More on traditional to Roth IRA conversions

So, Happy New Year to everyone! It's 2010 now, which means we can start converting our traditional IRA's to Roth!

Now, one more thing I found on these conversions- you may be able to "re-characterize" your newly converted Roth IRA back to traditional within the year after the original conversion.

Why to do that?

Suppose you had $10,000 in your traditional IRA, which you funded tax-free. Upon conversion, you'll owe your going rate (28-32% or whatever your tax bracket is) on this converted amount.

Suppose now, that within a year your original 10k dropped in value to 8k. Then you can do "re-characterization" of your Roth back into traditional IRA to avoid paying taxes on already depreciated asset.

Some authors even advise to create several Roth IRA's and transfer each kind of assets

( US large, US small, emerging markets, bonds, etc) into a separate Roth IRA. That way, you can see what depreciates ( hopefully none, but you never know), and "re-characterize" it, leaving appreciated assets in their respective Roths.

Madoff's auction

More on Mr. Madoff who seemed to become an epiphany of the Wall St. tycoons of late- recent auction of his personal possessions gave us a glance of his hyperexuberant lifestyle. Among other items is his wristwatch worth of $85K.

What I don't understand about all this is why people like him needed to keep on buying these items? He proved that he is "wealthy" many times over to all of his acquaintances and to himself many, many years ago, so no matter how he dressed, where he lived or what wristwatch he wore he still would've been thought of as the financial titan. I can't explain this by any rational means. I guess, it was pure greed...

Recently I visited that part of Europe that never been rich, and just recently became flush with cash. There most of the people would judge the degree of your success purely by the clothes you wear, the car you drive, and... you guessed right, the wristwatch you wear! Stories of your interesting, challenging , accomplished and, overall, happy life matter not to them. And I sort of understand them- they grew up in abject poverty, and now all the external attributes of wealth are perceived as success in life.

But to see the same logic emanating from the educated, albeit criminal, financial tycoons of the modern Western world??

The only saving grace in all of it is that Wall St. is not Main St.

http://www.msnbc.msn.com/id/33917333/ns/business-us_business/

Taxes and Roth IRA

Haven't posted in a long while due to various reasons. And guess what, economy is not better since my last post. In fact, it looks like it might be worse. In addition to California, 9 more states are in trouble
http://features.csmonitor.com/economyrebuild/2009/11/11/pew-report-nine-states-join-california-in-facing-fiscal-crisis/

For all of us, it means only one thing: more taxes. On everything. ( I had to renew my car registration- it's $186 for 2 years, compared to the previous $ 120 !!)
So this change for Roth IRA rules for 2010 becomes more and more attractive- you will be able to roll over your traditional IRAs into Roth IRA regardless of your income, obviously paying taxes on gains( this can be spread over 2011 and 2012). But since a market took such a hit lately (with some latest recovery), it might be that you won't owe anything in taxes, since you pay taxes on the conversion amount.
They can start taxing Roth IRAs too, sometime in the future, however...

Madoff fallout

Mr. Madoff, as we already know, might have ran a criminal enterprise. I don't believe, though, that he started his fund in the 60's having a Ponzi scheme in mind. It's just when the things started to get bad, he wanted to keep up the play.
What is interesting, though, that people were lining up to give him their money without questioning his investment strategy. It was the "in" thing, only for well-connected. On the other side, however, Mr. Madoff was almost as Alan Greenspan as far as his reputation ( before the collapse, of course) and credentials were concerned-who could possibly question him? This is what we called "eminence-based practice"!

Yet another confirmation of the fact that few financial advisers keep their clients' interest at heart. The issue is that of financial education. Yet again!
I wonder how many doctors were among Mr. Madoff's unfortunate investors....

What we thought we know about financial safe haven

There's an interesting article on Marketwatch.com about municipal bond funds once considered to be a safe haven for people who don't want to take too much risk and yet enjoy tax-free dividends. Municipal bonds once were this safe haven, benefiting people in higher tax brackets(doctors?)
No more, no more... Munis took a whopping hit- 30% decline this year.

http://www.marketwatch.com/news/story/Muni-bond-fund-investors-face/story.aspx?guid=%7B72B8F338%2D452A%2D4DE0%2D891C%2DF683B8DF213B%7D

Safe heaven... Does one truly exist these days?

Market troubles: part 2

Now that the Dow took a bit of a nose dive, and panic is widespread, the question is: what is an average investor to do? Convert all your holdings in cash? Withdraw all the cash and keep it in a safe deposit box, knowing that, as banks start to fail en masse, FDIC will not be able to cover all the deposits(it's my uneducated guess) and will have to impose a withdrawal limit on your deposits? I certainly felt this way yesterday.

Nevertheless, despite all this doom and gloom and threats from the Wall Street that economy will collapse if they are not given those $700 bln, I thought to myself: where would all global investors invest their money if not in the US? Will it be China? China is a rising giant, but still almost completely dependent on exports. The rest of the emergent markets are very volatile, unpredictable, and subject to political turmoil( Eastern Europe)).What about Western Europe? Economically speaking, they don't have the same prowess as American economy due to over regulation and big shadow of their governments cast on their economy.
So it seems that the American economy is something those investors cannot live without.
And after that bloodletting on Wall St. on 09/29, they flocked to... US Treasury bills!

Besides, even there will be a massive collapse of the current financial institutions, there will be fast growth of the new type of financial industry, which is not burdened by the collective "sins" of the old good boys. That will happen just because the American economy is the most flexible and resilient in the world, and no banker would want to pass the opportunity of a lifetime.

Therefore, we probably should continue staying the course and even consider getting into a buying mode (I can't believe I'm saying this..). But will see in, say, 5 years, what will be going on

Market troubles. What next?

After recent tumultuous days of bankruptcies, forced sales, mergers and nationalizations I have 2 questions: first, what does this all mean for a long term market outlook (this is a question from an amateur investor in me), and, second, is it possible that health insurance companies are facing the same grim prospective as their cousin AIG?
I suspect that the answer to my first question is that , eventually (maybe after years of trouble and stagnant growth) market will rectify itself. Then again, after so much governmental intervention, would government play a much, much larger role in the market?
Now, the second question: is it possible that at least some health insurance companies which had a misfortune of investing their collected premiums into anything that is mortgage-related are also on the brink of insolvency? Would then they be bailed out, effectively bringing us to a one-payer model? And what would that mean for doctors?