the money should not be touched if possible!
  3. A Roth IRA serves multiple purposes… like a tax shield for dividends (most dividends anyway) and future capital gains in the account, an emergency fund source, etc.  (read Roth IRA – Unusual Benefits for more)
  4. In a Roth you can invest in stocks (commonally called equities), mutual funds, etfs and other options.  Isn’t diversity the spice of life?

The Roth IRA makes the myRA a poor investment options for working folks and especially young working folks!  I understand a myRA could be a gateway route to fund a Roth IRA, but I think the low return vs equities will discourage most people from participating.  I could be wrong though, but why not keep it simple and just get a roth IRA up front?

If you are thinking about going the myRA route, I think you should really think about the pros and cons.  To me it’s a dead option out the gate if you have any financial savvy or education at all.  That said it’s still something and I applaud the POTUS for providing such an option, even if I think it’s a poor choice and shouldn’t be used.  It will be interesting to see if it really gains in popularity…

What do you think,

Don

 

 

Disappointing 2013 Stock Portfolio Performance But Promising New Start

by

I hate when this happens…

Midway through the 2013, I was beating the Stock market indexes (S&P 500 and DOW) by about 10%.  I could do no wrong!  Then it happened, instead of all the right moves, I flipped over into bizarro world and everything that I did was wrong.  Not wrong enough to hurt my returns drastically (I ended the year up over 20% in my regular brokerage account), but enough to pull down my 10% premium above the market that I had midway thru the year last year.

So what happened?

I over-traded, over-analyzed and over-reacted.  Once I started down that path, it was pretty much over for me (pun intended).  It’s an easy path to go down in the stock market.  Sometimes when you are very successful, your emotions start to take over and when you are up decently, you start to think that anything you do will be golden.  Well, it doesn’t happen that way always.

Okay, I have to admit, this has me bummed, but at least my Roth IRA gained 48.7% and my 401k was up over 30% for the year.  Still, having just one of my accounts underperform the S&P 500 index definitely bums me out.  I have to wonder if it wouldn’t be easier just to put a sizable amount into a S&P 500 index ETF and just let it ride.

The same stocks that hit me hard at year-end also have been surging at the beginning of this year.  While the stock market has been close to flat YTD, my regular account is up 5% YTD, so maybe I’m not doing so horribly after all.

Either way, 2014 seems much more questionable and I seriously doubt that it will rise unabated like the 2013 year climbed.  Every year I think I learn a little more about investing and the stock market behavior.  Investing to me seems like a constant state of learning and refining.

Out with the old, and in with the new, good luck everybody!

Don

Tick, Tick, Boom: Insuring the Most Explosive Jobs

by

He thought to himself why on earth they’d even spend the millions to research and develop a robot that did this when he still had to sometimes. They could have given him a raise instead. Tick, tick, tick. Dozens or hundreds of lives depend on the decision our hero makes under pressure. Tick, tick, tick.

The deafening silence of a terminally tense atmosphere echoes through his mind like a freight train in the desert night. He pauses briefly to mop stress from his forehead with the back of his tactical glove as he stares intently at the deadly device before him and the timer coldly counting down to his demise. You can find out more at https://www.gio.com.au/personal-life-insurance/life-protection-insurance.

30 seconds. He knows that his life could come to a violent end in mere moments, but can only think of his loving wife and 3 beautiful children at home eating dinner and awaiting his timely arrival in vain yet again. 15 seconds. He briefly laments not becoming a sketch artist instead for their sake, but the rapidly evaporating time frame affords him little time to reconsider his life choices. 10 seconds. He still finds himself less than totally sure which snip leads to salvation and which cancels Christmas for him permanently. Red wire or green wire? One second.

Let’s pause time to look at the life of our hero. A member of the regional bomb squad, he is called upon in the most volatile situations imaginable to use his very particular set of skills to save lives and property on what is often a massive scale. When he succeeds, his rich reward is a beer with the rest of the unit and the smiling faces of his family. If he ever fails, it will be the first and last time. In such a high-stakes profession, the reality is that he must ensure his family’s security in the event that he ever does.

Luckily, it is possible for even a member of the bomb squad to get comprehensive coverage. Although diffusing bombs is obviously a dangerous job, insurance companies look at the official occupational statistics as opposed to the actual perceived element of danger when evaluating potential policyholders. Although any job with the word “bomb” in the title is pretty dangerous, others such as commercial fishing, construction and logging have even higher fatality rates, and workers in those industries are frequently able to obtain insurance.

Insurers also consider their own experiences with members of a profession, so companies who have long relationships with bomb squad members will have lower rates. Others who have a history of less buck relative to bang will raise their premiums accordingly.

The tradeoff comes with the premium a person in such a dangerous field will have to pay to get viable life insurance. Insurance is a business, and providers want to be sure that the amount they may have to pay out to a policy holder or his beneficiaries is equal to or less than the total in premiums they will collect. The chances are fairly high that a given member of the bomb squad will have a bad day at the office and trigger a payout, and if this happens within a few months of establishing a policy, the insurance company loses money.

Providers evaluate each potential policy holder as an investment, and will seek to even the odds on a shaky investment by increasing the amount they collect upfront. Although it may be expensive, our hero can indeed get the protection he wants for his family in the case of a failed mission. Some agencies even offer group insurance to lower the cost of a policy to each member. It’s good news in an occupation where there are only two kinds and one is deadly.

We return to our specialist as he tentatively makes the decisive cut, holding his breath as if not to breathe in the sense of dread in the air. An almost inaudible snip, then silence. Half a second passes as he wonders if this silence is that which comes with eternal sleep.

He heaves a heavy sigh as he realizes he is still alive and flashes the all clear signal to the rest of his unit. The sounds of their jubilance fall on his deaf ears as a deep sense of relief washes over his body. His experience and skill were good enough to keep his family at work safe today, and his insurance policy will keep his family at home safe should they only be almost good enough tomorrow.

The above was a guest post.

Don

 

 

Does Kiddie Tax Create Inequality

by

First below is the basic information about what Kiddie tax is (this is from irs.gov)?

If the child’s interest, dividends, and other investment income total more than $2,000, part of that income may be taxed at the parent’s tax rate instead of the child’s tax rate. See Form 8615 Instructions, Tax for Certain Children Who Have Investment Income of More Than $2,000.

Part of a child’s investment income may be taxed at the parent’s tax rate if:

  1. The child’s investment income was more than $2,000
  2. The child meets one of the following age requirements:
    • The child was under age 18 at the end of the tax year
    • The child was age 18 at the end of the tax year and the child’s earned income does not exceed one-half of the child’s own support for the year, or
    • The child was a full-time student who was under age 24 at the end of the tax year and the child’s earned income does not exceed one half of the child’s own support for the year (excluding scholarships)
  3. At least one of the child’s parents was alive at the end of the tax year
  4. The child is required to file a tax return for the tax year, and
  5. The child does not file a joint return for the tax year
Spock-like

Fascinating

Okay, now with the basic definition of what Kiddie tax is, here are the reasons that I think that kiddie taxes could be a cause of wealth inequality.

  1. To be taxed at your parents rate is punitive and teaches young student that investing is bad.  Teaching that investing is bad to young people encourages them to miss out on one of the greatest wealth builders in the United States.
  2. Another huge disensentive is the tedious and complex tax filing consideration.  Why even try?  Young Adults have enough complexities with live without this complex and head ache of a rule.  Why even try?
  3. It’s hard enough for kids to divert money from spending on fun things to know that the government a huge bite out of the earnings right away.  Again, why even try?

In conclusion, I have to believe that the Kiddie tax does more harm that good.  Perhaps the government should re-evaluate the way that they are discouraging the young to consider investing because of the Kiddie Taxes (after all a 23 year old is pretty old and not a kid anymore).

It’s sad that we complain that kids aren’t being taught finances in school on one hand, but then in the other hand our taxing system is screwing young adults if they decide to go that route.  Where is the fairness here?

At a very minimum, the threshold amount should be raised from $2,000 to $5,000.  At $5,000 it’s not entirely fair either, but at least it’s less of a disinsentive to participate in the greatest wealth builder in America (ask Warren Buffett).  And to think of all of those projections that say “start early”, but I wonder how many of those projects calculate the huge tax bite that the government may take out of their investment projection models?

I think it a horrible lesson for our youth, and the pros (teaching kids to invest) outweigh the cons (bad folks taking advantage of their kid’s brokerage accounts for tax purposes.  Besides, these days the government can detect such transactions that are questionable…  I wonder if the government even realizes the potential harm they are doing on kids and young adults?

I write a lot of what I consider unique things (or at least I think them), and I sometimes worry about others might copying my content… but this is one area that I would gladly allow to be paraphrased, and even encourage it!

What do you think? 

Don