Getting Your Financial Ducks In A Row Rotating Header Image

ira money

Book Review: A Random Walk Down Wall Street

A Random Walk Down Wall Street

A Random Walk Down Wall Street (Photo credit: Wikipedia)

Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio.

This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game.

Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current prices of stocks reflect all available information and prices adjust instantly to any changes in that information.

The weak form of the EMH rejects technical analysis as a way for beating the market and getting superior returns. Technical analysis can best be described as using past information to exploit future stock picks. Examples of exploiting such information are through charting, which is analyzing a stock based on its pattern of movement on a chart. Other examples given are those of anomalies that investors try to exploit such as the January Effect and the Dogs of the Dow.

The semi-strong form of the EMH says that analyzing a company’s financials, managers, and quarterly and annual reports will not help an investor or manager find stocks that will beat the market overall, thus bot technical and fundamental analysis of companies is futile.

The strong form of the EMH goes even further by stating that even inside information (think Martha Stewart and ImClone) won’t lead investors to superior returns over the market. So technical and fundamental analysis along with insider information are useless.

Admittedly, we know that anomalies exist and there are going to be differences here and there. Even Dr. Malkiel admits this – which is why it’s called a hypothesis and not a law. But the point to remember here is that even though markets have anomalies they are generally efficient and to the extent markets are inefficient, we won’t be the ones to beat them.

Think of it this way: if hundreds of Wall Street professionals and analysts can’t get it right, what makes us think we can?

So don’t try to beat the market; buy the market.

And that’s the meat and potatoes of this book.

Enhanced by Zemanta

Which Account to Take your RMDs From

Scrambling may be required
Image via Wikipedia

When you’re subject to the Required Minimum Distributions (RMDs) and you have more than one IRA account to take the distributions from, you have a choice to make.  Even though you have to calculate the RMD amount from all of your IRA accounts combined, the IRS provides that you could take the total of all your RMDs from a single account if you wish.

With this provision in mind, you could take all of your RMDs from the smallest account, which would provide you the opportunity to eliminate one of the accounts in your list, thereby simplifying things.  By reducing the number of accounts that you have, you could simplify the calculation of RMDs, estate planning, and just general paperwork.

However, it might not always work to your best interests to reduce the number of accounts that you have.  You may have multiple accounts in order to simplify your estate planning process, so that you can direct each account to a specific beneficiary or class of beneficiaries, for example.

In addition, if you’re hoping to eliminate some of your IRA accounts, you could always combine several IRAs together by rollovers – the end result is essentially the same.

This combination of accounts for RMDs can also be used with 403(b) accounts – if you happen to have several 403(b) accounts from previous employers, you can combine the RMDs and take them all from one account.  This doesn’t work with 401(k) plans, though, and you also cannot combine unlike accounts (IRAs with 403(b)s or 401(k)s) to take the RMDs for the dissimilar accounts.

Enhanced by Zemanta

One Way to Use IRA Funds to Invest in Your Business

chip shop staff

As you know, it is against all the rules to use your IRA to invest in anything which benefits you or a related party.  This is one quick way to get your entire IRA disqualified, quite likely owing a big tax bill and penalties as well.

However – and there’s always a however in life, right? – there is one possible way that you could use funds from an IRA to invest in your own business.  It’s a bit tricky, but it is a perfectly legal, in fact encouraged, method.

Howzat?  The IRS encourages the use of IRA funds for your own business?  Not exactly.  There’s more to it than that.  The IRS encourages by preferential law the use of Employee Stock Ownership Plan (ESOP) funds to invest in your business.  An ESOP is a type of qualified retirement plan that is designed specifically to invest in the stock of the employer.

So, if you have a small business and it’s incorporated, you can adopt an ESOP and roll your IRA into the plan, then use the ESOP funds to invest in your business.  You have to make certain that the ESOP follows all the usual rules – the plan has to be primarily designed to provide retirement benefits, it must be permanent in nature, you must make substantial and recurring contributions, and the plan must not discriminate against employees.

This is definitely not for the faint of heart. Although all the statutes allow the method as legal, the IRS is well aware of the method and they don’t seem to like it much.  They’re referring to this activity as “rollovers as business startups”, or ROBS, and they are siccing their auditors on abusers of the option.  I suspect that the main reason that folks run afoul of the IRS on this is if they don’t stick with the requirements for a valid plan and abuse the privilege.

As with many of these sorts of schemes, I don’t recommend it for regular use.  It could work for special circumstances though – but you should definitely be very careful if you decide to give it a shot.  The downside could be significant and painful.

Enhanced by Zemanta

NonDeductible IRA Contributions: Good or Bad Idea?

Image by Sean MacEntee via Flickr

If you find yourself in the position of having too high of an income to make a deductible contribution to your IRA for the year ($110,000 for joint filers in 2011, $66,000 for Single and Head of Household), you may be wondering if it’s a good idea to make a non-deductible contribution to your IRA.

There are two opposing camps on this issue, and the deciding factor is how you’re intending to use the funds in the near term.

It’s a Good Idea

If you’re intending to convert your IRA to a Roth and your income is too high to just make the contribution directly to the Roth account, the non-deductible IRA may be the right choice for you.  This way you’re effectively working around the income limitations of the Roth contribution ($179,000 for joint filers in 2011 or $122,000 for single or head of household filers).

You also have more funds available in your IRA account, which provides you with the ability to take advantage of economies of scale – certain mutual funds have higher minimum purchase amounts, for example.  Since the money is in an IRA you don’t have to track holding periods, non-qualified dividends versus qualified dividends, and your paperwork is reduced.

In addition, depending upon your state laws your money may be protected against creditors since it’s part of an IRA.

No, It’s a Bad Idea

If you’re not planning to convert this IRA to Roth, you’re effectively increasing the tax cost of your investment gains (under today’s law).  Since withdrawals of investment gains from your IRA are taxed at ordinary income tax rates (up to 35% under today’s rates), you’re effectively giving yourself a tax increase over the capital gains rate which is 15% at the maximum these days.

Instead of making a non-deductible contribution to your IRA, you could just make your investment in a taxable account.  Then within this account you could make investments geared toward long-term gains rather than income or dividends, therefore deferring tax until you sell the investment.  And when you do sell the investment it will be taxed at the currently much lower capital gains rate versus the ordinary income tax rate (which would be applied if you made your contribution in the IRA).


So – depending on what you’re planning to do with the account, a non-deductible contribution could be a good idea or a bad idea.  You will have to make that call.  Hopefully the information above will help you with your decision.

Enhanced by Zemanta
%d bloggers like this: