Will politicians say the word recession? Not if they’re serious about helping their party get elected. Yet, it feels like we are in a recession — or at least, that’s what the media wants us to believe. The stock market, measured by the indexes, is certainly in a downward trend, but I suppose I agree with Kiplinger. There are some reasons to be happy.
1. The rebate check. Soon, most Americans will receive a check from the IRS, possibly for $300, maybe $600, or even $1,200 or somewhere in between. The government’s intention is to spur the economy — or is it? Perhaps it’s more of a feel-good measure in a year when Democrats and Republicans alike must create fan-friendly press. The last time the IRS sent rebate checks en masse, it didn’t have much effect on the economy. In fact, the economy was already recovering by the time the checks arrived.
If you’re wondering how much of a rebate you’ll receive, use this economic stimulus tax calculator. The “rebate” is an advance on a new tax credit that will appear when you file taxes for your 2008 income. If you qualify, you’ll get the rebate this year instead of next year.
2. Undervalued stocks and bonds. Go for it. Yes, in general it’s bad to time the market. Yes, it’s possible stocks in general will go down more this year. But I believe that dips like the one we’re experience are perfect opportunities for long-term investors to pick some good values company by company or buy the overall market through a low-cost index fund like VTSMX.
3. Lower interest rates. Kiplinger says that as the Federal Reserve lowers the federal funds target interest rate, opportunities are available for those with good credit ratings to borrow cash as needed. I’m not quite sure this has played out quite yet. From what I’ve seen, banks are still being tight and not lending as much even to those who are well qualified. Interest rates on mortgages certainly haven’t dropped much. In fact, rates for a 30-year fixed mortgage, a typical loan for qualified home buyers, have increased in the last few months, from 5.5% to 5.9% (source: Bankrate).
4. New tax breaks. “You might owe less to the IRS this year thanks to a new deduction for private mortgage insurance, an extension of the sales-tax write-off and a boost in the alternative minimum tax exemption amount.” This is helpful for home buyers who couldn’t afford to put 20% down on their house and were required to resort to paying PMI.
5. Falling house prices. Well, at the moment, there are more people trying to sell homes then there are buyers. This inequity between supply and demand means that in order to sell houses, prices must fall. But as there are fewer people looking to purchase than there are looking to sell, this benefits fewer people than increasing house prices.
6. Higher retirement account limits. Kiplinger suggests using the rebate check to turbocharge your retirement savings. This year, you can invest $5,000 (or $6,000 if you’re over 50 years old) in a Roth, Traditional IRA, or a combination of the two. If you have a 401(k) you can contribute up to $15,500 (plus another $5,000 if you’re over 50). These limits will continue to increase, too.
7. Help with college bills. Got student loans? If you’re a teacher or if you work in public service, you may be able to receive grants. Those with high debt and low income will benefit the most.
8. New rollover option. If your adjusted gross income is $100,000 or less, you can now roll over your 401(k) directly into a Roth IRA without having your funds go through a Rollover Traditional IRA first. Not only that, but if your income is above the $100,000 threshold, just wait until 2010 when the income limit disappears. For any funds in your 401(k) from a pre-tax source, you will owe tax when you roll over into a Roth IRA, providing early tax income to the government, possibly to help pay for expensive programs like Social Security.
The option I’m most excited about is easily number 2, undervalued stocks. I was interviewed by Columbia News Tonight, a weekly television program produced by Columbia University’s Graduate School of Journalism the other day, and we talked about this topic. I’ve increased my 401(k) contributions to the maximum this year, a feat made possible thanks mainly to my additional income not from my employer, even though my retirement account’s value is down about 10% so far this year.
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Good News in Hard Times [Kiplinger]
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