The Roth IRA Conversion Opportunity in 2010

I’ve been fielding a lot of inquiries lately about Roth IRA tax planning for the future. Let me do my best to explain who should be doing what in terms of Roth conversions for 2010. Let me preface this by saying none of this is an exact science. There are all sorts of moving parts in the tax code and naturally we have no clue where tax rates are going after 2010. We do know they are not changing for 2010 so any planning we do over the next 12 months or so should be for 2011 and beyond.

Continue reading

Stability of Principal vs. Stability of Income – CDs vs. Variable Annuities

Many conservative investors like Certificates of Deposit (CDs) because of their stability. It is true that your principal rarely fluctuates with a CD. However, the rate you get is variable, volatile and highly unpredictable as has been evidenced by interest rates in the economy over the past 15 years. As a result, if you were rolling over one-year CDs from the late 90’s until now, your income would have fluctuated dramatically. From 1996-1999, one-year rates ranged from about 4.5% – 6.5%: a respectable return for a conservative investor. Keep in mind that the stock market in those years was on fire, so that 5% CD rate may not have felt as warm and fuzzy as it would today. After year 2000, interest rates plunged and you were lucky to get 2% on a one-year CD. The same applies today as interest rates are low and CD investors find themselves scrambling for a ‘good rate’ such as 3% or maybe 4% if you lock in for years. So the new important question becomes, what is more important: stability of principal or stability of income?

Continue reading

My Issue with Mutual Funds

There has been much debate over the past decade about the value proposition of actively-managed mutual funds to the average investor. The potential advantage which you’re really paying for with mutual funds is the possibility of choosing a brilliant portfolio manager who can beat their benchmark year after year. I’ll only break out one statistic here among the many which convey the same unfortunate message about the mutual fund industry: six out of ten actively managed stock funds underperformed their indices in 2008, primarily due to fees, according to the Center for Institutional Investment Management at the University of Albany. Besides the fact that actively managed mutual funds, on average, cost investors more to own than index and exchange-traded funds, they are also generally less transparent than index and exchange-traded funds. This isn’t necessarily a criticism of mutual funds, but an inherent operational difference between two very different investment products: mutual funds and exchange-traded funds.

Continue reading