Category Archives: Investing

How to Convert a Traditional IRA to ROTH IRA?

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I’m currently trying to figure out how to convert my traditional IRA to a ROTH IRA. The only reason I contributed to a traditional IRA for the last two years was because I thought each year my income would exceed the income limits for a ROTH IRA.

Well, it turns out the income limits for a traditional IRA are lower than those for a ROTH contribution. Thus, I’ve invested $10,000 into a traditional IRA for the last two years and put post-tax money into the account, and will be paying tax when I retire later in life and take the money out of the account. I think that’s probably a bad idea, so I want to convert the $10k to a Roth.

The question I have is… how do I do that? Sharebuilder has a form for this, but it seems to assume you put the funds in pre-tax. I’ve heard if you paid tax of money in the account already, then you only will have to pay tax on the interest in a conversion. Given I still have 30+ years before retirement, it probably makes sense to convert the funds now, especially if I only have to pay tax on the $1k.

Do any of you out there in cyberland know how I can do this without paying tax on the entire $11k in this account?

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Get Rid of My Emergency Fund? Everyone Says “No” — I still think yes.

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My earlier post on how I want to get rid of my emergency fund and instead invest the money into stocks led to a few commenters practically saying that’s the dumbest idea in the world — after all, an emergency fund is for, well, emergencies, and should be available in case something bad happens.

I don’t think I’d want to put the entire $8k into stocks, but at .35% or even 1% interest, it’s just a wasted investment opportunity, esp with the market still probably at a lowish point. I could be wrong and the market could collapse again at any moment, but I’m confident that I can find a way to earn enough per month to pay my basic necessities (probably $1000 / month total including rent if I get desperate and need to cut back.)

This is why I prefer to invest with my savings then buy a house/condo. My rent is cheap and if it so happens I can’t pay rent, it would really suck, I’d have to move out and crash with a friend or find an even cheaper place to live, but I wouldn’t loose all the money I invested in a house, paying off the giant gobs of interest that you have to pay to afford a house in the first place.

Now, the shit could hit the fan and all stocks could drop to $0, and I’d be poor with no emergency fund, but chances are that isn’t going to happen. Worst case the market goes down for a while and I end up losing money instead of making money. Best (reasonable) case that $8000 earns 10% interest in the stock market and in one year I have $8800 plus dividends.

Emergency funds are important if you don’t have a back up plan, or you have kids and other major responsibilities. I know I could manage to get enough freelance work to cover my basic living expenses month to month — because I am focused on keeping those expenses low. Without a mortgage, I think it’s more reasonable to live without an emergency fund. Just don’t spend that money on random stuff, invest it in something you could sell if you needed to, even if it loses some of its value and you have to pull it out for less than you put in. I’m probably going to cancel my CD this week with the $8k, but I haven’t fully decided what to do with the cash yet. At least I can save $2k per month if needed, so I could quickly build up my emergency fund again as long as remain employed. I guess if I get hit by a car and can’t work and lose my health insurance I’d be screwed, but even with a sizable emergency fund, $8k isn’t exactly going to cover medical bills like that anyway, I’d be better off taking my chances and trying to turn that $8k into more money before I need to use it for an emergency.

 

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My IRA Breakdown

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I’ve received a few emails lately at hereverycentcounts@yahoo.com asking what the breakdown is of my Sharebuilder IRA that I started last year. While my taxable account is focused on individual shares, I require all funds that go into my IRA to be index funds or ETFs for long-term diversification.

Account Total: $9281.23 (+$1,021 (14.19%))

AGQ: [Shares: 4.65 | Loss $216.34 -43.27% ] — silver leveraged, selling
DVY: [Shares: 28.8984 | +$194.51 +14.73%] — dividend etf
GLD:   [Shares: 8.25 | +$403.26 +40.33%] — gold w/ collectible tax
SDY:   [Shares: 47.76 | +$193.89 +8.28%] — dividend etf
SLV:   [Shares: 26.71 | +$ 348.39 +69.68%] — silver w/ collectible tax
VNQ:   [Shares: 10.40 | +$403.26 +9.19%] — REIT tax
XRT:   [Shares: 10.40 | +$48.67 +40.33%] — retail ETF, prob should be in taxable account, dividend is not too high, but holding long

What do you hold in your IRA?

 

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Should I Get Rid of my Emergency Fund?

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It’s wise for everyone to have an emergency fund of approx 3 months of typical life expenses. Since 2005, I’ve had $7,000 (now $8,200) sitting in a CD. While it wasn’t entirely liquid, I considered that my emergency fund. If I need it, I could take it out of the bank with a slight penalty and have it in a short amount of time. If I were desperate, my parents and/or boyfriend would be able to lend me a few hundred bucks to cover rent, food and gas until I had access to the money.

That made sense back when my account was yielding 4%, but now it’s making a paltry .35%. I’m so tempted to take that money out and put it in the stock market. Ok, so I’m getting addicted to investing — which could really bite me in the butt — I just realize that the only way I am going to be able to afford retirement is if I put as much much as possible into the market in my 20s and early 30s.

If I take the money out of the Emergency Fund, I’d put $2000 to maxing out my IRA for 2010, and then $3000 on AAPL, $1000 on VZ, $1000 on MCD, $500 on CVX, $500 on SBUX or something like that. AAPL is the riskiest play of all of those, but I believe AAPL stock will go up before it goes down, and it’s still a bargain given its growth prospects. The $2000 in the IRA would go straight into my high dividend ETFs (I use my IRA for dividend ETFs and gold/silver ETFs that would otherwise get charged at the collectible rate) and a REIT ETF which I don’t understand but supposedly it’s good to hold those in IRAs also.

Anyway — is it a terrible idea to get rid of my emergency fund? I have over $100k in stocks now, and many of them are in taxable, non-IRA accounts, which really are just as illiquid as the CD. They are much more risky, but $8,200 sitting in a .35% yield account for 18 months is not doing me any favors either.

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Buy a House vs. Invest in the Stock Market or..?

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This a question that has been weighing heavily on my head lately, as some would say it’s the best time to buy a house/condo right now, while mortgage rates are low, and others would say it’s the best time to invest in the stock market as the recession, over or not, is still heavily weighting stocks down, and growth will return to the markets sooner or later.

There are a lot of reasons why it is not the right time to buy a house, for me personally. Putting money in the stock market is an investment, buying a house is a life step, not necessarily an investment. It’s certainly tough to aspire to be the next Warren Buffet when your entire liquidity is tied down in a 2br, $500k condo, with a monthly HOA fee to boot.

But I still have to ask myself — am I being stupid? Stocks can just as easily go down as they can go up, and I may just be investing away my downpayment — and all of my savings — by putting my money into the market. And by stupid, I mean by picking individual stocks (something super risky, even with large cap companies) vs focusing on my earlier index investing strategy.

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