State of North Carolina Comprehensive Annual Financial Report

If you live in North Carolina, and ever wondered how your tax dollars are spent, you can find out in the recently published 

          2012 North Carolina Comprehensive Annual Financial Report

If that report seems daunting at 301 pages, you might start with the 21 page

          2012 North Carolina Financial Highlights - Popular Report

Both reports also include many non-financial statistics including economics, demographics, and employment.

A few highlights:  You can discover facts like North Carolina has fewer teachers in 2012 than 2008.  It also lists the top 10 employers in the state.  The state itself is number 1, and the federal government is number 2.  North Carolina has roughly $9 Billion of debt outstanding and collected about $22 Billion in taxes last year.  Of the $22 Billion collected, $10.4 Billion came from individual income taxes and $7.4 Billion from sales and gasoline taxes while corporate income taxes chipped in $1.2 Billion.

Everyone in the USA should watch this video of David Walker

David Walker from the Comeback America Initiative ran the Government Accountability Office (GAO) as the US Comptroller General for 10 years under Presidents Clinton and Bush (1998-2008). This is a video of his presentation at Dartmouth University. Hear his SOLUTIONS to most problems in government.  If you care at all about our nation's fiscal health you will be fascinated by this video.  Be sure to watch even the questions and answers at the end.  

If you have time to watch Survivor, Dancing with the Stars, Downton Abbey, Duck Dynasty or Honey Boo Boo every week, you have time to watch this video, once.

Do I earn too much to have a Roth IRA? Nope.

There is an income limitation for contributing "directly" to a Roth IRA ($173,000 Modified Adjusted Gross Income for 2012 for married couples filing jointly).  However, back in 2010, the income limitation for Roth "Conversions" expired, completely.  Thus, it is not possible to earn too much to have a Roth IRA.  If you exceed the income limitations for a direct contribution to a Roth IRA, one just needs to make a non-deductible contribution to a Traditional IRA then "convert" the Traditional IRA to a Roth IRA as soon as possible.

Annual contribution limits for IRAs and Roth IRAs are $5,000 per person in 2012 and $5,500 in 2013 unless you are over 50 in which case your annual limits are $6,000 and $6,500 for 2012 and 2013, respectively.  Thus, a husband and wife can EACH put $5,000 away this year for a total amount of $10,000, or $12,000 if they are both over 50.  I recommend everyone get money into a Roth IRA every year if at all possible since earnings grow tax free and withdrawals in retirement are also tax free.

The Fiscal Cliff-Hanger: Were the Mayans Right?

Good news!  The US Government has confirmed the end of civilization as we know it WON'T happen on December 21, 2012 - the end of the Mayan Calendar.  The bad news? The Mayans may only have been off by 10 days.  The US will plunge off the so-called "fiscal cliff" on December 31, 2012.  Many folks are probably wondering what this "fiscal cliff" is all about anyways? The "fiscal cliff" is the phrase coined by the United States top economist, Federal Reserve Chairman Ben Bernanke, to characterize the man-made impending economic cataclysm created by our US Congress.

Bernanke said, "Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."

Congress, in its infinite insanity, decided playing chicken with the US economy via the man-made "debt ceiling" and "budget" crises at least twice every year, was not exciting enough.  So, Congress purposely set up the US economy to drive over a cliff, unless the most dysfunctional group of 535 people ever assembled in world  history, comes to an agreement on whether to steer left, or right and avoid plunging into the abyss.

So, the big question is, "which is Thelma and which is Louise" in this picture from our real-time historical econo-drama?  I'm sure we can all agree that Treasury Secretary Tim Geithner (a.k.a TurboTax Tim among the CPA crowd) is Brad Pitt in this analogy.

My second question is, "should I trademark the term econo-drama?"  Just think of the royalties Dr. Bernanke could have earned had he trademarked "fiscal cliff?"

And lastly, "who will bail out the U.S." if we continue to write our own version of the similar econo-drama, and Greek tragedy, "The Five Little PIIGS" that is playing out on the European stage simultaneously? 

Should I invest in a Roth 401(k)? No, probably not.

Many company 401(k) plans have added a Roth 401(k) option.  I believe most people should NOT use the Roth 401(k) option.  The Roth feature seems very appealing since withdrawals from a Roth account can be made tax-free in retirement.  However, these FUTURE tax-free withdrawals come at a high up-front cost since the employee must pay more taxes right NOW.  Let me go through an example and provide an alternative strategy.

Scenario 1:

Take a married couple, 40 years old, with taxable income of $85,000.  This couple would be in the 25% Federal Income Tax bracket and the 7.75% North Carolina State Income Tax bracket.  Let's assume the couple contributes $15,000 per year to a Roth 401(k).  This means the couple is paying an extra $4,912 in income taxes than if they contributed to a traditional 401(k) plan (15,000 x 32.75%).  So, the couple is paying an extra $4,912 for the privilege of placing $15,000 into a Roth account.

Scenario 2:

My suggestion to this couple is to stop making contributions to the Roth 401(k) and instead switch back to the traditional 401(k).  By switching from the Roth 401(k) back to the traditional 401(k) this couple will have an additional $4,912 in take home pay due to the lower income taxes.  The couple should then take that $4,912 in additional take home pay and contribute that money into a Roth IRA (I suggest doing this at Vanguard and use only low-cost index funds).

Worsification: Diversification Gone Bad

The North Carolina State Retirement System's pension fund is a perfect example of what I call "worsification" or diversification gone bad.  If one takes a look at the most recent investment performance report by clicking here.  You will notice six asset classes:

1. Global Equity (publicly traded stocks)
2. Fixed Income (publicly traded bonds)
3. Real Estate (partnerships that buy shopping malls and office buildings)
4. Alternatives (private equity, venture capital, hedge funds)
5. Credit (junk bonds and bank loans)
6. Inflation (derivative securities on commodities: eg. futures and options on gold or corn, etc.)

Most folks are familiar with the first two categories which are just traditional stocks and bonds.  But, the next four categories might come as a surprise to some pensioners to discover their retirement is being bet on such items as private equity, hedge funds, junk bonds, and derivatives.  The worst part of the surprise is that the four new categories have all produced returns lower than a simple, traditional, 60% / 40% mix of stocks and bonds.

NCRS 10-year returns
Stocks = 8.0%
Bonds = 6.8%
60/40 Stock/Bond = 7.5%
Alternatives = 5.3%
Real Estate = 3.8%

529 College Savings Plans

It's not too late to make a contribution to a 529 College Savings Plan and possibly reduce your state income tax bill (depending on your state and income situation).  

One thing I like about my home state's North Carolina 529 College Savings Plan is the ability to utilize very low cost Vanguard Index funds.  The one minor disappointment is the NC 529 Plan charges an additional 0.25% for administrative expenses, but even that amounts to just $12 for each $5,000 invested.  The second thing I like about the NC 529 Plan (for North Carolina residents) is that there are no income limitations in order to receive a state income tax deduction.  

(see the NC Department of State Revenue statement on the NC 529 College Savings Plan by clicking here)

A married couple in the highest North Carolina tax bracket (7.75% for taxable income over $100,000) can save up to $387 in North Carolina state income taxes with a contribution of $5,000 to the North Carolina 529 College Savings Plan each year.  I view this as the state of North Carolina paying me $387 each year for planning for my children's college education.