Archives for January 2009

$7,500 Credit For First-Time Homebuyers May Not Have To Be Paid Back

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Since my post on the $7,500 tax credit for first-time home buyers has over 225 comments and growing, I thought I should point out that both the current House and Senate versions of the Obama Stimulus bill remove the requirement to pay back the credit over 15 years.

If it becomes law, this will be essentially $7,500 of free money for most first-time home buyers. You’ll have to wait until you file your taxes in 2010 to claim the credit, but you might be able to adjust your tax withholding to improve cashflow until then.

According to this CNN Money article, it will also expand the eligible dates retroactively to January 1st, 2009 until the end of June or August.

To be eligible, buyers cannot have owned a home for the past three years, and the new home has to be used as a primary residence. The credit phases out as income rises above $75,000 for singles and $150,000 for couples, and disappears entirely at $95,000 and $170,000, respectively.

Will this really make a long-term difference?

What’s Inside Your Target Date or LifeCycle Retirement Fund?

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I ran across a BusinessWeek article today about retirement plans in 2008 from top 401(k) provider Fidelity Investments. It stated that although the average retirement account balance fell a whopping 27% to $50,200 last year, people actually contributed slightly more in 2008 than in 2007.

This quote also caught my eye:

Are investors making a lot of changes within their retirement accounts?
Some 60% of plans administered by Fidelity in 2008 utilized a lifecycle fund as a default investment option, that’s up from 38% in 2007. What happens in a time of short-term volatility is that investors in these funds are not switching. Only 1% lifecycle fund investors made a change compared to the overall average to 6.1%.

Makes sense overall. Investors in these types of funds want all-in-one simplicity. However, almost every company these days offer a lifecycle retirement fund. And most 401(k) investors can only invest in the one that happens to be in their plan. Check out this Money magazine example of the possible extremes out there for a mutual fund designed for a worker retiring in 2010:

On the aggressive side, the Oppenheimer Transition 2010 Fund (OTTAX) has 65% in stocks for someone on the verge of retirement, resulting in a 46% loss in 2008. On the conservative end, this AP article has an even better example – The DWS Target 2010 Fund (KRFAX) only has 18.1% in stocks and only had a 3.6% loss in 2008. The rest was in cash and bonds. (Of course, it also had a fat front-end load and is closed to new investors.)

That is some pretty stark contrast. Do you know what is inside your target-date fund? Dig up the ticker symbol, plug it into Morningstar, and scroll down to “asset allocation”.

What about the big boys like Vanguard?
Even the most highly-rated mutual fund companies don’t agree on the asset allocation for each time horizon. See how Vanguard, Fidelity, and T. Rowe Price differ in their target-date retirement funds.

Bought a OBD II Code Reader for Check Engine Light

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Several months ago my “check engine” light went on. I went to my local mechanic, who plugged in a code scanner and found my error. Since it didn’t re-appear after resetting, he said he could try to fix it ($$$) or I could just leave it and it might never come back on. He said he normally charges $50 just do do the diagnostic, but this time it’d be free. A week ago, it came back on, and of course I wasn’t eager to go through all this hassle again.

I decided to try and buy my own error code scanner. If you search for “OBDII”, “OBD II”, or “OBD 2” code readers, these devices will plug into your 1996 or newer model year car and read the diagnostic code from your car computer. In addition, they can erase or reset the code so that you can see if it is an ongoing problem.

Luckily, while searching I ran across a post on Fatwallet that had this CodeKey OBD II code reader on clearance for $23.90. There are nicer scanners out there, but they usually start at $60+. From the CodeKey site:

Simply put, CodeKey™ is an easy to use device designed to unlock the mystery of why your vehicle’s Check Engine Light is on. The Check Engine Light can ignite for something as simple as a loose gas cap, or as serious as a fuel leak. A flashing Check Engine Light can be serious, and continued driving can cause permanent damage to the vehicle. Until now, you would need to rely on a mechanic to determine what problem caused the light to go on

When you know the source of the problem you can:
* Decide if you should go to the garage immediately.
* Determine if the problem is something you can fix yourself.
* Know what to expect when you bring your car to a garage.

Other options
If you go to a dealership and have them read this code, it’ll cost you $100 just for the “diagnostic check”. Some people report that your local Autozone may lend these out for free at the store. I have also read that some Jiffy Lubes let you use theirs if you pay for some service like a oil change. I’d call first.

The old-school method is to simply disconnect your car battery and wait for the computer to reset itself. But for cars newer than 1996, this site reports that wiping out the computer’s memory can affect the operation of the transmission, climate control system and other functions. You can also trigger your alarm system or anti-theft car radio into lock-down mode. However, you won’t know the actual cause of the problem.

In the end, at less than $25 I just bought the tool. Just avoiding the gas to/from the mechanic and having to arrange a carpool for pickup/dropoff would be worth it. And sure enough, after resetting the light it has not come back on again.

It turns out, buying this tool could be the start of a new side business. Check out this Craiglist ad where a guy will come over and reset your light for $25. Learn how to do common repairs, and there you go. I think I’ll pass, but don’t forget to deduct business mileage if you go this route! 😉

Our Current Simple-and-Steady Budgeting System

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For the past several months, we’ve been using a crude but effective way of tracking our overall spending each month. The basic idea is that we only put the amount of money we actually want to spend into our primary checking account, and then pay all our bills out of that account. Everything else goes directly into either a high-yield savings account, an IRA/401k/403b, or a brokerage account.

Add in an appropriate buffer balance to avoid overdraft fees, and ideally our bank balances should look something like the sinusoidal line below:

So what is a proper spending goal? I would recommend looking at your current spending levels first, and then deciding on a numerical goal of say $X,XXX per month.

Or, for us, we decided that we wanted to live on only one of our incomes (the lesser one). So only that paycheck is direct deposited into our “spending” account, minus retirement account contributions. We pretend this account is all we have, carefully watching that the balance does not go below the buffer level. (We are signed up for e-mail alerts if we do hit that barrier.)

In addition, we note the high and lowest balances for the last 30 days. This helps keep a rough trend that we are headed in the right direction. Here is an graph made from the actual daily balances of our checking account from the last few months:

Benefits
The biggest benefit is that because it is so simple, we actually do it! By keeping all our other transactions separate, it really helps us pretend that we only have a certain income. It’s a reflex that when I see the balance get low, I get nervous and start changing my spending behavior. If we eat into the buffer one month, then the next month we have to dig our way back.

Also, looking at the big picture in this way prevents the cheating that sometimes happens when we have a large unexpected expense like a plane ticket to visit sick family or a surprise car repair. It’s so easy to ignore that chunk and say that we still did okay our regular categories like “Gas” and “Groceries”. And we all have unexpected expenses, right?

Drawbacks
This system really works best for those that already have a basic idea of what they spend each month, and aren’t looking for drastic changes. It does not provide any deep analysis, such as identifying areas to cut back. We’ll have to do that separately, or use another budgeting system.

FaceBook Advertising Coupon Codes: Free $300+ In Ads

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If you have a website that you would like to promote, there are several coupon codes out there that can get you a free $200+ in credit towards Facebook Ads (update: codes are expired). In addition, if you join the Visa Business Network and install application, they’ll kick in another $100 (still available). Via this SlickDeals thread.

You’ll need a credit card to sign up, but it shouldn’t be charged until after you use up all your credits. Watch the expiration dates, and set your ad budgets wisely. Facebook ads are pretty low-converting from what I’ve heard, but at least this way you can test for free.

Free Audiobook: 7 Habits of Highly Effective People

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Audible.com is giving a free audiobook version of the popular personal development book The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change by Stephen R. Covey.

I’ve read about half of the print version, and it does have some useful tips. One idea that I explored previously was to focus on your circle of financial influence.

Might be worth a download to see if you like to listen to audiobooks while commuting. Turns out, I don’t.

Strategies For Maxing Out Your 401k/403b and Company Match, True-Up Contributions

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Why the interest in 401k limits? Well, we found out that my wife now gets a company match to her 403b retirement plan. Score! I then wanted to explore how to maximize both our $16,500 401k limits and the company match.

Example: Maxing Out But Missing Out Too

You make $120,000 per year and get a full 3% company match during each pay period. Let’s just say you get paid $10,000 gross monthly. However, you are a really motivated saver and can defer 20% of your income each month into the 401k.

For the first 8 months of the year, you put away $2,000 (20% of $10,000) and the company matches $300 (3% of $10,000). That’s brings you to $16,000 in salary deferrals. On the 9th month you can only contribute $500, which the company also matches $300 again. On the remaining 3 months of the year, you can’t contribute at all, so there is nothing to match! Even though you contributed significantly more than 3% of your salary, you’ll miss out on $300 x 3 = $900 of free money.

Solutions and Potential Problems
The solution is usually given to space out your salary deferrals evenly throughout the remainder of the year. For the above example, you would divide $16,500 by 12 = $1375 each month. If you can only set percentages, you’d set aside 13.75% each month ($1,375 / $10,000).

The problem with this is that for those people who earn hourly wages, overtime, or bonuses, it can be hard to synchronize. Get paid too much, and you’ll lose match again. Get paid too little, and you might max out your match, but not fully reach the $16,500 limit. Also, if you quit or are laid off before the end of the year, you might not be able to reach the limits either.

My tweaked solution. I would vary the percentage so that you always contribute at least 3% each pay period the entire year, but otherwise front-load contributions early on. Again with the example, you could set aside the $2,000 per month for 6 months, and then put in $750 per month for 6 months. Percentage-wise, this is 20% for first half the year, and then 7.5% for the last half. This way, you are balancing getting your annual limit maxed out as closely as possible, along with getting all the available match.

True-Up Contributions

But before going too far, you should ask your benefits administrator whether they offer what is called “true-up” contributions. What this does is compare your year-to-date (YTD) contributions to your YTD salary. If you contributed at least 3% of your YTD salary, but did not receive a 3% company match, then they will send in an additional contribution to “true-up” the numbers.

Some companies perform this true-up calculation after every pay period, while others wait until the end of each year. If they true-up every pay period, then it would seem to be a good idea to contribute as much as you can as early as you can – you’ll get the full year’s match early this way.

Our company does one true-up after the end of the year, and the credit doesn’t show up until March. However, I was also told that if you aren’t employed in March, you won’t get this credit. So again, the front-load with minimum method might be the best idea to get your match as it comes available.

As I write this, I realize that I really overthink some of this stuff. What can I say, I’m excited about our new match, and I just can’t help myself!

2009 401k/403b Maximum Salary Contribution Limits

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The 2009 inflation-adjusted limits for 401(k) and 403(b) defined-contribution plans are as follows:

  • The 401(k) elective deferral limit goes to $16,500, up from $15,500.
  • The “catch-up” amount allowed for those age 50 years and up increases to $5,500, up from $5,000.
  • The overall annual defined-contribution plan limit goes to $49,000, up from $46,000. This usually comes into play when you have additional employer contributions.
  • These numbers apply for both Traditional pre-tax and Roth after-tax contributions.

Maxing out pre-tax 401(k) contributions
$16,500 annually works out to $1375 per month. If you get paid bi-weekly that’s $635 per paycheck. But since this is gross income, if you are using pre-tax contributions (not the Roth 401k option*) your actual reduction in take-home pay will be less.

According to the calculators at PayCheckCity, if you are single with one allowance, earn a gross annual income of $60,000 per year ($5,000/month), and you live in a state with no income taxes, this works out to a reduction in your monthly take-home pay of $1,031. (It would go from $3,804 down to $2,773.)

You can also get to the same number by first finding your 2009 marginal tax rate. Since a such a person would be in the 25% bracket, taking 75% of $1375 is $1,031.

* If I were in the 15% tax bracket or lower, I would go with the Roth option (if available) because historically that is a low rate. Pay the low rates now, so you can avoid paying them later! For higher tax brackets, it depends on some personal variables like how much taxable income you expect to generate when withdrawing for retirement.

Cosmetics Settlement: Free Cosmetics While Supplies Last

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I’m a day late on this one, but perhaps there is some free make-up or perfume left:

As part of a class action settlement, $175 million worth of free cosmetics products will be distributed to members of the class for a maximum of seven days, while supplies last, on a first come, first served basis, beginning on January 20, 2009. No rainchecks will be issued. The products will be distributed at stores owned by the Retailer Defendants.

See CosmeticsSettlement.com for a list of participating stores and products. Thanks to reader Jeremy, but I take it back if this makes me have to drive to the dreaded mall today. 😉

Sprint Nextel Class Action Settlement for Early Termination Fees

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Sprint Nextel recently settled a lawsuit over the early-termination fees (ETFs) on their contracts. I believe the it was over the fact that the ~$200 fee stayed flat even if you were on the last month of your contract. You can find details at SprintETFSettlement.com.

There is a whole bunch of legal-speak in there, but it would appear to me that anyone who was a Sprint customer and entered into a cell phone contract between July 1, 1999 and December 31, 2008 should take a closer look. If you click on “File a Claim” and enter your information, it will guide you to the award you are eligible for. You’ll need your Sprint/Nextel phone number at the minimum.

In general, it would appear if you were charged an ETF and can provide documentation, you can receive $90. Even if you didn’t cancel your contract, if it was because you were afraid of the hefty cancellation fee, you can get a check for $35 for each line.

Add More Money Your Roth IRA – Undo and Redo Contributions After Losses?

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So you listened to the financial experts and dutifully contributed $5,000 to your Roth IRA in early 2008. Unfortunately, stuff hit the fan and now you’re left with a lot less. Wouldn’t it be nice to be able to find some silver lining and shield another ~$1,000 plus earnings from taxes forever?

Well, here’s a slightly controversial idea that I ran across in this Boglehead Forum thread that might help you do just that. I think the easiest way to explain it is to continue with an imaginary scenario. Note that this leaves some variables in exchange for simplicity.

Example Scenario
Sometime in early 2008 you contributed $5,000 to your Roth IRA for the 2008 tax year. At the time, your IRA was worth $20,000 in total after the contribution. Now, in January 2009, the entire IRA is now worth $15,000.

You first “undo” your 2008 $5,000 contribution by following the same steps as someone who ended up being ineligible for a Roth IRA due to too much income*. Because your entire IRA account dropped by 25%, your $5,000 contribution is considered to have dropped by the same amount. You end up receiving a check for $3,750. You have received a return of your contribution, and have now technically contributed nothing to your 2008 Roth IRA.

Soon afterward, you simply open up a new IRA either at a new broker, or at your current broker if they are on the ball and have your 2008 total contributions as zero. (Otherwise they might throw a fit…) You can now throw in another $1,250 and contribute $5,000 again to your Roth IRA for the 2008 tax year before April 15th, 2009. Even if you just reinvest the $3,750 the same way as you did before, by using this strategy you have allowed another $1,250 to grow shielded from taxes, forever.

Is This Legal?
This is somewhat similar to the Traditional-to-Roth IRA reconversion method to save taxes. I read some skeptical posts in the BH thread as to the legitimacy of this action, but none were really backed by any evidence. I don’t see why both methods aren’t equally legal.

As another example, you might have made two separate $5,000 contributions by accident, and need to undo one of them. If everything is accounted for correctly by your IRA custodian, the IRS shouldn’t blink an eye. Here is another educated discussion in support of this idea. Other tax pros please add your thoughts in the comments below.

We ended up not being eligible for a Roth IRA this year, but if I was a candidate I think I would take advantage of this idea. In the long run, even stuffing another $1,000 in a Roth could save a lot of money in taxes.

* More information on correcting excess contributions in this Investopedia article. It must be done by the owner’s tax-filing deadline, which usually April 15, 2009 unless you file for an extension. Note that this is not the same as taking a distribution.

Free Equifax FICO Score Redux

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Looks like Equifax and FICO are giving out another 10,000 free FICO scores (expired!). Again… no credit card or trial required. This is an official FICO score based on your Equifax credit file. Score only, no credit report. This time you don’t have to sign up for an extra forum account.

If you already got one of these free scores recently, you are out of luck. There is a limit of one every 12 months. The site URL is FreeFICOScore.com, which really sounds spammy, but it is verified by Verisign to be run by Fair Isaac Corporation.