Archives for March 2010

Should I Dip Into Savings To Max Out Roth IRA?

It’s getting very close to April 15th, which in addition to tax returns is also the funding deadline for IRAs in the 2009 tax year. A reader wrote in asking whether they should dip into their savings in order to fully fund their Roth IRA contribution for the year. I would imagine this is a common scenario this time of year.

Let’s say that your income is under the phase-out limits and you can contribute the full $5,000. (See this IRS page for more info on limits.) Perhaps you’ve contributed $3,000 so far. You can either take the remaining $2,000 out of your other accounts (emergency fund, car repair fund, sell stocks, etc.) and fully fund the entire $5k, or simply stop where you are.

An important fact to know here is that anyone can withdraw their Roth IRA contributions at any time, without penalty. (This means just your original contributions, not any earnings on those contributions.) However, you cannot retroactively make contributions to past years. In my example above, you couldn’t just contribute $5,000 + $2,000 = $7,000 next year.

Thus, if you feel that you would likely be able to max out in future years, it may be better to simply make your contributions now. It would be quite sad to miss out on a one-time opportunity for tax-free earnings forever! If you do need the money later, you can always withdraw it again. The early withdrawal process is not that complicated, although you will have some additional paperwork to fill out come tax time.

More details about the actual IRS fine print in this post: Can I Really Withdraw My Roth IRA Contributions At Any Time Without Tax Or Penalty?

There are always some possible wrinkles, of course. If it is truly an cash-under-the-bed emergency fund, you should know it make take a few business days to make an IRA withdrawal. In addition, if you really do foresee needing the money, then you may want to invest in conservative options like CDs or money markets. If you are selling stocks, you may be subject to taxes on capital gains. But you buy the same stock in the Roth IRA, you’ll be able to defer taxes on future gains.

National Park Week: Free Admission April 17-25, 2010

Entrance fees to all 392 national parks will be waived during National Park Week, April 17th to 25th. Parks will also offer additional family friendly activities and special offers on tours, lodging, food, and souvenirs. A listing of parks and promotions is available at

Normally, 146 of 392 national parks charge entrance fees ranging from $3 to $25. The other 246 do not charge for admission. [Press Release]

*Fee waiver includes: entrance fees, commercial tour fees, and transportation entrance fees. Other fees such as reservation, camping, tours, concession and fees collected by third parties are not included unless stated otherwise.

Mutual Fund Hidden Cost: Brokerage Commissions

You might know the expense ratio of the mutual funds you own, but do you know how much of your money they spend on brokerage commissions? Yes, even huge billion-dollar fund managers have to pay someone to execute their stock trades for them, and it can sometimes involve a murky world of “soft” dollars where expenses are hidden from investors through inflated stock commissions.

Morningstar article A Big Fund Cost You Don’t See explored this hidden cost and found that the average equity fund pays approximately 0.30% of assets a year in brokerage commissions. If your equity reports an expense ratio of 0.90%, that would bring the total expenses including commissions to 1.20%. (When comparing performance numbers, those are usually reported after all expenses.)

However, these are just averages. Some funds have high turnover and thus lots of trades relative to their asset balances. The Morningstar article highlighted 10 funds that paid over 0.60% of assets in brokerage commissions recently. One of these is CGM Focus (CGMFX), which I seem to read about a lot in popular personal finance magazines. They spend 1.04% of assets on stock commissions, on top of the 1.23% official expense ratio. Overcoming a 2.27% total expense drag every single year is quite difficult – some would say nearly impossible over the long run.

I am not saying they do this, but you can see how it would be beneficial for a mutual fund to shift some of their costs onto the stock commission side and reduce the highly publicized expense ratio figure.

I also ran across this Mutual Funds’ Hidden Costs page at Retire Early Home Page, which was last updated in 2005 but provides some historical perspective. In 2004, Forbes magazine revealed that the Dreyfus Founders Passport Fund paid an “astonishing” 4.64% of assets towards brokerage commissions.

It also states (again back in 2004):

The average US domestic mutual fund pays about 5 cents in brokerage commissions for every share of stock bought or sold in the fund. Vanguard averages about 2 cents per share in its low-cost index funds.

What about Vanguard index funds?
This made me want to investigate Vanguard’s brokerage commission hit further. To calculate it yourself for any mutual fund, you’ll need two numbers. First, you’ll need the total net assets as of December 31st, found inside the fund prospectus. Second, you’ll need to track down the total brokerage commissions spent, found inside the fund Statement of Additional Information (SAI). Luckily, these are both easily found on for any specific fund – just click on “View prospectus and reports”.

In 2004, the Vanguard Total Stock Market Index – Investor Shares (VTSMX) had an expense ratio of 0.19%, and brokerage commissions of only 0.0077% of net assets In 2008, the expense ratio was 0.18%, with the commission costs dropping to only 0.0069% ($5,643,000 divided by $82 billion). As the fund grows, the expenses per dollar are reduced – something I’ve come to see and expect from Vanguard.

This goes back to one of the structural features of index funds – they do not need to trade very much to maintain their goal of tracking an index based on market capitalization. If one company rises (or drops) even significantly in value, they simply represent more (or less) of the index accordingly. There is little need to buy or sell in response to market fluctuations. Instead, trades are made primarily due to new fund purchases and redemptions by investors, or due to the occasional change in the tracking index.

Ally Bank 5-Year Certificate of Deposit: A Closer Look

Previously, I wrote about Ally Bank CDs and how they offer flexibility in the case of rising interest rates. I finally found the time to do the analysis of the 5-year CD that I wanted to do. In particular, I felt that the current yield curve and short 60-day early withdrawal penalty make this certificate of deposit very attractive.

The current Ally Bank 5-year CD yields 2.00% APY (as of 1/05/15). Rates change constantly, but let’s assume you have a certificate of deposit from any bank paying 3.09% APY with an early withdrawal penalty of the last 60 days of interest. (3.09% APY = 3.04% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.

Some very interesting realizations come out of this:

    • After only 4 months, your annualized rate is 1.52%. (Essentially you 2 months out of 4, which is half of 3.04%). This isn’t bad at all, considering their liquid online savings account is currently paying 0.99% APY (as of 1/05/15).
    • After 1 year, your annualized rate is 2.57%. The current 1-year CD is currently paying 1.05% APY(as of 1/05/15). I can’t find any bank with a 1-year CD paying anywhere close to 2.57% APY. Try to find one!
  • After 2 years, your annualized rate is 2.83%. Ally’s current 2-year CD is currently paying 1.29% APY(as of 1/05/15), although it does have a Raise Your Rate feature.
  • After 3 years, your annualized rate is 2.91%. The current 3-year CD is currently paying 1.40% APY(as of 1/05/15). At this point, a few banks offer a similar rate, but this is still amongst the top. The only better one I could find was PenFed which was slightly better at 3.00% APY.


Final benefit: No minimum opening balance!
As icing on the cake, you can buy these CDs in increments of as little as $1. Now, I wouldn’t abuse their policy, if only to avoid the trouble of keeping track of them all. But let’s say you have $50,000 to put aside. You could buy five $10,000 CDs, and so if you must make a withdrawal of $10,000 you’ll just “break” one CD and have the other four intact. For more modest total amounts, you could go into smaller increments, for example at $1,000 a piece.

Capital One 360 Apologizes

Capital One 360 apologized for shutting my site down without warning or cause via e-mail today:

Jon, I’d like to apologize for our recent actions regarding your website. Customer security is our number one priority, and it is not something that we take lightly. One of your readers and one of our vigilant Customers alerted us to what he felt may have been a phishing scam. When presented with security concerns — such as a possible phishing scam– that may affect Customers’ personal information, we act swiftly and decisively to protect them. In the case with your site, we may have acted too quickly. After further review, we immediately reversed course and resolved the situation. We’re sorry for the inconvenience it caused you and your community, and we are working to make sure this type of situation doesn’t occur again.

Thanks for being a valued partner of Capital One 360. We look forward to continuing our successful partnership.


Robert Weaver
Head of IT Security
Capital One 360

I suppose that is something. I only wish it could have been “When presented with security concerns, we actually visit your site and verify the accusation before hiring a large security firm to scare your web host into shutting down your revenue-generating website.” I also disagree with “immediately reversed course” because only after my begging my hosting provider was my site brought back online and given 12 hours to comply to the demands.

Oh, and here’s the long, scary e-mail that was sent from RSA Security yesterday morning (after the jump). I think you’ll agree it was very accusatory and pretty offensive. They even demanded an entire download of all the contents of my site and server.

[Read more…]

Unemployment Rates vs. Level of Education

I ran into a friend today that has been unemployed for a while. He seemed pretty beaten down, and doesn’t even really seem to be trying anymore. “1 out of every 10 people can’t find a job.” Almost like that stat made it okay. Well, it does seem like a huge amount of people. Is there less stigma attached to being unemployed now?

However, he does have a degree and some experience. This reminded me of a graphic in Businessweek of the benefits and costs of college. They compared unemployment rates when separated by level of education. People who don’t have a high school diploma have triple the unemployment rate of someone with at least a bachelor’s degree.

You can view the original article here [pdf], which also has an interesting chart showing that higher education expenses have been increasing at double the rate of medical care since 2000. College tuition and fees are up 92% (!) since 2000. That trend simply can’t continue… can it?

Free Knife Sharpening at Sur la Table

Through April 30, you can bring up to 2 knives per person to Sur la Table and have them sharpened for free. A good way to keep quality knives for a long time, as I hear those sharpening steels often aren’t enough. You may need to leave them there for a couple days. Locations mainly in larger cities, lots in CA.

Capital One 360 Accuses Me Of Phishing, Shuts My Site Down, Then Apologizes… Kind Of was unceremoniously shut down this morning by Capital One 360 and RSA Security when they sent a long, scary e-mail to my web hosting provider accusing me of phishing.

The page, now still removed just in case, involved Capital One 360’s person-to-person referrals, which Capital One 360 offers users in order to promote it’s banking service. One user refers another user, and if a new user opens an account, both get a cash bonus. My page was a simple page where other readers could post up their referral links, and have another person come by and claim the other end of the bonus. Win-win, right?

I should also mention that this specific page has been up for about 4 years, with not a peep from them. I can confidently say over 1,000 people have gotten a new account at Capital One 360 through this page.

Was there an warning e-mail saying “Hey Jon, this page angers us.” or “Hey Jon, remove this page or we’ll shut your site down with our big bad lawyers.”? Nope.

Finally, all of the links directly go to a Capital One 360 page. There is no link on that asks for any Capital One 360 user information, least of which full name or login credentials, nor had there ever been. Their accusation is like Bank of America accusing me of phishing when I link to a $100 account bonus that they’re offering at (Don’t get any ideas, BofA!)

I’m also kind of disappointed with my web host, LiquidWeb. You’d think if I buy a dedicated server from them, I’d at least get a phone call before having everything shut down.

Conclusion. I called RSA Security directly to get this all straightened out. After checking their records, they said (over the phone, I’m paraphrasing somewhat) “There was a misunderstanding with Capital One 360. They first contacted us to shut down your site. Then they realized you work with them as an authorized partner. So a few hours later they told us never mind. Everything is okay. You don’t have to take down anything. We apologize on behalf of Capital One 360.”

Of course, neither my web provider nor myself got this “all clear” e-mail. Capital One 360 still acted like a big faceless corporation, and I haven’t yet received any apology from them directly. Being just a little peon, I’m just happy my entire site wasn’t shut down further because of this. Now please excuse me while I throw up from all the stress…

Changing 401k Contribution Rates During Year, Catch-Up Contributions

401k company matches are great ways to boost your retirement savings, but sometimes you have to be careful in order to capture it all. My wife’s company offers a 3% match, but only up to 3% of whatever you contributed that pay period. What if you contribute less than 3% for some period, and then a much larger amount a later period, with the overall total being much more than 3%? With some plans, you are simply out of luck and have missed out on potential money. Other plans offer what is called a “catch-up” or “true-up” contribution. Do you know which one you have?

I wrote about 401k true-up contributions and maxing out 401ks earlier, but finally got my hands on the employer’s Summary Plan Description which addresses it explicitly. Luckily, my OCR software was working, and I scanned it in below:

Is a year-end Matching Contribution provided if I changed my saving percentage during the year?

If you are employed by the Employer on the last day of the Plan Year, a true-up calculation is made so that your Matching Contributions will be maximized even if you changed the percentage of your Compensation that you elected to contribute during the Plan Year. The amount, if any, of the true-up Matching Contribution is the excess of (i) 100% of your Employee Contributions for the entire Plan Year that do not exceed 3% of your Compensation for the entire Plan Year that was paid to you while you were eligible for Matching Contributions, over (ii) the total amount of Matching Contributions already contributed to your Account for the Plan Year.

For example, John was eligible for Matching Contributions for all of 2010. John, who earned $40,000 evenly throughout the year, did not elect to contribute to the Plan from January 1 to June 30, 2010. From July 1 through December 31, 2010, John made Employee Contributions of 12% of his Compensation (12% of $20,000 = $2,400), and received Matching Contributions of $600. His year-end Matching Contribution is calculated as (i) minus (ii), as follows:

(i) 100% of John’s Employee Contributions to the Plan for the entire year that do not exceed 3% of his Compensation for the entire year. 100% x 3% x $40,000 = $1,200

(ii) The total amount of Matching Contributions already contributed to his Account for the year = $600

Year-end Matching Contribution to John’s Account for 2010 = 1,200 – 600 = $600

The year-end Matching Contribution generally is contributed to the Plan within a few months after the end of the Plan Year. hi some cases, IRS rules limit or reduce the amount of Matching Contributions the Employer can make on your behalf if you are Highly Compensated, as defined in Question 1, above. You will be notified if you are affected by this limit or reduction.

An important note here is that, at least for this plan, you must be employed on the last day of the Plan Year in order to be eligible for this catch-up contribution.

Net Worth & Goals Update – March 2010

Net Worth Chart 2010

Lack of Recent Updates
Up until last December, I had done regular monthly updates of our net worth for five consecutive years. However, recent personal events made me much less interested in detailed, analytic planning towards early retirement. As a result, I have barely checked any of my statements in the past few months, other than to make sure they weren’t negative. I think I made a few trades here and there, but for the most part haven’t bought or sold any stocks to maintain my asset allocation. I haven’t even converted my Traditional IRAs to Roth IRAs like I had planned, or made any IRA contributions for 2010.

Instead, reading blogs and other financial news has simply been a recreational escape for me, and I think my blogging has reflected that. I still had fun learning about ways to save money here and there, and enjoy keeping track of other market changes and various offers out there.

However, it’s time to catch back up a bit! Here we go…

Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”. My balances are simply monthly charges that I have not yet paid in full when due.

If you’re looking for a competitive offer, Citibank is offering 0% APR for 15 months with a 3% balance transfer fee.

We’re both still working, but will be taking some unpaid time off in April which will reduce income temporarily. Our monthly expenses are still much less than our (regular) income, so while we may eat into savings a bit, I expect to bounce back into the positive very quickly.

Retirement and Brokerage accounts
Near the end of last year, I had gradually moved $30,000 into a brokerage account at OptionsHouse to invest in ETFs due to their $3.95 trades. In my usual way, I then thought about switching instead to WellsTrade since I now had the $25,000 required to get 100 free trades per year. Stuff happened, the application process took too long, I got distracted, and the money is still sitting mostly non-invested. Grrr.

As stated above, besides our regular 401k contributions, we haven’t made any real moves in our retirement accounts either.

The stock market has done relatively well in the meantime, with the S&P 500 nearly hitting 1,200. Our total retirement portfolio is now $269,538 or on an estimated after-tax basis, $233,164. At a theoretical 4% withdrawal rate, this would provide $777 per month in after-tax retirement income, which brings me to 31% of my long-term goal of generating $2,500 per month.

Cash Savings and Emergency Funds
We continue to keep a year’s worth of expenses (conservatively set at $60,000) in our emergency fund. It’s still a nice warm safety blanket. I am thinking of moving a chunk of it into several separate 5-year CDs from Ally Bank, as they pay 1.60% APY (as of 10/25/13) and each would have a small early-withdrawal penalty of only 60 days interest.

Home Value
I am no longer using any internet home valuation tools to track home value. After using them for a year, I went back to simply taking a conservative estimate and focusing on mortgage payoff. After checking them again today, I am staying away. A house nearby sold recently for $500,000 but is listed at both Zillow and Coldwell Banker as being sold for $1,000,000. Needless to say, it is skewing my home value estimates!

It would seem that I am currently long on thoughts and short on action. Time to fix that.

Sharebuilder – 5 Free Real-Time Market Trades

Here’s a another Sharebuilder promotion, which will give existing customers 5 free real-time market trades. (New customers should grab their free $50 sign-up bonus with code 50WCFA first and then come back).

Log into your account, click on the “Accounts” tab and then the “Promotions” tab below it. Enter the promotion code HVC09NY and you should see the following confirmation:

Thank you your promo code has been accepted. Happy New Year!

You should also receive e-mail confirmation. To double-check, visit this page when logged in and you should see 5 free trades good until 8/1/10. Credit to flaredup from FW.

These real-time market trades are handy if you want to sell any of your shares, especially any small positions you have, without paying $9.95 a pop.

Free Book Download: Elements of Investing

Vanguard is offering a free PDF download of the recently published book Elements of Investing by Malkiel and Ellis. It looks like it might have been meant for Flagship members, but is currently open to everyone. From the Amazon reviews and table of contents, Elements of Investing is targeted at investing beginners, intended to provide a brief overview of basic investment principles like diversification and focusing on the long-term. Thanks to 2million for the tip.

Burton Malkiel is also the author of A Random Walk Down Wall Street, the classic book that was the very first investing book I read when I started this blog in 2004. Perhaps his new book will be the start of a great financial revolution for you as well?