Only the rich are saving

Last quarter, the percentage of Americans’ personal savings rate stood at 5.9% of their disposable income, according to the Bureau of Economic Analysis’s. Given that number had fallen to as low as 1.9% in 2005, that’s a large improvement. But who is saving and who is not is the real question to ask. Our savings rate is clearly higher than it used to be relative to other countries. It is nowhere near the Chinese savings rate of 38% of 2014, for example, but it has improved to the point that we are now somewhere in the middle of the pack when looking at the 35 member countries of the Organization for Economic Cooperation and Development. But before we break out the champagne in toasting our newly-thrifty nation, you might want to understand that it is most likely the top 10% of households who are responsible for the lion’s share of this improvement. Given that income inequality is at historically high levels in this country (comparable to what they were during the American Revolution), an argument could be made that the “haves” in this country are so rich that they can’t spend it all. And so they increase their savings rate. We do know that as late as 2013, the bottom half of income earners saved little to no money. In 2015, a Pew Charitable Trust study indicated that 41% of households had less than $2,000 in savings and 25% of us had less than $400 on the side. After the financial Crisis there was some hopeful news for the common man on the credit card front. Debt had fallen...

The Cost of Clutter

 For well over 20 years I have been guilty of the sin of cluttering. It is only now, after I was finally forced to address the consequences of my actions, that I can write this column. This is my confession. Before you judge me too harshly, let me remind you that Americans overall are guilty of clutter. In fact, we are besieged with clutter. The average U.S. household has at least 35 unused items taking up room in their homes, which is remarkable given that the size of an American home has grown by 53% in the past 30 years. Our clutter is so bad that fully 25% of people with two car garages can’t park their cars in that space because of the mountains of junk we store there.   We have bought and saved so much stuff that one out of every 11 Americans now rents a self-storage space for approximately $1,000/year. No wonder that storage facilities have grown to a $154 billion industry. On average, it must cost me about $10/square foot in lost living space to store all the junk in my house. If I had to bet, I would guess I’ve spent at least one whole year of my life just looking for lost items amid the stacks of boxes and crates in my basement, attic and spare rooms. In our house, clutter had grown so acute that at times there was barely enough room to walk through piles of furniture and other items. Fortunately, it is a weekend house which we frequent less and less so we don’t have to live with the...

Should You Convert your Traditional to a Roth IRA?

Next year investors will be given a once-in-a-life-time chance to convert their traditional individual retirement accounts into Roth IRAs regardless of how much you earn. Most savers’ knee-jerk reaction is to convert, pay the taxman now and forevermore be free of giving the government a cut of their tax-deferred retirement money. When I dig beneath the surface of this transaction, however, I’ve discovered a few things you should consider. Under the current 1977 tax law for Roth IRA conversions, individuals are permitted to convert a traditional to a Roth IRA but only if your adjusted gross income(whether married or single) is no more than $100,000. In May, 2006, President Bush changed the rules for one year only. Starting in 2010 taxpayers earning more than $100,000 will be allowed to convert and the taxes due on the conversion can be spread out over two years. So a 2010 conversion amount can be included as taxable income in 2011 and 2012 lessening the impact of the tax bite. Now removing the cap for one year doesn’t mean that any one can open a Roth IRA. Taxpayers are still restricted based on the amount of income they earn. For example, married couples, filing jointly earning between $166,000-$176,000 and singles earning between $105,000-$120,000 are phased out of contributing beginning at the lower number. Obviously, the draw in converting your IRAs is based on how they are taxed. Traditional IRAs are tax –deferred meaning the money you contribute each year is not taxed until you start withdrawing it when you retire when hopefully your tax bracket is much lower. In a Roth IRA, the...

Resist the “Buts,” Contribute to Your IRA in 2008

Although the deadline, April 15, is still a good three months away, it might be time to think about contributing to your traditional IRA. That’s the individual savings plan that allows each of us to contribute up to $5,000 this year tax free ($6,000 if you’re over fifty) toward our retirement. We’re urged to contribute the maximum each year. I see your eyes rolling and I can commiserate. The vast majority of us are still struggling to make ends meet. What with the kid’s clothes, putting food on the table and paying a higher price at the pump just to get to work it’s how much, if any, can we “afford” to contribute. Maybe it’s the timing. Somehow all the good intentions we had last year about contributing evaporate as the first of the holiday season credit card bills begin to arrive. Even though we can pay them we still “feel” poor. We resolve to start contributing “next year.” After all, retirement is a long way off. Sound familiar? But maybe its time to change our thinking since tax deferred savings plans are a good deal for a variety of reasons and not all of them have to do with retirement. The assumptions behind the retirement plan are that your money earns income tax-free through investments. With the right investments you could possibly double your money every ten years. At age 70 ½, your are required to take a yearly minimum required distribution taxed at a rate presumed to be lower than the one you are in now. If you withdraw the money prior to 59 ½ you pay...

Generation X and the Roth IRA—A Perfect Match

It’s not often that earning less is an advantage in the working world but one of the savviest things a young person can do right now is invest in a Roth IRA. You can contribute up to $5,000 a year in after- tax earned income, twice that if you’re married. If you’re 25 now and sock away the maximum at 8% a year, you end up with $1.1 million at retirement and it’s all tax-free. Double that number if your spouse does the same thing. So where’s the catch? For one thing, you can’t claim a tax deduction like you can with a traditional IRA contribution. Second, you can’t contribute if you make more than $95,000 a year ($160,000 if married and filing jointly). Old guys like me usually don’t qualify because our income climbs as we grow older and gather more experience. Younger Xers also have more time on their side when it comes to savings. So which is better for you if you’re on the cusp, traditional or Roth? If you’re still young and expect to earn more in the future it makes more sense to invest in a Roth because the money you contribute now will be taxed at a lower rate. As you grow older your income will grow as will your tax rate. Think of it like spring planting season. With the Roth, the small seed you plant is taxed now but the harvest will be tax-free providing you follow the rules. You have to keep the money in a Roth for five years before it qualifies as tax-free. Like a traditional IRA, money withdrawn...