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Reminder: April 17, 2007 is Your Last Chance to Fund a 2006 IRA

This is just a reminder that tomorrow, Tuesday, April 17th, 2007, is your last chance to fund an IRA for the 2006 tax year. After tomorrow, you will have lost the chance forever to make your contribution for 2006.

You can contribute up to $4000 in 2006 towards an IRA if you are under 50. If you are 50 or over, you can actually contribute $5000 in 2006.

Many people don’t realize that even if you have a 401(k) or 403(b) plan at work, you can still qualify to contribute to an IRA.

Assuming that you are not opening an IRA for your partnership or business, there are four IRAs to be aware of:

  • Deductible IRA. This is what most people think of when they think of an IRA. This is a retirement account where you get to deduct your contributions for the year off your income on your tax return. The problem? You can’t deposit into this type of IRA if you have a 401(k) or 403(b) plan at work, and people over a certain income are disqualified.
  • Roth IRA. The hero of the hour. This is the IRA that everyone is talking about. You don’t get a tax deduction this year, but you get a better bonus down the road. All gains on this IRA are tax-free, forever, as long as you withdraw them after the age of 59 1/2. Problem? You can’t contribute to this IRA if you make more than $110,000 as an individual, $160,000 as a married couple filing jointly.
  • Rollover IRA. You can’t contribute to this type, but this is a great place to move your 401(k) money from your old company. It keeps the tax status of the old 401(k), and it usually gives you access to a much wider variety of investment options. Better yet, you have the option of either converting this IRA to a Roth IRA, if your income permits, or you can roll it into a future company 401(k) if you’d like.
  • Non-Deductible IRA. This is the over-looked gem of the IRAs. Anyone can contribute to these in any year, regardless of income. You will owe taxes on the gains when you withdraw them in retirement, but they get to compound tax free until then.

There are several good reasons to consider an IRA contribution this year, even if it’s non-deductible:

  • You never get the chance to go back and make contributions for past years. You lose your option to make a 2006 contribution tomorrow, forever.
  • You can now make IRA contributions for a spouse that does not work, up to $4000 for a year.  A great addition if you are in a one-income household, and you are concerned that your retirement savings are limited.
  • In 2010, thanks to the 2006 budget, you will get the ability to convert a non-deductible IRA to a Roth IRA, regardless of income! Check out my post on the 2010 Roth IRA Conversion Loophole for more information.

Reasons not to make an IRA contribution for 2006:

  • You can’t afford the drop in liquidity of having your money locked up for potentially decades.
  • You forgot about the April 17th deadline, and read this post too late.  :)

Opening up a new IRA is extremely low cost, if not free. E*Trade offers free IRAs. Vanguard offers IRAs for only $10. You can open them online, with a transfer direct from your checking account.

Happy Saving!

Mom My Ride & Minivans on eBay Motors 2.0

eBay has been testing their new eBay Motors site in the past few weeks.  However, what many people might not have noticed is that Carolyn & the boys are the picture-perfect representatives of the new Minivan page:

Now, since I’ve taken a lot of flack in some circles about actually owning a minivan, Carolyn forwarded me this great spoof video on Youtube called “Mom My Ride”.

I’m posting it here as just a little bit of love for my friends at eBay Motors.

Enjoy.

Public Service Announcement: Free Burritos on April 16th

I am a big fan of the burritos at Chipotle. They are not my absolutely favorite (that honor belongs to Bueno Bueno Burrito in Mtn. View), but they are quite good, and I am a big fan of the chain.

They are running a promotion this week where if you buy a burrito on April 14th or 15th, they’ll give you a free burrio on April 16th.

Enjoy.

Amazon S3: Backbone to Cheap Multi-GB Web Backup for Mac OS X?

About a year ago, Amazon launched it’s S3 storage service.  This seemed a little strange to me at the time, because Amazon’s core business is as an online retailer… it was unclear to me what type of strategic advantage they would have as a long term of provider of cheap, online storage.

“Let a thousand flowers bloom,” I guess… (one of the most misunderstood quotations used around innovation, by the way.  Check out the source!)

In any case, I received my regular TidBITS digest email today, and it featured web-backup services for the Mac.  What was interesting was that the article featured primarily applications that use Amazon S3 as their backbone!  At $0.15 per GB, and $0.20 per GB/transfer, Amazon is a fairly cheap way to backup & store large libraries, like music & photos.

Several small software shops have built applications to help users do just that…

Here is the original TidBITS article.  The applications covered include:

  • Jungle Disk.   This application is the most polished of the bunch.  It does not handle incremental backups, yet, but it does support scheduled backups.  It will cost $20 when it reaches 1.0, but it’s free right now in beta.  Jungle Disk is available for Mac OS X, Windows & Linux.
  • S3 Backup.  This application, by Maluke, offers different named backups, as well as the ability to exclude files based on pattern matching.  However, it doesn’t offer scheduling or incremental backups, yet.  Still in beta.
  • Bandwagon.  This application is tailored for music lovers who want to backup and maintain a large music library online, to be available to multiple machines or for safe keeping.  Very interesting because it offers menu-bar controls, and support for multiple “storage clouds”, including Amazon S3.

I remember a few years ago looking into online backup solutions, and being totally disillusioned with the low storage volumes and costs offered.  I have about 300GB of content to backup, with daily increments that vary from 10MB all the way up to 2-3GB on days I upload a new set of photos from my camera.

These solutions aren’t there yet, but they are closer.  And the pricing is closer too.

Anyone out there actually try one of these?  Or are you using Amazon S3 for anything else interesting?

How to Track Prosper Loans in Quicken 2007 (Mac OS X)

So, a few confessions to start this off.

First, I am still a Quicken addict. It has been thirteen years, I think, since I started using Quicken in earnest to track my finances, and I’m still at it. Despite absolutely terrible releases of the software, and lackluster Mac support, it’s still one of my must-have applications.

Second, I am a big fan of Prosper.com. I found Prosper when it was CircleOne, through some friends from eBay who left and joined the company. As a result, I’m a founding group leader (though not a very successful one), and a shareholder.

Earn 8-12%. Great Returns. No Banks. Borrow Money From People. Low Rates. No Banks.

So, with those confessions out of the way, on to the good stuff.

If you don’t know what Prosper is, it’s basically a marketplace where you can easily borrow money or lend money to other people. Consumer debt is very expensive, so it’s potentially a way for individuals to get cheaper rates borrowing, and for lenders to make higher rates than normal saving options. Here is a Q&A on Prosper from Money Magazine. Here is a write-up in Forbes of some strategy when dealing with Prosper.

If this sounds crazy to you, here are some of the rates you can earn on Prosper. Note that even for the highest risk borrowers, right now the default rate is around 3%. 24% – 3% is a very good return, but only if you spread your money around with a lot of very small loans.

For the past year, I’ve been struggling with an appropriate strategy to track Prosper Loans in Quicken. I found some information through web searches that seemed appropriate for the Windows version of Quicken, but didn’t work for me on the Mac. The idea was to create an Asset account, which is the loan, and then to set up a loan paid from the asset back to the Prosper account. I couldn’t figure out how to do it.

Since I had trouble finding a solution for this online, I thought I’d post my solution here. Feel free to comment if you’ve found a better way to track Prosper loans in Quicken.

Step 1: Create a Security for each Prosper Loan. I name them after the unique Prosper Loan number, like “Prosper Loan 335″

Step 2: Create a Brokerage account for your Prosper account. Transfer the money from your checking account to this account when you move money to Prosper.

Step 3: When you make a loan for a certain amount, let’s say $100, then purchase the shares of the Prosper Loan security, at $1 per share. So, in this example, you would purchase 100 shares of “Prosper Loan 335″

Step 4: Whenever you want to update the account, use the following 3 transactions. Use a “Sell Shares” transaction to represent the principal re-payment. Use a “Interest Income” transaction to represent the receipt of the interest payment. Lastly, use a “Miscellaneous” transaction to record the Prosper fees charged.

This is likely too much work to do monthly, although you need to if you want Quicken’s IRR calculations to be accurate. Personally, I’ve decided just to update the account once every 3-6 months, which is sufficient for my needs.

Let me know what you think… if this helps even one Quicken addict out there, it will have been worth it. :)

Update (4/9/2007): This is why I love blogging. AMF posted my blog comment on a Prosper Board, and now there are good comments there too. Check it out!

Update (4/10/2007): RateLadder.com has their own solution… not as accurate as the one above, but worth linking to. I agree with them that it would be better for Prosper to offer a Quicken-compatible download format.

Update (4/10/2007): Are you interested in joining Prosper.com? If so, please join my group. I originally started it for my investment club, but I’m changing it to be an open group for friends & family. I feel a little lame right now because I only have 3 members in my group, and I am a founding group leader.

Update (4/10/2007): Rateladder.com has merged their approach with mine in a hybrid approach that tracks you entire Prosper portfolio as a single security. Only 3 entries per month! The only downside is you can’t track the performance of each loan this way. Check it out here.

Update (4/11/2007): OK, last update. But Rateladder.com has followed up with a finally post on the topic. Between the two of us, I think we’ve provided the best way to handle this until we convince Prosper to provide downloadable transactions.

How to Search iTunes for EMI Songs on Mac OS X (non-DRM)

About two months ago I wrote a post about Steve Jobs’ announcement on the role of DRM in the online music industry:

Steve Jobs Drops a DRM Bomb on the Music Industry: Thoughts on Music

Well, that release was followed with the news about two weeks ago that iTunes would begin carrying music from one of the major music labels, EMI, without DRM. In fact, it’s a very clever proposition: For $0.99 you get the standard, 128-bit AAC files with copy protection. For $1.29, you get 256-bit AAC files with no copy protection.

Well, since I already wrote a long post on the topic, I thought I’d follow up here with a slightly more user-centric question:

Let’s assume that I love the new DRM-free music… how do I find it?

First attempt: I tried to search the iTunes store for EMI. The results were meaningless. I guess their search engine isn’t set up to search by publisher.

Second attempt: I looked around for the announcement on the Apple website or in the iTunes store, hoping for a link that would take me to a way to filter iTunes just for the DRM-free music. No luck.

Third attempt: I found a great little hint on the Mac OS X Hints site. It’s a simple terminal command to let you find out which of your purchased songs are EMI. You’ll be able to upgrade these to the DRM-free versions for $0.30 a song in May.

It seems that the new DRM-free music isn’t available yet, so I might have just been looking too early.

Oh well. Apple will likely debut the functionality with the new format in May. I hope. I fall into the camp of users who have resisted buying songs on iTunes because of the low-quality (128-bit) and the uncertain future of the FairPlay DRM. Instead, I’ve been ripping CDs and ripping them to Apple Lossless. But this new format looks interesting.

In the meantime, my old friend Wikipedia does have a page on every artist signed by EMI… it’s a start, at least, for searching iTunes for DRM-free music.

Pssst. Want Some Hot TIPS? Buying Inflation Protected Bonds.

One of the blogs I read regularly is The Finance Buff.  This past week, he has posted four times on the topic of inflation-protected bonds, TIPS and Series I Savings Bonds.  As a result, I thought I’d post some pointers and comments here.

First, as I mentioned in my personal finance series, Series I savings bonds are an interesting option for an cash emergency fund.   Series I savings bonds have the following advantages:

  • After 12 months, you can cash them in at a moment’s notice.  Great liquidity.
  • You can buy up to $30K of them in any year.
  • You can buy them direct from the government with no fees at the Treasury Direct website.
  • You owe no income taxes at all until you sell them.
  • You never owe state or local income taxes on the gains, even when you do sell them.
  • You won’t owe federal income taxes on the gains if you use the money towards a qualified educational expense, like college tuition.
  • Your money is guaranteed to grow above the rate of inflation, re-adjusted every 6 months, for the next 30 years.  You are given a fixed rate above inflation, measured by the CPI-U index, which measures inflation in urban areas.

Right now, Series I Savings Bonds pay 1.4% + inflation.  Given that historically, money market funds have basically matched inflation over time, and bonds have only beaten inflation by about 1.7%, that’s a pretty good deal, by historical standards, for something that is at least as liquid as a 1-year note.

In any case, the Finance Buff doesn’t like the Series I Bond rate.  In fact, because inflation is so low, he sold his Series I Bonds in November, taking the 3-month interest penalty.

Instead, the Finance Buff likes TIPS, which are the inflation-protected version of normal US Government Bonds.  TIPS are offered in terms of 10 years and 20 years, and right now they are paying a whopping 2.63% over inflation!  Given that the historical return of bonds is below that amount, I can see why he likes them.

Unfortunately, TIPS do have a down side or two:

  • While you are paid the interest every year, the inflation value accrues every year to the bond principal.  What that means is that you owe taxes on the inflation gain every year, but you don’t get the cash to pay the taxes.
  • TIPS are only available in high dollar amounts.
  • TIPS, like other bonds, can be sold before maturity.  However, there is no guarantee of the price you’ll get if you sell them before they mature.  To guarantee your return, you have to hold them the full 10-year or 20-year period.

Here is a great post from the Finance Buff on TIPS.

I have to post this great snippet from his follow up article on pricing TIPS.  It’s fairly complex, but I love seeing the hard math posted for some reason.  Check it out:

I tip my hat to you, sir, for posting that.  :)

In any case, I had to think about why I’m still such a fan of the Series I Savings Bonds.  I think it is because of the context that I use them – as a cash-equivalent emergency fund.  I’m not looking at them as a bond investment, but as a form of cash.

As I stated, cash equivalents, like money market funds, over time have returned an average of 0% over inflation.  So the idea of getting better than that on my “safety money” appeals to me.

That being said, the rates on high yield internet savings accounts, like Emigrant Direct, are well over 5% now.  With inflation as low as it is, that’s a serious yield also.  With no risk, money available at any time.  Government protected, even, up to $100K!  Hard to argue with that.

The problem is, there are penalties around selling Series I Bonds too early, and there are significant tax advantages to consider.  Interest on a bank account goes on your 1040 every single year, and is taxed at federal and state levels.  There is also no guarantee that these type of high-yield savings accounts will be around forever, although they’ve been pretty consistent over the past 5-7 years.

I’m lucky, because the Series I savings bonds I purchased in 2002 have a 2.0% premium over inflation, so they are paying a higher rate that the bonds you can buy today.  As a result, I’ll be keeping mine for a while.  Sometimes, like this period, they pay less than 3% interest.  Other periods, they have paid almost 8%!  In the end, to be comfortable with them, you have to be comfortable with earning a fixed amount over inflation over time, and leaving it at that.

You can find out more about TIPS and Series I Savings Bonds on the Treasury Direct website.

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