AskDong

As I do my taxes this year, I thought I would take careful look at all the different taxable asset classes, and different tax advantaged accounts that can hold them. I think it’s a good exercise every year to classify your assets. This means both Asset Allocation and Tax Allocation. Also when you do purchase an investment, consider carefully what your planned holding period is. Personally I like have some cash in all my accounts so I have opportunity to make purchases in any of those accounts. However, in general I’m fully invested because my time horizon is probably longer than I wish it were. I don’t need the cash for anything and if I do, I rather try to save or even borrow rather than sell. I keep cash in my account only by adding savings. Also in my taxable accounts, if I am worried about the market, I rather use put options to cover my risk rather than selling. As I see it for the companies I want to hold and the mutual funds I plan on keeping – there’s no reason for me to incur incremental taxes along the way.

Below is tax comparison of the different account types. I’ve assumed a current marginal tax rate of 35% which holds through in retirement. For the taxable brokerage account, in calculating net return, I’ve made some simplifications. I’ve assumed at the end of the period that everything will be taxed at the capital gains rate.

Below is an example with a low current marginal tax rate.

As you can see the benefits of a Roth IRA are much more significant when you’re in a low tax bracket. The Roth IRA is too good of a deal to pass up when you’re young.

The other fact you’ll notice is the relatively pitiful performance of annuities and non-deductible IRAs. Unless your assets are income generating, i.e. bonds, or plan on churning through your investments at a high clip, both annuities and non-deductible IRAs suffer from the fact that the long term capital gains rate are currently so much lower than the marginal income tax rates for many individuals. When you invest money in a annuity or non-deductible IRA, you’ve often effectively traded lower capital gains rates for higher marginal tax rates. However, the non-deductible IRA does offer a backdoor for high income folk to a Roth IRA via a conversion. And the annuity can make sense for certain individuals for specific tax reasons. However in general unless you have specific reasons to invest in something like an annuity, you’re generally better off putting your money into a taxable account once you’ve run out of tax deferred options.

So given all the tax consequences of all these different type of accounts, what should you be buying in each account? That’s the topic of discussion for the next post. So stay tuned.

I use TurboTax myself to do my taxes.  I’ve been using it for a couple years and am generally pleased.   This year I suggested to my girlfriend that she should use one of the free tax filing options since her taxes are relatively simple.   She did.   She ended up using one of the sites listed on the IRS site.  Her experience and indirectly my experience has left me a bad taste for the whole free e-filing process.    I liken it to the process of getting a free credit report except worse.  

1) The first thing that went wrong was that she filed with an itemized deduction instead of the standard deduction.   You would think the filing software would take the larger of the two.

2) She emailed them about taking back her return - no response

3) She couldn’t print out a copy of her taxes once she filed - she had to pay $9.95 for them send a paper copy via snail mail

I accept some culpability in this matter as when she was actually doing her taxes, I was too engrossed playing my Wii to help her out.   I’ve since helped her file a 1040X amendment, but who knows when she’ll actually get her proper refund.   In light of the experience my girlfriend had with the efiling (and I imagine all the competing vendors to employ similar nickel and dime tacticts to make money), I’d recommend everyone who does want to efile to first do his or her taxes by hand before they actually go forward and efile.   Me - I’m sticking with TurboTax.

I’m all for government outsourcing, but the IRS has made the free e-filing process full of potential landmines given the varied quality of the sites out there.   The IRS should’ve at least mandated a standard level of service from different e-filers.

I own a condo, but right now I’m renting. I lived in my condo for nearly 4 years.  It served me well,. The smartest financial decision I made during that period was to live in that condo with a roommate.  It was 2 bedroom condo, and given the price of real estate where I live I would have hardly been able to afford the place if I hadn’t shared the costs with a roommate.  I’ve always liked living with people, so having a roommate was ideal for me.  The rental income paid for about 1/3 of total costs including mortgage, condo fee, and utilities - plus I got to live with friend.  However last year, I decided it was time for a change, and my roommate was moving out to another coast.  I wanted to live somewhere slightly different, and bit closer to work (not that I was that far from work - I’m spoiled by public transportation), so I rented the condo out, and rented another place.  I still have a roommate, except now we sleep in the same bed (well most of the time). Still, I think I may want to buy another place.

So, To buy or not to buy, that is the question.

Our society places a great deal importance on home ownership.  While personally I think home ownership is overrated, I’m still brainwashed. Psychologically there is something about owning rather than renting.  I would say it’s the permeneance of it, but in truth most people (my age) end up selling and buying a new place in a few years as it is.  But, it certainly seems more permenant.

The other consideration is of course financial.  Assuming that one will actually be staying at a newly purchased home, it’s a no-brainer to buy as long as housing prices go up or even stay the same.  But who know if you’re going to stay? In the end that’s the most important question to answer.  What’s happening in your life? Is going back to school in the future?  Another job? Marriage? Children? These questions need to be answered first, but even if you have the answers, there still a question of when.  For that reason renting is often a better option. Buying a place is a commitment, renting is not.  When you rent you can always pick and move.  Breaking a lease is not big deal.  Selling a house or a condo is.

Given the current housing market environment, I feel a great deal apprhension abouting buying.  I’d like to buy at the bottom of the market, but if I knew where that I was, I wouldn’t be writing this post.  My gut feeling is that the bottom is probably about a year a way, and even then I don’t expect to market to recover for another 5 years.  After we hit bottom, housing prices I imagine will struggle to even keep up with inflation. So I’ll keep looking until I find the perfect place.

On Sunday my girlfriend rose early in the morning to meet my needs. I had to have it, and she had to give it to me. What was it? The Nintendo Wii of course. We waited at a close approxomation of the crack of dawn in line outside a Target in subzero tempertures, knowing that Wiis were in stock (a Target employee had tipped us off 3 days before). I haven’t owned a video game console since the 8-bit Nintendo Entertainment System. Sure, I have often had access to a Playstation, Playstation 2, and XBox, but my interest in gaming has only been rekindled by the Wii’s innovative control system. At $250 for the console, and another $50 for Zelda, the purchase set my girlfriend back quite a bit - but she wanted to give me something for my birthday - and she knew this was the only thing I wanted. I’m rarely in want of anything (or at least anything material). Normally, I would pooh pooh consumerism and especially pooh pooh something that could be anti-social, but now that I’m a victim of this consumerism, I’ll try to make an argument for the Wii.

First off, I’m impressed by the game system. The motion sensing controls really do break new ground. The combination of the speaker and rumble pack in the Wiimote works effectively at making it feel real. Without the audio and tactile feedback, swinging a remote around would feel, well, like swinging a remote around - not that fun. Kudos to Nintendo. Full Disclosure - I’m a recent owner of Nintendo ADRs (NTDOY). I think Sony has really dropped the ball with the PS3. Between the Wii and the already established XBox 360, Sony is being pushed out of the 7th generation console market. The PS3 is not selling as it needs to from what I can observe. There are no lines for the PS3 and the console can be easily found in stock. There is no must-have game for the PS3 and the system only offers marginally better graphics than the XBox 360. The gaming market is fickle. Nintendo once ruled the roost, but they stumbled and gave Sony a chance to become the dominant force in the market. The tides I believe have now turned again.

Getting back on topic, as this is suppose to be a personal finance blog, why is the purchase of the Wii a good thing financially? In general buying stuff is bad, at least when it comes to personal finances. Hobbies are expensive. However, it’s not about not having hobbies but rather substituting more expensive hobbies with cheaper ones. My hobbies are: eating out and going out for drinks. Both of which are expensive. The Wii, given its user interface, is ideally suited for games with a good measure of in-person interaction, such as Wii Sports. This quality of the Wii presents an opportunity for me to cut back on my two other hobbies.

As I see it, I spend at least $25-$40 on dinner out and or drinks.

Pretty much if I curb by nights out by about 12-15, it’s pretty much break-even on the cost. Of course, since it was a gift, I didn’t actually spend any money, but the point still holds true. Instead of going out for drinks with my friends, I can now have them over to play Wii. Very middle school and very cost effective.

Of the personal financial bloggers out there, there is a spectrum of frugality. Not suprisingly, most of them are more like Silas Marner than they are like Paris Hilton. All said and done, I’m probably one of the less frugal bloggers. I pay too much in rent even adjusting for the area I live in. I eat out too much. I enjoy having a drink (or two or three) out with my buddies.

Silas Marner I am not. For example I eat out for lunch almost everyday, which is because I usually don’t cook the night before. No leftovers - No lunch for the next day. It’s a vicious trap I’ve yet to escape. I think one of the more important things in saving money is knowing your limitations. Know Thyself! I know I have neither the time nor the inclination to make dinner most nights, therefore I don’t buy groceries. Buying groceries that end up going bad is financially a much worse decision than getting a $5 burrito. However, because I do get a lot of takeout for both dinner and lunch, I’ve amassed quite a collection of “free” tupperware. Having used this motley assortment of tupperware for the past 4 years, I’ve been shocked at the quality. I’ve thrown away pieces here and there, but for the most part, they’ve stood the test of time. They are not as solid as the true “meant for life” tupperware but I find them superior to the disposable tupperware that Ziplock makes. So next time you get takeout, don’t throw away the containers - keep them and use them again.