To Convert or Not Convert the IRA

This was the year long debate in our household. In 2010, the federal government dropped the income limit for moving savings from a traditional to a Roth IRA. Additionally, you had a one-time option to pay taxes on the current value of the converted funds over a two-year period. The converted asset then grows tax-free.

To get this tax break off any future earnings of the converted funds, you have to pay income tax on the value of the funds moved.

From Kelly Greene's Wall Street Journal article on 9.30.2011, "The federal government allows the tax-law equivalent of a do-over, says Maria Bruno, an investment analyst at fund giant Vanguard Group, whose customers converted more than 230,000 traditional IRAs to Roths last year, and which has processed 3,900 do-overs this year, as of Monday."

We are one of the 3,900 who converted back. This was a highly contested move in our household. Bob is sure with the current level of the national debt, that by the time we withdraw the retirement savings, we will be under the burden of a significantly higher tax rate. Kristy is pretty convinced we most likely will never retire so it will be a tax that our kids can cover when inheriting the asset. In the final hours.... Kristy won.

Investors who transferred traditional IRA holdings to a Roth in 2010 can move the funds back to a traditional IRA and avoid the tax up to October 17th. If you filed your 2010 tax returns already, you can amend them. We amended our tax returns last month. The weight of such an extra-large tax payment, even spread across a two-year time line seemed insurmountable to Kristy, given our number of other more short-term, family goals.

There were multiple steps to "reconvert", a waiting period, and then the "recharacterize" of the account as a traditional IRA. Calls to our tax advisor, calls to the IRA custodian...

The downside? We lose the one-time option for 2010 conversions of getting to spread the income involved across two tax returns. We lose out on the possible tax-free earnings of the converted fund. Up-side? Significant less tax to pay over the next two years.

Who was right? We will let you know in 30 years.

Renters Insurance Is Assurance for Students

This morning, firefighters from cities across Johnson County, Iowa battled a large fire affecting multiple buildings in downtown Iowa City. There were apartments on their upper floors of the impacted buildings.  In the TV interview, one of the displaced student tenants said ‘Thank God for renter’s insurance’. Hopefully, all the tenants were as wise as the student being interviewed.

College students renting an off-campus apartment or house should consider purchasing renters insurance to protect their personal property (i.e., computer, television, bicycle,  furniture, clothing) in the event that it is damaged, destroyed or stolen.

 Even if a student is a dependent under the parent’s insurance, the student’s personal property, in many cases, is not covered if the student lives off campus.  Your landlord’s insurance doesn’t cover your personal property in the event that your propriety is stolen or damaged as a result of a fire, theft or other unexpected circumstance.

Premiums for renters insurance average between $15 and $30 per month depending on the location and size of the rental unit and the policyholder’s possessions. For the price of a few lattes, you could have thousands of dollars of insurance.  Unusually expensive items, such as fine jewelry or an art collection, may require the renter to purchase additional coverage, called a “rider” or “floater”. Your insurance agent can help you determine if additional coverage is necessary.

Another important factor to look for when shopping for renters insurance is “actual cash value” vs. “replacement cost” coverage. Actual cash-value coverage will reimburse you for the value of the personal property (it's garage-sale price) at the time of your claim. Replacement cost coverage, on the other hand, will reimburse the full value of the new item, after you purchase the new items and submit your receipts. While the up-front cost is greater, you are more likely to receive accurate compensation for your possessions.

Bankruptcy and Student Loans

If you're having serious trouble paying back your student loan debt, bankruptcy is not a likely alternative for you. Student loans are usually not eligible for discharge from bankruptcy.

If you're having trouble making any of your payments, the first step is always to contact your lender, be honest and try to work toward a realistic payment plan. The lender would much rather be paid over a longer period of time then for you to default on repayment of your debt.

If your student loans are the largest part of your debt, you are better off to contact your student loan lenders and see if you can arrange an easier repayment plan or deferment of payments, over bankruptcy.

Bankruptcy filings stay on your credit report for 10 years and will likely limit your ability to get a mortgage, borrow money, or get a job. 

Student Loan Default Rate Increases

Is the education worth the debt?  Is it worth going an extra year so you can work while going to college and not take on debt? First, a college education is worth the cost, but you have to look at the potential ROI (Return on Investment).  Different careers pay varying wages. With higher earnings, you are able to pay back a larger student loan debt with fewer sacrifices. 

The U.S. Bureau of Labor Statistics (BLS) publishes an OccupationalOutlook that lists occupations, the education required, and the potential salary range.  According to the BLS, the high your education, the more money you will make and the less chance you will be unemployed.  Choose your education, career and debt load carefully.

The cost of an extra year of college could be more costly than taking out a loan and finishing on time. To calculate this cost, add together the cost of tuition and books for one additional year of college plus your potential future salary, and then subtract your current salary.  If tuition and books cost $30,000 and your future salary is $35,000 upon graduating, and you are making $15,000 now, that extra year cost you $50,000 ($30,000 + $35,000 - $15,000).  Can you better afford the fifth year of $50,000 or take out a loan to get done in four years?

Choose your institution carefully.  You may think that private 4-year colleges and universities are the most expensive but if you calculate the true cost (tuition, room and board minus any grants and scholarships) it might be close to the cost of a state school.  If adding in the cost of getting done in four years compared to five or six, and placement rates for their graduates, it may be less expensive to attend a private college or university.

You can also receive credits from your local community college and usually transfer the credit to a 4-year college or university.  If considering this option, talk to the college or university you are planning to transfer to make sure all of your community college credits count towards graduation.

Using the Federal data for the 2009 cohort, the highest default rate for colleges and universities offering baccalaureate or above degrees is for for-profit schools with a 15.4% default rate, followed by public colleges or universities at 5.2% and then private colleges and universities at 4.5%. Student loan defaults do not go away on your credit report.

Being a federal loan, the government has more power to garnish wages (up to 25% of your wages), keep your federal and state income tax refunds, take your future lottery winnings, and garnish part of your social security.  Student loans are rarely discharged in bankruptcy.  So once you borrow the money, you will have to pay it back! 

If you are having trouble making your student loan payments, check out www.studentloans.gov for information on deferment of payments. You can also check out a Wall Street Journal video for more information on student loan defaults.

Goals and Lotteries

We know it is better to save our money than to buy a lottery ticket. The odds of winning the Powerball are 1:195,249,054. Yet, when the payout climbs above a $100 million, we start to dream of what we would do with a winning jackpot.

Lotteries give us an excuse to dream of what we would do if we had an abundance of funds at our finger tips. What would you do? What would you buy? Where would you travel? These dreams provide motivation to set goals and to work to achieve these goals. It also helps you to get in touch with your values and to ask the question of what your really want out of life.

We know that we probably will not win the Lottery jackpot, but we have big dreams and goals to achieve. An entrepreneurship professor once said "if you are going to dream, dream big." and "be careful of what you dream for, it just might come true." So go ahead and dream of winning the lottery and what you would do with all the winnings. Then set goals based on your values and work to achieve your dreams.

Freezing Sweet Corn is Sweet Work!

This week a wind storm blew down three rows of our neighbor’s sweet corn. Luckily, the corn was ready to be picked. Now to be perfectly honest, picking sweet corn is hot work, especially in Iowa when the temps are in the 90’s and the humidity is in the 70’s. But here is what we have found to make the harvest enjoyable:

 Do it with friends: Many hands make light work – as well as good conversation while doing the work.

 Share a meal: We picked the corn at the farm, and then had a nice meal with FRESH (picked off the stalk less than an hour before eating) corn, with a home raised chicken, warm bread, great cheese and wine. And oh yes, a good desert before we started the shucking, cleaning, blanching, cooling, cutting and bagging of the corn.

 Divide and conquer: It is just the way it works, but while the guys are shucking, the girls are cleaning, blanching and cooling the corn. By the time the guys get done shucking, it is time to start cutting the corn off the cob. When is it all cut, we bag it up for the freezer, teaming together, getting it done.

 Share the profits: Now we didn’t make money by freezing corn, but we all saved money by having corn in our freezer to eat later. We shared what we harvested with those that helped and with our family and friend.

 Make it festive: Making an evening event around the activity, such as sharing a meal and drink, adds to the camaraderie. Productive activity with others makes the “work” fun and leaves you feeling well and good.

Where to Invest in Turbulent Times

The Dow Jones industrials dropped 634 points Monday. Gold is at a record high. Farm land prices are high. There is uncertainty in the housing markets, stock markets, bond markets, international government debt, and the world-wide economy. The big question--where to invest? When the markets are so volatile, let it ride out and instead turn to make investments in what you can control: your time.

Now is the time to invest in yourself and time with your family and friends. It is time to reassess your skills, abilities, and how you spend your time. It is time to become more self-sufficient. Some ideas of self-investing in turbulent times:

• Grow a garden or visit farmer markets; can or freeze fresh vegetables for the winter months. Nothing tastes better than corn chowder or lasagna on a winter day made with fresh frozen sweet corn or tomatoes that you grew.

• Cut firewood. If you have a wood burning fireplace or wood stove, cut and stock up on wood for the winter. This can be a family event and as they say, the wood will heat you when you cut it, split it, stack it, and finally burn it! This can also cut down on your winter heating bills and provide hours of family time watching the fire burn.

• Take a class to improve your skills or learn a trade. The more you know the further you will go. Maybe you want to learn about auto repairs, plumbing or other trade. This can help you save money by doing your own repairs. Perhaps you need to improve your computer skills, cooking skills, or writing skills, take a class at your local college or community center. This can make you more marketable and you may unleash one of your passions.

• Invest in your family and relationships. Nothing has a higher return and lasting benefit than great relationships. Invite family or friends to join you on the above adventures. Turn off the television, computer, and phones and have a night of playing cards or board games. Join or start a book club. Engage in conversation, really get to know other people, and build lasting relationships.

The markets will go up and down. Money will come and go. Your true happiness will be determined by the friends and relationship you have and the difference you make in the lives of those around you. So in these turbulent times, invest in you, your community, and in family and friends.