My Retirement Blog

TradeKing.com is one of the leaders in the online discount broker business with their $4.95 market and limit equity trades and $4.95 option trades (+65 cents per contract). It was named Smart Money #1 Discount Broker in both 2006 and 2007 and likely will win for 2008 as well. While it’s certainly not as cheap as the likes of Zecco, it does give comfort to know that a reputable publication like Smart Money is willing to stake it’s reputation and name it #1 in discount brokers two years running (it also happens to be #1 in online discount brokers as rated by me!).

So, what are the specifics of their IRAs? Well first off, TradeKing.com does not charge an annual fee for maintaining an IRA account, which is relatively rare. By comparison, Vanguard has a sizable fee that can be avoided if you request all electronic notifications. TradeKing.com also charges a $50 fee for closing your IRA or transferring out funds but that’s a standard fee in the industry.

Lastly, another nice, and rare, feature is that TradeKing.com has no account minimums. If you want a Vanguard account, the minimum you need to open an account is $3,000. While you’ll always want to put as much as you can into your IRAs in the beginning, it’s always nice to know that you can start with $100 if you really want to. Of course you won’t want to begin trading yet because even at $4.95 a trade, each transaction costs you 5% of your portfolio if it’s only $100.

So, TradeKing.com looks like a pretty good place to put your IRA if you haven’t yet picked a spot for it yet. Smart Money can’t be wrong two years in a row, can they?

Consumerist offered this gem up the other day, a forty-page document released by the AARP called “A Financial Professional’s Guide to Working With Older Clients” (PDF).

The first 18 pages were written for financial professionals and you can probably skip them. As a potential client, on the service provider-client side of the relationship, you could read the first 18 pages if you want to know what you need to be asking someone advising you. If you don’t plan on working with an adviser, you can skip it entirely.

On page 19, it starts discussing the issues that concern retirees and older clients. Not all of these will apply to you but it’s good to know what your peers are concerned about because you might be concerned too and just not know it! It covers social issues, family issues, generational issues, physical impairments (hearing, vision, disability), mental impairments, as well as written & online communications.

It’s a very quick read and gives you something to think about.

I always thought of investing in collectibles such as wine, scotch, or art, as something the fantastically wealthy did as they played polo on their front lawn and retired to their private libraries to smoke their fancy cigars. That got me thinking for a moment and wondering if investing in collectibles is something that the general public should start doing… then I came to my senses.

You Don’t Understand It

You should not invest in art because you probably don’t understand it. I studied art history for one year in high school and the only thing I learned as that you had to be the first to do something. You had to be the first to use cubes to represent people (Picasso) if you wanted to be famous. You had to be the first to repeat images and make them crazy colors (Warhol) if you wanted to be famous. You had to be the first to draw vertical and horizontal lines and start coloring them in with primary colors (Mondrian) if you wanted to be famous. Are you seeing a trend? You have to be first and lucky and even then there was no certainty for the artist him or herself! So you want to invest in it? If you don’t understand it, you can’t possible make money in it.

Probably Too Expensive & Limited Demand

Do you really want to put a few thousand (or even a few hundred) on a collectible with a limited demand? The stock market is hard enough and there are millions of people at any moment willing to buy your stock from you. The collectible market is even less fluid and so you run the risk of never finding a buyer for your great artistic find.

They Do It For Fun

When the fantastically wealthy invest in art or scotch or wine or whatever, it’s more for entertainment than it is as an investment. Regular people compare cars and the number of bedrooms and bathrooms in their homes, fantastically rich people talk about how they paid $5,000 for a bottle of this limited edition wine from some obscure place that no one else has.

Don’t invest in collectibles.

A self-directed IRA is a type of Traditional or Roth IRA in which you’re allowed to invest in things other than stocks, bonds, or mutual funds - such as investing directly in a hot new biotechnology or traditional technology startup. In fact, it’s the only way you’d be able to invest your IRA dollars into anything non-traditional to include but not limited to real estate, race horses, and basically anything else (as long as you follow a few rules).

Disqualification

The biggest rule is that you can’t do anything that makes it appear as if you’re using deferred funds for current use. The biggest example is in real estate investing. If you use your IRA funds to “invest” in a property that you end up using and the IRS finds out, then your entire IRA could be disqualified, considered distributed, and you’ll have to pay any associated taxes and withdrawal penalties if you’re under 59 1/2. The disqualification aspect is the biggest danger associated with self-directed IRAs because it can sink you.

There are some categories that are explicitly not allowed and the two biggest are life insurance and collectibles. The “current use” rule regarding life insurance is clear, you’re technically always using it, right? With collectibles, it appears that the rule exists simply because there’s no way to enforce the “current use” rule otherwise. If the IRS ever asks, you could simply give your cousin the piece of art and say they were using it.

How To

This part is pretty simple, just head on over to your bank’s trust department or open an account with a custodial firm (many traditional brokerages, such as Vanguard, also handle self-directed IRAs). They handle all the accounting from disbursing the funds to collecting the profits but they stay mum on all other issues, they are not allowed to give advice. The fees are typically higher than your normal IRA account but that’s because they do a lot more work handling all those esoteric investments you’re thinking about.

I’ve left two jobs in the last five years and each time I rolled over my 401(k) into a Rollover IRA held at Vanguard. In both cases, I rolled over the IRA within a few months of departing my job and I did so for a small handful of reasons.

The number one reason for rolling over my 401(k) into a Vanguard Rollover IRA was simplicity. Why deal with yet another account accessed through yet another website, when I could integrate everything and deal with that account through a great brokerage such as Vanguard? I don’t need more fund balance mailings and fund performance reports, I need my life to be simpler so I can focus on the other things that matter. The end result was that I rolled both of my 401(k)’s into a single Vanguard account (and then I turned on electronic delivery of statements!).

The second reason was for diversification, which is related to simplicity. If I have to access two 401(k)’s in two accounts, it’s much harder for me to control the asset diversification because I couldn’t feasibly see two accounts at once and tweak them concurrently to get the right diversification. One of the 401(k) had some home-brew funds (not created by a major brokerage like Vanguard or Fidelity), so I couldn’t even be certain what the asset allocation within the fund itself was like. It was far easier to pull them all into Vanguard and break them up into Vanguard funds, though any major brokerage like T. Rowe or Fidelity would’ve sufficed as well (I chose Vanguard because I’ve had a long history with them and never been disappointed).

The third reason was cost. At Vanguard, I pay no account maintenance fees whatsoever. If you turn on electronic delivery, the administrative costs go down to $0 and are integrated into the expense ratios of each fund. The funds at Vanguard are much cheaper than the ones at either of my 401(k) plans, though some were pegged to the same benchmarks. Cheaper isn’t necessarily better, much like expensive isn’t necessarily better, but Vanguard has a solid performance record and cost is something I can control.

One account instead of three, an accurate picture of diversification, and controlling the one aspect of mutual fund investing I can control (cost), were the reasons I rolled over my 401(k)’s to a Rollover IRA.

You may have heard about the Roth 401(k) and the Roth IRA and wondered, what is the difference and why is this guy Roth putting his name on everything? To be fair, the guy Roth was Former Sen. William V. Roth Jr. (he passed away in late 2007) and he was the man most responsible for the original Roth IRA. The Roth 401(k) was merely taking the Roth IRA and applying it to the 401(k), thus creating a regular/traditional 401(k) and a new Roth 401(k).

The Roth 401(k) works like the Roth IRA, your contributions are post-tax and your disbursements are tax free. You can take early payments but you pay taxes on the proportion of the withdrawal that is “appreciation” equal to 10% plus your marginal tax rate.

Contribution Limits

The contribution limit is $15,500 for those under 50, with an additional $5,000 catch-up addition for those over 50, in 2008. This contribution limit is shared between the regular 401(k) and the Roth 401(k), which means the sum total of contributions to both plans cannot exceed the annual limit of $15,500 or $20,500. Another wrinkle to the rule, that is often never an issue, is that the sum of employee and employer contributions have to be less than the employee’s total salary or $46,000, which ever is smaller. (another wrinkle is that employer contributions are pre-tax, so they sit in the traditional 401(k))

Rolling Over

When you leave your employer, you can roll over your Roth 401(k) into a Roth IRA just as you would a 401(k) into a Traditional IRA.

Of my two former employers, only one had instituted the Roth 401(k) so adoption has been slow. Most employers don’t want the added administrative burden of operating yet another defined contribution plan.

Sharebuilder, owned by is one of the best online banks, is a popular broker that has offered a handsome new account promotional bonus for as long as I can remember (current bonuses run in the $50 range). This begs the question, would they make a good place to hold your IRA’s?

Sharebuilder made a name for itself for $4 trades if you were willing to wait until Tuesday for the transaction to execute. For many years, a real-time trade was not an option until recently, when the price was set at $9.95 a trade (which is still pretty cheap but not $0 at Zecco or $4.95 at TradeKing). That being said, if you’re buying for the long haul or you’re buying on a set schedule, you don’t need real time trades because the Tuesday buying schedule will work just fine.

Here are the other benefits of Sharebuilder:

• Free dividend reinvestment - This is where they got their name, share builder, and one of the best reasons to join Sharebuilder. Rather than having the dividends sit in cash after they’ve been paid out, you can elect to have free dividend reinvestment and build your holdings. This is a feature that many offer nowadays but was novel back in the days Sharebuilder started.
• Fractional ownership - When they first started, it wasn’t possible to buy fractional shares and Sharebuilder gave you that option. In fact, back in the days before the internet, you couldn’t even buy odd lots (shares that didn’t number in round 100’s); however Sharebuilder gave you the option to buy 1.5 shares or 100.3 shares.
• Scheduled purchases - The $4 trade fee applies to transactions schedule on that Tuesday, likely to assist in bulk purchases, but it also let you de facto schedule your purchases every month at a set time.

Overall, Sharebuilder, now a subsidiary of ING Direct, is certainly a great place to turn to if you are of the buy and hold mentality and have little to invest.

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The 151st Carnival of Personal Finance is up at the Alpha Consumer, please check it out! My post about the difference between lifestyle and life-cycle funds was listed this week.

For 2008, the Highly Compensated Employee income level was increased from $100,000 to $105,000. If your income is above $105,000 then you are considered “highly compensated” for the purposes of retirement plans. If you are curious as to the rules regarding HCE’s, please read this page that discusses what a highly compensated employee means.

If you earn over a certain amount, the Roth IRA option isn’t available to you, you’re left to go after the Traditional IRA. If you participate in a 401(k), you can’t even deduct the contributions to a Traditional IRA. So, why would anyone ever contribute to a non-deductible Traditional IRA? If you did, you’d be paying taxes on the contributions and taxes on the disbursements when you retire… that’s double taxing and that’s foolish! However, there is one reason why you would want to do this. Conversion!

Right now, only those who earned fewer than $100,000 a year can convert a Traditional IRA to a Roth IRA. However, the Tax Increase Prevention and Reconciliation Act of 2005, signed in May 2006, introduced a conversion loophole in 2010 that removed that $100,000 rule. In 2010, anyone is permitted to convert from a Traditional IRA to a Roth IRA. What this also means is that it gives those above the Roth IRA income phaseout to have a back-door method of contributing to their Roth IRA.

When you convert a Traditional IRA to a Roth IRA, you pay taxes on the sum because you were able to deduct the contributions. If you made contributions to a non-deductible Traditional IRA, you already paid the tax so you can make the conversion absolutely free. That’s the only reason I can see for contributing to a non-deductible Traditional IRA… as long as they don’t close the loophole.

So, you may have heard that postage rates will be going up on May 12th. You may also have heard that the post office has a new little Forever Stamp that’s good for one first class letter, or what currently costs 41 cents (it will be going up to 42 cents). What this means is that you can buy a Forever Stamp now for 41 cents, use it after May 12th, and save your a penny. This begs the question, should you stockpile forever stamps and perhaps use it to fund your retirement?

Probably not. Historically, USPS postage rates have increased at or lower than the rate of inflation, making it a pretty poor investment. However, at those fringe periods, like right before rate hikes, it makes sense to purchase a few stamps and save yourself some cents.

I wouldn’t be saving too many of those though, just enough for several months of mailings (which can be very little if you go paperless personal finance). Put the rest in an index fund.