Friday Financial Five – January 18th, 2013
Friday, January 18, 2013
One interesting option arising from the new tax law is the conversion of 401(k)’s and 403(b)’s to Roth IRA’s at any time. Previously, transfers were only allowed after retirement, changing jobs or reaching 59 ½. Those with only traditional qualified plans might consider moving a portion to a Roth in order to increase flexibility at retirement. The conversion of any funds would be immediately taxable, but that money would no longer be subject to Required Minimum Distributions or taxation when withdrawn.
Consumer Financial Protection Bureau update
The CFPB is the watchdog agency created by Dodd-Frank, and according to Bloomberg, they’ve accomplished an amazing amount in the last year and a half. While continuing to rewrite mortgage rules to protect borrower and lender, their first enforcement action resulted in over $100 million in fines. They’ve also begun the process of overseeing payday lenders and debt collectors. These groups have never been under federal supervision and the concept is to transition bank oversight to smaller businesses that may have misled consumers in the past.
Unemployment of college graduates has raised questions about the actual return on college tuition. Now comes this: an independent study that says the more parents pay for their children’s tuition, the lower the expected GPA. Laura Hamilton published the results in the American Sociological Review based on federal data connecting tuition contributions, income, and grades. It stands to reason that students with skin in the game might make an extra effort to get to class, so keep that in mind when figuring your contribution versus student loans and work programs for your child.
For those college graduates that haven’t been able to find work, it’s worth investigating to see if you qualify for the new “Pay-as-you-earn” plan. It’s available to those that received Direct student loans (funded by the Department of Education) after October 1, 2011. If you qualify for the plan, payments are reduced to 10% of discretionary income and the payment period is reduced to 20 years. There’s still no program for PLUS loans or private loans, a negative when evaluating these college funding options.
Exchange-traded funds (ETFs) and your bond positions
In the face of rising interest rates, income investors may have to get creative when it comes to bond positions. Treasuries are certainly unattractive. Buying individual bond issues can get expensive and selling individual bonds can bring liquidity issues. A possible solution might be the development of fixed-term ETFs. These ETFs have a defined maturity, and the idea is to combine the positive attributes of individual issues with the diversification and liquidity of mutual funds. Research on the yields and bid-ask spreads is imperative before buying, but these ETFs might provide a nice laddering opportunity for bond investors jittery about interest rates.
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