Can I Switch IRA $ to a 529? April 30, 2002February 21, 2017 Englezos: ‘Can I liquidate an IRA to fund a Section 529 Tuition Plan and avoid penalty because it is educational?’ ☞ I doubt it, but I don’t know. Let’s ASK LESS! One rrrrrrring . . . Two rrrrrrings . . . ‘Hello, Less? I . . .’ ‘Say no more – I have Caller ID. Here’s the answer.’ How does he know all this stuff? Anyway, here’s Less’s answer: The matter isn’t settled in law yet, but it is not something I advise doing, even if there isn’t a penalty, for several reasons: (1) There will be immediate taxation of all the withdrawn money: it is all ordinary taxation, and only the earnings on the diminished value will be tax-free later on if used for qualified costs. (2) You must come up with the tax money from other sources, since anything not transferred will DEFINITELY be subject to the 10% federal penalty (and state penalties in most cases). (3) You are risking your own retirement to finance your child’s college costs. You can virtually always borrow to pay for college, but borrowing to pay for retirement is, for rather obvious reasons, not quite as easy. On top of all this, there is still the possibility of the penalty on top of the regular taxation, since the IRS has not resolved the matter. The main reason they haven’t resolved it is that, until very recently there would have been no reason whatsoever to try it (since 529 earnings were only tax-deferred, not tax-exempt, until the tax act of 2001, and it was already tax-deferred in the IRA). So somebody will have to be a guinea pig, and I don’t see the point in volunteering. I suppose if the child is a newborn, there may be enough years of earnings to make the transfer to a 529 plan a potential gainer over time, but I think it would be wiser to simply fund the 529 plan with the money that you were otherwise going to pay in taxes on the transfer this year, letting that compound tax-free while leaving your IRA alone. By the way, depending on your income, money withdrawn from the IRA in the years of college and used to pay tuition should qualify for the tuition tax credits or deductions, making some of it effectively tax-free anyway, without the transfer. Thank you, Less.
An eMail from Saul Kramer April 29, 2002February 21, 2017 I don’t know Saul Kramer, but his e-mail was passed on by a friend. Perhaps you’ve seen it, too. He writes: From: Saul Kramer Thursday, April 25, 2002 12:55 Subject: Tales from Jenin Hi all. I’m writing this email after having returned last night from the emergency army call up that sweetly interrupted my life 3 weeks ago. I’m writing this email for simple reasons, to tell you the truth about what happened in Jenin over the last 2-3 weeks and to share some of the stories and incidents that we had. It’s pretty sad seeing and hearing the lies CNN, BBC and all the others have been feeding the world when you have seen a completely different picture yourself. Feel free to pass this email around and send me any feedback or questions. Let me just get one thing cleared, there was no massacre in Jenin, I repeat no massacre in Jenin!!! (I’ll get back to this later.) My reserve battalion was stationed on the northern and eastern border of Jenin with the purpose of ensuring the enclosure of the area during the Defensive Shield Operation took place. We were divided amongst a number of roadblocks and defensive positions with the main purpose of preventing terrorists leaving Jenin to carry out attacks inside Israel and also from escaping during the operation. We were also responsible for monitoring the entrance of the Press and humanitarian aid going into Jenin, and also Palestinians needing to leave Jenin for humanitarian reasons. I myself together with eleven other soldiers manned a small roadblock at the northern tip of Jenin, which was one of the main thoroughfares for traffic entering and exiting the area. Jenin is not a big town. The refugee camp is a small part of Jenin and the pictures repeatedly shown on TV are of a small section (10% -15%) of the refugee camp that was destroyed. The refugee camp is where the terrorists have mainly operated and harboured factories and storage facilities for weapons, explosive belts etc. Many of the recent suicide bombers have strapped themselves up in this refugee camp. What is also very fascinating is that UNWRA (United Nations Work and Relief Agency – part of the UN) has been responsible for the refugee camps over the last 50 years and has allowed terrorist infrastructure to flourish under its nose. In the fighting that took place in the refugee camp, children were used as human shields by the terrorists. One of the brigade commanders told us this last Saturday night that they were shot at in the small alleys of the camp. They returned fire only to hear the cries of young children to which they immediately stopped shooting and prayed that they had not killed any children. They hadn’t. The armies respect and consideration for the life’s of innocent civilians is of a high standard. For this reason, 23 of our own boys were killed in the Jenin fighting. If we had no regard for the life’s of innocent civilians, 23 sons, husbands and fathers would be at home with their families now. They were the price we paid for the high moral and ethical standards upheld during the fighting. During the week of the incursion into Jenin the area was a closed military zone. However contrary to what was reported, humanitarian aid was allowed in and I myself personally checked many of the hundreds of trucks that were allowed in to deliver supplies to the Palestinians. This was carefully coordinated with the army to ensure that innocent civilians would receive the supplies and to minimise the risks of those entering the areas. For a few days after the fighting had stopped, the area was closed off to the press. This is when the rumours of the massacre began despite the army press giving detailed briefing sessions to the media on the situation. So why was the area closed to the press and what did we seemingly have something to hide? Simply, the refugee camp had been booby trapped by the terrorists and minefields awaited those that entered. Soldiers inside the refugee camp told me of not being able to move 5 meters at a time without having to diffuse another pipe bomb or mine. Many of the houses destroyed were done so by bombs planted by the very residents of the camp. Some of the dead bodies were also booby trapped with grenades and mines awaiting the Israeli soldiers. (The Palestinian death toll stands at below 40 with maybe another 20 or so buried in the rubble of which most has been cleared up. This was also told to us by embarrassed reporters who entered the area eagerly awaiting to report an Israeli massacre of Palestinians only to be disappointed to find minimal destruction.) The media. Last Sunday while myself and my good friend Ben were on duty at the roadblock at the time when no press were allowed to enter Jenin, we spotted a jeep trying to evade the roadblock through an adjacent field. We managed to stop the jeep and discovered a group of French Journalists who had managed to enter Jenin and were now trying to leave. We followed the normal procedure of questioning them, checking their vehicle and identification. This process sometimes takes a while because we have to phone another army base who then checks the identities with the Israeli authorities which includes the intelligence operations. Anyway, it turned out that one of the supposed French journalists is actually a Palestinian terrorist on Israel’s wanted list. He was taken away by the police together with the other real French journalists. Bet you never heard about that one on TV. * Last Thursday, friends of mine on duty at another outpost a few kilometres away from me spotted two young kids walking in the middle of the day with black backpacks on their backs. The two kids entered an abandoned structure about 800 meters away from the outpost and left without the bags. The kids thought they had gone unnoticed. It was later discovered that the bags contained weapons, explosives, an Israeli army uniform with a red paratrooper beret. The plan was for a terrorist to pick up the loot at night, dress up as an Israeli soldier and attack the outpost. We had already received intelligence reports 5 days earlier warning of a terrorist dressing up as a soldier and entering one of the outposts. Avi, a good friend of mine studying together with me at Bar Ilan was stationed in Nablus (Shchem) during this operation and told me the following: They took over a house in Nablus as a stronghold in order for the operation to clear out the terrorist infrastructure there. While in the house, they did not use the electricity to charge their cell phones. They did not touch or eat any food left in the house. They made a concerted effort not to use any furniture in the house. When they left the house a few days ago during the pullout of Nablus, they cleaned the house and left money on the table. I have heard this reported from soldiers that were also in Beit Lechem, Tulkarm, Kalkilya and Jenin. On Monday morning this week, a UN bus entered Jenin carrying a UN rescue team from Britain. The team included doctors and other rescue personnel who get dispatched around the world to help with rescue operations. Four hours later the bus returned through our roadblock and they stopped and we had a chance to chat a little. The first thing they said is that this was the biggest waste of time for them and they would be catching the next flight out of Israel. One of the doctors told us that one of the “massacred” bodies he examined was that of a man that had been dead for two years. What a shame that the Palestinians dug him up to add to the death toll. As my friends and I packed up yesterday ready to head for home we joked at how the whole world considers us to be monsters and how one day we might all be charged for war crimes. We felt good for having served our country once again and we hope that something was achieved in this operation. What lies ahead is still uncertain. What became so clear to me is the importance of seeing things in the right context and perspective. If all that happened these last 3 weeks was an Israeli incursion into the Palestinian areas, then yes, maybe we don’t look so good in the world’s eyes. But looking in the context of the history of Israel and our longing to live peacefully side by side with our Arab neighbours, we cannot let terror to exist and destroy our dream. I pray and hope that new Palestinian leadership emerges that will want to make this world a better place for its people.
Neither a Borrower Nor a Lender Be — But This Could Help April 26, 2002February 21, 2017 Have you ever borrowed money from, or loaned money to, a friend or relative? I don’t mean $50 – maybe $2,500 or $10,000? It’s a great way to lose both friends and money. I’m pretty sure that’s what Shakespeare meant when he had Polonius say, ‘neither a borrower nor a lender be.’ He wasn’t advising against your taking out a mortgage or buying bonds. Now comes a new service, CircleLending.com, that could conceivably cut down on the damage. Basically, CircleLending makes it easy to be more businesslike, but without offending the borrower. I haven’t tried it myself – but wish it had been available before I lent $2,000 to [name withheld] on March 11, 1997, or $10,000 to [name withheld] on June 13, 1993, or $5.000 to [name withheld] on October 15, 1987 or $20,000 (!!!) to [name withheld] on June 1, 1997 (but who’s counting?). Of course, in some cases, the ‘loan’ is a face-saving way to help a friend too proud to ask for a gift, but too poor to pay you back. ‘Hey, man – thanks! I’ll pay you back the minute I’m able.’ There’s nothing necessarily wrong with that at all. But for a loan that’s really meant to be a loan, this service (assuming it stays in business, etc.) could provide the friendly but firm prod needed to get you paid back as agreed – a service, really, to both of you – just as if you were Visa or MasterCard (but, if you have a shred of decency left in your body – and because you are a reader of this column I know you do – at a significantly lower interest rate.)
Short-Term Bonanza, Long-Term Crunch? April 24, 2002February 21, 2017 If some of this seems foreign, just plow through it, because it leads to an anecdote anyone can understand: Dan Critchett: ‘What do you think the consequences are of the overwhelming incentive in credit markets today to avoid long-term borrowing? REITs are now borrowing zillions at spreads against LIBOR (or swapping their current long mortgages) instead of financing our shopping centers and high-rises with bonds. Corporations opt for credit lines instead of floating 15-year paper. The Federal Government doesn’t even ISSUE some of its formerly-ubiquitous long bonds. And even everyday citizens prefer to borrow at 1.9% on a 6-month credit-card special rather than refinance their 30-year mortgage. All these yield-curve surfers have to come into the shore sometime, no? Where in the world will the SUPPLY of long-term credit come from – or more accurately, at what price will it come – when, one day, everybody wants to borrow long? And what kind of mess will we have gotten ourselves into?’ ☞ Let me answer indirectly with an anecdote: I got an offer from MBNA to sign up for a credit card that would let me borrow up to $100,000 at ZERO interest for the first nine months. So I made the call, as it urged, and had them wire $95,000 to my bank account, which they did. It is now my free money for nine months, which I can put to work any way I want. All I have to pay until next January is $15, the minimum monthly payment. As tickled as I am by this bonanza (if you figure I can earn 2% on the money in 9 months, and I think I may even be able to do better, MBNA just gave me $2,000), it makes me nervous . . . just as the free running shoes that some website gave me made me nervous back during the dot-com bubble. I hesitated to brag about this – I know I am exceptionally fortunate to be able to get this kind of credit – but I do so because, in the first place, I suppose it will not astonish you to know that I am not entirely poor just because I am entirely cheap (indeed, it may be the cheapness that has spared me from the poorness) . . . and because I think it somehow relates to Dan’s point. One of these days, the low-cost short-term money will be over, to be repaid with higher-cost money. And that could be yet one more reason that the stock market, on average, as anemic as it’s seemed to some, may not be what you’d call a bargain here. Rising interest rates, when they come, will pose a problem. GLOSSARY The yield curve is the line your daughter could draw in a graph that shows where interest rates are for different time periods. Usually, short-term money carries a lower rate than long-term rates. Just look in your bank window: a 30-day certificate of deposit might yield (for the sake of the curve I want you to draw in your mind) 1% interest, a 90-day CD might yield 2%, a 1-year CD might be yield 3%, a 2-year CD might yield 4%, and a 5-year CD might yield 5%. These are not real-world numbers, but do you see the ‘curve’ you could draw if you made a graph of that? Sort of like a wave. REIT = Real estate investment trust. Libor = London Interbank Overnight Rate (or something like that) – a floating benchmark for very short-term money. Long bonds were the 30-year bonds the U.S. Treasury used to issue. Coming soon: The Wisdom of Dick Davis
Trapped with My Broker – Part 2 April 23, 2002February 21, 2017 Yesterday, Bernie said he’d like to leave his broker at Merrill Lynch, but they’ve been friends for 30 years. John Bercini: ‘One possible solution to Bernie’s problem would be Merrill Lynch’s Consults program, in which Bernie could hire Institutional Money Managers to run a series of private accounts (for diversification) all for around a 2% annual fee which includes custody, transactions reporting, everything. I don’t work for Merrill, I do have money in this program and I do work for a money manager, but we are not in Merrill’s program.’ ☞ I appreciate the suggestion but disagree. Two percent is a huge slice of your assets to give up each year. If the stock market can be expected to do maybe 8% a year over the next 20 years (slightly regressing to the mean after 20 phenomenal years), then to pay 2% is to give up 25% of the potential return! Worse, since you probably can’t take the full fee as a tax deduction, if you can take any of it at all. So the 8% you earn might be taxable, while the 2% you pay might not be. Granted, if Merrill can find managers who reliably beat the market by more than the 2% fee, then this begins to get interesting. But why would Merrill be able to do that? Merrill Loser: ‘Bernie’s letter about ML could have been mine, except that my money is in ML Funds, which is worse.’ ☞ I don’t mean to pile on Merrill specifically. These problems are industry-wide. But I’m sure some of you have been reading about New York Attorney General Eliot Spitzer’s action against Merrill for conflicts of interest. Seems this firm, once renowned for its focus on ‘the little guy,’ was leading more than a few little guys down a primrose path. BOTH PARTIES ALIKE? If, for religious or other reasons, you think gay Americans should be denied equal rights, you will probably want to vote Republican. In a forthcoming column, Hastings Wyman compares Republicans and Democrats. He reports that 151 Congressfolk have “perfect” ratings from the bi-partisan Human Rights Campaign – 70% of the Dems and 1.4% of the R’s. Lowering the bar from a 100 rating down to a 67 rating still brought the Republican tally up only to 8%. Meanwhile, 63% of the Republicans got a complete zero on the HRC scorecard, meaning that there was not a single place they sided with gays and lesbians. And in Texas last week, the nine Republican judges who comprise the state’s highest criminal court upheld that state’s sodomy law, under which two men were arrested in 1998 for having sex in the privacy of their own home. The Bible is clear: women should be subservient to men, slaves should obey their masters ‘with fear and trembling,’ nonvirgin brides should be stoned, and intimate relations between people of the same sex is an abomination. What’s complicated about that?
An Stock to Consider April 22, 2002February 21, 2017 EQUALITY IS CATCHING ON How come your employer’s health plan covers your better half but not your office–mate’s – doing the same work as you but barred from a legal union because he or she is gay? Well, less and less is that the case. More than half of the nations 50 largest companies – 29 of the Fortune 50 – now offer domestic partnership benefits. Equality is catching on.* *But not at Exxon. When Exxon bought Mobil, it put the kibosh on Mobil’s progressive domestic partner benefits. Hence the boycott. TRAPPED WITH MY BROKER Bernie: ‘My very nice broker at Merrill Lynch has been a friend of my family for close to 30 years and I have all my eggs in the Merrill basket of CMA accounts and IRA’s. Problem is that most of my money is ‘invested’ in money markets. I am a lousy stock picker. So is he. I should buy government bonds but I can’t bring myself to break away. Any advice or comments?’ ☞ Blame it on me? AN STOCK TO CONSIDER That’s it: AutoNation – AN. Check it out. (Full disclosure: I own some.)
Can Value Line Beat an Index Fund? April 18, 2002February 21, 2017 COOKING LIKE A HORSE Brian Adair: ‘If you like ice cold carrot juice, try this: blend equal parts carrot juice and low fat vanilla ice cream (I like Breyers). My girlfriend made me try this drink a few months ago (‘Carrot juice? That sounds disgusting’ was my exact response.) Now I can’t enough of it. I bought a juicer just to make my own carrot juice and I buy a 5 lb bag of carrots every few days. (I’ve been eyeing the 20 lb bag every time I’m in the store, but I haven’t bought it yet.)’ ANDY’S GANG! Now I see why I remembered Froggie and his magic twanger. It comes from an old show called Andy’s Gang. Thanks to Jack Kirsch and Jon Zich for these links. Click here for the history. And here for Froggie’s page. Hiya kids! Hiya! Hiya! TOBACCO Eric E. Haas: ‘I read with interest your comment about Third World cigarette distribution. I remember an interesting press conference about ten years ago. President Bush (the First) was bragging about opening China to American cigarette exports — how this was a great thing for America. What seemed especially ironic was that this was the same man who sent his army to invade the tiny nation of Panama to bring Manuel Noriega to justice. The charge: Exporting addictive drugs to the United States.’ ☞ Tobacco helped build this country – you will note the tobacco leaves on the dollar bill – and the industry has had a good friend in the Republican Party, and vice versa. The Bushes and the Doles have gotten on fine with Big Tobacco. By contrast, Clinton/Gore, not to mention Congressman Henry Waxman, were the industry’s worst nightmare. (Remember smoking on airplanes? Ah, the good old days. Those days may have ended sooner had Elizabeth Dole not been Secretary of Transportation, calling for further study.) TRADING ONE ADDICTION FOR ANOTHER Mike Lebuf: ‘Forty years ago, cigarette companies were allowed to hand out free samples on US college campuses. But no more. Instead of free cigarettes, students are now given credit card applications.’ VALUE LINE VERSUS INDEX FUNDS Mike Gavaghan: ‘You’ve written quite a bit about the near futility of trying to beat the market average over the long term (thus recommending index funds). So, what can be made of the claims by Value Line that their ‘timeliness’ rankings are highly correlated, since 1965, with stocks that both outperform and underperform the market over a 12 month period? Here’s a link where they state there case. Are they just playing statistical games here, or is this track record worth paying attention to?’ ☞ I subscribed to Value Line for many years and loved those huge looseleaf binders they’d send, with their wonderful research and ranking system – it was sort of the equivalent of the Scott’s Catalog to a 13-year-old stamp collector. And I loved the notion that they could help me beat the market. I visited their offices, met the great man (then 90 or so and the head analyst, and came away impressed. (This was, by the way, well before the invention of index funds.) Then they had a rough patch – right around the time they went public, if I recall – as their ranking system seemed to get out of whack for a while. It may well have returned to whack. But: 1. Following their lead takes some work, and – if you do trade in and out as the rankings change – exposes you to tax. (Remember, if Warren Buffett had achieved the same astounding annual returns he has, but switched positions once a year incurring tax instead of holding for the long term, he’d be a poor man today! Well, OK, not poor. But consider this: A dollar left to compound at 26% a year for 35 years grows to $3,258. The same dollar compounding at the same 26% — but subject to, say, a 20% tax every year, compounds just 80% as fast, at 20.8% — to $745. So taxes matter. And index funds keep them to a minimum.) And . . . 2. Consider the results of Value Line’s own mutual fund, which probably uses its ranking system as well as you could. Here’s what Morningstar says of the Value Line Fund: ‘This fund paints by numbers. It uses the Value Line ranking system to direct its stock picks. But this quantitative strategy has churned out so-so performance numbers relative to other large-growth funds.’ So if you really worked at it, and leaving aside Value Line’s not insubstantial fee, you might do a little better than an index fund – or you might not. Especially in a taxable account. THEY KNOW EVERYTHING Joel Williams: ‘The last time I downloaded a form from the IRS website, when I printed it out on my printer, at the very bottom of the page it said ‘Printed on Recycled Paper.’ How did they know that?’ THE MEXICAN FISHERMAN Christoph: ‘Just to tell you. As far as I know: The history with the Mexican is an adaptation of a history from Heinrich Boell and features originally a Spanish fisherman, and a German telling him to work more. It is called: Anektote zur Senkung der Arbeitsmoral . . . which would be in English something like ‘Anectote to lower the working moral.” Frances: ‘There was a book written by Paul ter Horst around 1984, Cashing in on the American Dream: How to Retire at 35. The story was in there.’ Fleming Bearston: ‘What if the fisherman gets injured? If he can’t fish for more than a few days, he and his family may starve. I don’t mean to be a party pooper – it’s just that this simplistic put-down of corporate life ignores some important issues.’ John Mahoney: ‘Not to be a spoil sport, but doesn’t the fisherman’s reluctance to expand his business explain why so many Third World countries are mired in poverty?’ Chuck Dean: ‘This reminded me of a Depression-era story: A beggar came to a household, which happened to be a whore house, and asked for work. The kindly madam asked if he could work on her accounts for her. He said no because he couldn’t figure. So, she fed him a nice meal, gave him an apple and he left. The good meal satisfied him so much that he fell asleep under a tree holding the apple. When he woke he found that someone had taken his apple and left him a nickel (remember, this is a Depression-era story). He took the money and bought two apples, which he sold. This went on. His business grew and he became known as the Apple King. When he was being interviewed by Fortune, the reporter was in awe of the rich Apple King and said, ‘You’ve done all this without an education. Think what you could have done if you had gone to school.’ The Apple King replied, ‘If I’d gone to school I wouldn’t be here now. I would be a bookkeeper in a whore house.”
Hey, Kids — Free Smokes! April 17, 2002January 25, 2017 But first . . . INDEX FUNDS ARE NO WAY TO MAKE BIG BUCKS Kirk: ‘Many financial writers suggest index funds and large diversified mutual funds. However, these investments only return ‘average’ results while still exposing the investor to overall market risk. If one wants to get rich, wouldn’t a portfolio of 5 or 6 well-chosen and researched undervalued growth stocks (using a strategy similar to David Dreman) work much better? Then when the stock returns to full value, sell and move on to another selection. I just don’t see how a small investor is ever going to make big bucks buying mediocre mutual funds. Also, isn’t this the strategy of Warren Buffett, not to diversify?’ ☞ Sure – just buy a few stocks that will go up faster than the market. How can you lose? (Actually, they have to go up much faster than the market in order to compensate for the tax you’ll have to pay as you sell one to buy another). The only problem with this strategy: What if you’re no better at finding undervalued growth stocks than, say, professional money managers are? In that case, you will have put in a lot of effort, and exposed yourself to more taxes and risk, than if you had just accepted the returns of an index fund. If you look at the rich folks around town – both the famous ones and the “millionaires next door” – you will find very few who got rich trading stocks. Most started their own businesses and/or relentlessly spent less each year than they earned, putting the difference to work for them in stocks and/or real estate. I don’t mean to belittle your sentiment. Believe me, I know that slow-but-steady is frustrating. But ‘trying harder’ – while much more interesting (and great fun when you’re riding a winner) – is often a formula for doing worse. So I would suggest you try your strategy with some of your money, because life is not a business (see yesterday‘s column) and because it sounds like it will eat away at you if you don’t. But with most of your stock market money, stick with index funds. And now . . . WHO SAYS WE DON’T GIVE THIRD WORLD KIDS FREE STUFF? One of the great things the Bush administration has done, trade-wise, is adopt a more tobacco-friendly stance, aiding American cigarette makers in their efforts to compete abroad. As cigarettes are addictive, this could have beneficial effects on our chronic balance-of-trade deficit long after the current administration is history. (Well, it may sound callous, but it makes better sense than encouraging fuel-efficient cars that would cut our oil imports in half. Trent Lott was on the floor of the Senate not two weeks ago making fun of that.) According to a Daytona, Florida, editorial yesterday, ‘Teen-age ‘Marlboro girls’ distribute free packs on streets all over the globe. In Hong Kong, empty packs of American cigarettes can be exchanged for free movie tickets. In Nigeria, teen-agers win concert tickets sponsored by Philip Morris, then find Philip Morris brands distributed with other freebies there.’ The editorial cites a World Health Organization study last year: Free cigarettes are given to schoolchildren in at least 68 countries. Cigarette sales in the U.S. have stalled, but abroad they’ve been booming. Philip Morris has seen them rise 80% since 1990. Makes you proud Philip Morris is an American company, doesn’t it? (For the political-giving scorecard, click here.)