What the Roth IRA vs Regular IRA calculator won’t tell you. Especially if you have a solar roof

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Roth IRA vs Regular IRA calculator

Using a Roth IRA vs Regular IRA calculator to decide how to invest may not be telling you the whole story. The Roth IRA is a great investment and I am NOT telling you not to put money into a Roth IRA, let’s make that absolutely clear from the very beginning.  I have most of my retirement money in a Roth IRA and there is a pretty good chance you should to. However, I want you to be aware that when you enter your information into a Roth vs Regular IRA calculator there is one circumstance the calculator isn’t factoring in you should be aware of, especially if you are thinking about getting a solar roof.

What is a Roth IRA

A Roth IRA is an investment account where you put after tax dollars into a retirement account, the funds grow tax free until you retire, and then you take the money out of the account without paying any additional income taxes on that money.  In other words, you get no tax benefit now, but you pay no taxes later, which is a huge benefit. When you run the Roth vs Regular IRA calculator, there is a pretty good chance it is going to tell you to go with the Roth. This is especially true if you are under 40 years old or in a low tax bracket.

What is a Regular IRA

In a regular IRA, you don’t pay income taxes on the money you put into your retirement account now, but you pay income taxes on that money when you take the money out after you retire. If you are putting money into a regular 401k account, this means your employer puts the money into your 401k and then calculates the income taxes withheld from your paycheck after that money is subtracted.  If you are putting money into a regular IRA account that means you get to take a tax deduction for the amount you contribute up to certain limits.

What the Roth IRA vs regular IRA calculator won’t tell you

What the IRA calculator won’t tell you is that under the right circumstances in a later year you might be able to transfer money from your regular IRA to your Roth IRA by paying a penalty at a lower rate than your initial IRA deduction and in the end wind up with more money in your Roth than you would have if you had just put it into the Roth to begin with.  I know that last sentence was hard to follow, so we are going to take this nice and slow.

This whole idea revolves around tax brackets, so we are going to start there. In our tax system the more money you make, the higher tax rate you pay. Let’s say you are married and make a combined income of $100,000. Depending on what state you live in your total income tax rate (federal + state tax) might be around 30%.  If in some later year you might make much less money, and if you make less money your income tax rate will fall also.  Maybe you will only pay 15% on the money you earn one year later in your life. Everybody with me?

The next thing you need to know is that at any time you can convert your regular IRA to a Roth IRA.  All you have to do is pay income taxes on the amount you convert at your current tax rate. So what if your current tax rate is lower than the tax rate you used when you initially put the money in and took the deduction?  Profit.  The government just paid you to invest money.

Let’s say you put in $10,000 at 30% and got a tax deduction worth $3,000. Now lets say in a later year you convert $10,000 of your IRA to a Roth IRA at a tax rate of 15%. Your going to have to pay $1,500 in taxes.  Did you catch that? Your deduction was worth $3,000 but you only had to pay $1,500 to convert it to a Roth.  The IRS just paid you $1,500 to put $10,000 into a Roth IRA!

What are the chances you will have special circumstances?

This is the tricky part.  What are the chances at your tax rate will go down in future years?  I can’t answer that, but think about all the possible reasons you might make less income and pay a lower tax rate in future years:

  • You lose a job and it takes a while to find a new one.
  • You get married to somebody that doesn’t make a lot of money and go from single status to married filing jointly status
  • You divorce someone who makes more money than you do. This is especially relevant if you find yourself in the head of household status and receive child support rather than alimony.
  • You take time off work to raise children
  • You take time off to take care of a sick relative
  • You start a new business that takes a little time before it makes money
  • Your business has a bad year
  • Your business is bought out and you sign a non-compete agreement that doesn’t allow you to work for a period of time
  • You take some time off to do something besides work while you are still young
  • You buy a solar roof (See below)

Some of these items might seem unlikely to you but what are the chances that one of them will happen in a future year and take you to a lower tax bracket?  The combined likelihood might be higher than you think.

What does any of this have to do with Solar Roofs

As I wrote about in the Tesla Solar Roof article, if you buy a solar roof you might get more in tax credits than you can take on your tax return in a single year.  For example if you get a $10,000 tax credit for installing a solar roof and only pay $4,000 a year in federal income taxes you can’t get all of the credit this year.  You will have to take $4,000 this year, $4,000 next year, and the remaining $2,000 in 2 years.  On the other hand, if you have some money to convert from an IRA to a Roth IRA, you can do that in the year you get your big credit and have let the big credit pay your conversion fee.

 So what should I do?

The Roth IRA is a great investment vehicle and I am NOT telling you that you should not put money into a Roth account.  But perhaps even if the Roth IRA vs regular IRA calculator tells you the Roth is better you should consider putting just a little into a regular IRA just in case you ever have a chance to use this strategy.

One more thing to keep in mind is that this strategy takes cash.  A lot of people who experience drops in income won’t have the extra money laying around to pay the extra tax bill.  You are going to want to make sure you have plenty of dough laying around to make this work.

Special thanks

A big tip of the hat to Joe from joetaxpayer.com for first explaining this idea to me. One of my favorite personal finance blogs.

Disclaimer

This is a fairly tricky tax strategy and depends highly on your specific information.  You should check with your professional tax advisor before doing this.  In case you are wondering, no, I am not your professional tax advisor.

Original photo is by opopododo and has been altered.

 

House bill 3081 hopes to prevent predatory loans

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This week, the U.S. House of Representatives will most probably stop the year-long effort by the Consumer Financial Protection Bureau to prevent predetory loans which profit the givers by trapping the borrowers (mostly poor people) in a vicious circle of debt. Today in America, there is a widespread phenomenon in the financial sector controlled by private enterprises that offer fast cash or fast pay short term loans. The payday loans are offered to people who find themselves in financial difficulties before the month ends. The financial services some of which are title loans Austin, TX target individuals who due to unfortunate circumstances find themselves in money problems that forces them to seek for help from a lender The CFPB last June proposed new legislation that for the first time would impose national guidelines on a payday loans industry that fleece the financially vulnerable Americans out of nearly $8 billion yearly. Although the proposed regulations are not harsh in scope because they merely require a titles loan and payday lender to
assess the ability of the borrower to pay, it represents a first step that will prevent predatory loans and rein in the industry’s worst abuses.
The CFPB also enforces existing legislation that stop other predatory practices like pressuring borrowers into debt traps, overcharging borrowers and using illegal tactics for collecting debts. The House bill 3081 which is before the house will completely eliminate the authority of the Bureau to control the industry. It corresponds with the larger provision of the Financial Choices Act which was aimed at destroying the 2010 Dodd-Frank law that came into force to regulate Wall Street in response to the financial crisis in 2008. The CFPB was created by the Dodd-Frank law which gave it the power to protect borrowers from the abusive, deceptive and unfair loans and other services.

Millions of economically vulnerable people fall deeper and deeper into a debt nightmare after taking out online title loans and car title loans to pay for utility bills, rent, food and other basic needs. The intended legislation was to prevent predatory loans from devastating low-income communities further. One of the poorest states in which the CFPB focused on by gathering comments is Alabama where it was discovered that borrowers are charged interest rates of about 300 percent for online title loans and 456 percent for title loans annually.

The industry works in the same way all over because when the borrowers are unable to repay the principal in a one-month or a two-week period, the lenders are willing to roll the loan over into a new one which earns even more interest. Borrowers end up making payments for many months and they end up owing more than they will be able to pay back. On average, the latest figures from Alabama showed that borrowers who took out the loans remained trapped in debt for over 168 days. The industry must clearly be regulated to prevent predatory loans from making vulnerable Americans even poorer.

The cash advances that are given are not just free walk-in- walk-out events because there are tough conditions that one must meet in order to get money. Some lenders will need to verify your credit worthiness by looking into the type of job you have or your FICO credit number and a bank deposit slip.

 

Disclosure: This is a sponsored article paid for by eTech360 Publishing

Is the Tesla Solar Roof a good investment?

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tesla-solar-roof

Tesla recently announced they are going to be selling their new Tesla Solar Roof, which is basically solar cells disguised as everyday shingles to collect electricity without looking like a solar roof. Their estimate of cost savings bothers me though, so we need to look at the estimate a little closer to properly evaluate whether the Tesla Solar Roof really is a good deal.

The Tesla Solar Roof savings according to Tesla

I visited the Tesla Solar Roof website and entered some basic information.  It only took about a minute and here is the estimate they gave me:

tesla-solar-roof-estimate

To summarise the estimate it basically says I will need to pay $61,000 for a Tesla Solar Roof and a Powerwall battery. Buying these 2 things will give me a tax credit of $13,700 and then over the next 30 years I will save $50,400 in electricity.  Put this all together and it nets out to a savings of $3,100 over the next 30 years.

6 Problems with the estimate

1. Some of the benefits are impossible to estimate the value of

There are some very real benefits both to you personally and to the rest of the world for you to have a solar roof and Powerwall battery that are impossible to properly value.  Ever been without power? It sucks.  Your home becomes basically unlivable if it is too cold outside, all your refrigerated food is ruined, and in general life becomes very difficult.  Of course you could just get a simple generator for a couple of hundred dollars off of Amazon (affiliate link) that will produce enough power to heat your home and run your refrigerator, but with a solar roof and Powerwall battery your whole house will be up and running while all your neighbors try to figure out how they will survive. While that is very valuable, it is hard to put a price tag on, so that hasn’t been included as a benefit in this estimate.

It almost goes without saying that solar power is good for the environment, but once again the value of this to you is impossible to reasonably estimate so it has not been included as a benefit in this estimate.

2. It doesn’t include the benefit of added value to your home

Having solar power makes your home more attractive to potential buyers who will know that after they buy your home they get all the cost savings from not paying monthly electricity bills.

According to Berkeley Lab’s 2011 study solar power raises the average home value by $17,000.  I can find no estimate of how much a Powerwall battery will raise your home’s value, but let’s say it is about half of the original cost, or $3,000.  That will bring the increase in your homes value to a total of $20,000.  This is a very real value that wasn’t included in Tesla’s estimate.

3. You’re probably not going to get that tax refund quite as quick as you think

I hope you’re not day dreaming about how sweet it is going to be to get a check from the IRS for $13,700, because the truth is a little more complicated than that. It is true you can get a 30% income tax credit for installing solar energy.  But this is a non-refundable credit, not a refundable credit.  That means the IRS will only use this credit to reduce your tax liability to zero.  It will not write you a check for a larger than the amount of taxes you have already paid in for the year. To get the full amount of the credit in one year you would have to make $72,000 after all deductions per year if you are single or $89,000 after all deductions if you are married.  These numbers are significantly above the national average income.

If your tax liability is less than your energy credit then the remaining amount will be rolled forward to the next year, so you will get it eventually, but maybe not as quickly as you want it.

I have come up with a clever trick to get around this and get all the benefit in the first year, but it’s a little complicated and will take up too much space to explain it here.  Check back next week. You could also enter your email in the box on the upper right hand side of this screen to sign up to receive all ABC articles through your email.

4. It doesn’t account for interest cost

Not a whole lot of people have an extra $61,000 laying around they can afford to sink into a solar roof right away so many people will have to take out a loan to pay for this. Even if you can afford to just right a check for that amount, that money shouldn’t be considered free. There is an opportunity cost in using this money for a solar roof versus putting it into another investment.  In either case, the cost of the money used should be considered, but is not in Tesla’s estimate.

5. For people who need a new roof, the effective cost should be adjusted.

Is your current roof just fine?  In that case your decision is between a $61,000 solar roof or a free regular roof and $61,000 should be considered the real cost of the roof.

But what if you need a new roof anyway and a regular roof will cost you say $8,000?  In that case your decision is between a $8,000 regular roof or a $61,000 solar roof. In that case the solar roof only costs you an additional $53,000 over the regular roof.  That should be factored into your decision.

6. The biggest problem- no reasonable person would use “Net earned over 30 years” as a metric

The biggest problem with this is no reasonable person would look at a 30 year period of time when they evaluated an investment. It is just far too great a period of time. Very few people will still be in the same house in 30 years, and looking that far ahead in to the future it is just impossible to predict what the world will look like then.  What are the chances that new technologies by then could make your Tesla Solar Roof completely obsolete?  Maybe not 100%, but close too it.

The proper metric to use is the payback period.  This metric is often used in artofbeingcheap.com articles, but if you are new to the ABC, it just means the amount of time it takes for all the benefits of a choice to add up to exceed all the costs of a choice.  A good payback period would be 3 years.  Most financial experts recommend your payback period be no more than 3 years when you refinance a loan for example.  I would say for many investments stretching things out to a 5 year payback period would be a perfectly reasonable decision.

Let’s calculate the payback period

First let’s calculate the payback period for people who don’t need a new roof. For purposes of calculating the payback period I started with Tesla’s estimate, then I also included the cost of the loan. I assumed a 10 year loan at 5.25% interest rate. I came up with a payback period of 27 years.  After 27 years here are the estimates of all the benefits and costs:

Totals after 27 years
Tax credit 13,700
Energy savings 45,360
Increased home value 20,000
Total benefits 79,060
Less loan payments -78,480
Net Benefit 580

That isn’t good. 27 years is a lousy payback period.  If you were going to have to get a new $8,000 roof anyway things are just a little bit better at 23 years:

Totals after 23 years
Tax credit 13,700
Energy savings 38,640
Increased home value 20,000
Total benefits 72,340
Less loan payments -78,480
Net Benefit -6,140
Add: Cost of normal roof 8,000
Adjusted Net Benefit 1,860

A little bit of an improvement, but still not near enough I am afraid.  This calculation was for my set of facts and assumptions which will vary somewhat from your sets of facts and assumptions.  Even taking that into account it is still difficult to imagine what set of circumstances would lead to solar roofs making sense from a purely economic perspective. I love the idea of solar energy, so it pains me to have to conclude that the Tesla Solar Roof does not make economic sense for individuals right now.  At some point in the future, I expect efficiency will improve enough that my answer will change.

More information can be found at Tesla’s website.

Photo is by Elias Gayles and has been modified.

Keep your air conditioner running efficiently to save money

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air-conditionerIt is Spring time and if your air conditioner hasn’t been on already it will be soon.  To make it run at it’s most efficient there is an incredibly simple air conditioner DIY maintenance step that anyone can do to keep your air conditioner running smoothly, keep your house nice and cool, and keep your electricity bills down.

To run efficiently, an air conditioner needs air.  It needs to breath.  If you look closely at your air conditioner you will see that it gets it’s air through vents all around the air conditioner. Keeping those vents clear so plenty of air gets through makes your air conditioner run more efficiently.  Here is how to do it.

Bent Vents

bent-ventPhoto by David Shellabarger

First, lets take a look at the vents.  Do they look bent up like in the picture above? Sometimes the vents can get so bent up that they basically look closed and don’t do a good job of letting air through at all.

 My vents looked like this a couple years ago so I bought a simple tool called either a fin straightener (affiliate link) or sometimes an air conditioner comb.  It is simply a device with teeth at fixed intervals. You insert it into the bent parts of your vent and pull it down through the vent. This will bend the vents back to their original position so the air can flow.  A professional heating and air guy will want to charge you $100 to $150 for this procedure, but it is super easy to do and the tool costs about $16 on Amazon.

Clean your vents

You may or may not have bent vents, but it is a virtual certainty that your vents are dirty and restricting air flow if you haven’t cleaned them in a while. Everybody should follow these steps once a year.

First I went and bought some air conditioner cleaner. You can buy air conditioner cleaner (affiliate link) for as little as $5 on Amazon.

wpid-img_20150712_084212129.jpgWhen I started, my vents looked like this.  You may not be able to see this very well if you are on a mobile device, but that is one dirty air conditioner. The vents are so clogged up with dust you probably can’t even tell those are vents.  You can scroll down the page for the after shot to see what it is supposed to look like for a comparison.

According to the directions on the can, step one is to take a garden hose and rinse the vents off real well. This cleaned away most of the dirt and it looked to me like the vents were clean enough to let all the air through. The picture below shows the clear vents after a rinse.  That is quite a difference from the dirty vents above.wpid-img_20150712_090701840.jpg

If I can give you a little peak behind the curtain of how I work, I had this whole article written in my head at this point.  I was going to write about how all you need to do is give your old AC a quick shower and there is no need to spend the $5 on rip off air conditioner cleaner. I was going to take pictures before and after I used the cleaner and say “See, you don’t need this cleaner, save your $5 and do it for free”.  I love writing articles about how to get stuff for free, so this made me happy.  After I used the cleaner though, I changed my mind.

I followed the directions on the can, and sprayed my vents down with the cleaner.  It was a very simple process, and the cleaner foamed up so that it expanded into all the areas I missed. I left for about ten minutes and was surprised by what I saw when I came back.

wpid-img_20150712_090458453.jpg

See all that gunk in between the bars?  That is the dirt that didn’t get washed away when I rinsed the AC unit, but that was washed out when I used the foaming cleaner. I was so surprised by how much gunk there was that I changed my mind on the cleaner. It is only about $5 and I will wager that the increased efficiency in your air conditioner will be worth a lot more than the $5. So, I am now recommending that you spring for the $5 can of cleaner. (affiliate link)

TL/DNR

Your air conditioner needs to breath well to work efficiently and can’t breath well it the vents are bent up or not clean. If your vents are bent, get yourself a fin straightener. If your vents are dirty (and they probably are) get yourself a can of air conditioner cleaner and follow the directions. A clean air conditioner will save you money in electricity bills.

Disclosure: Links to Amazon are affiliate links. 10% Revenue generated from affiliate links goes to support the charity chosen by ABC readers.

Top Photo by Kenneth Lu

What Mr. Clean doesn’t want you to know about Magic Erasers

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magic eraser

 

magic eraser

Magic Eraser

I believe that every parent out there loves Mister Clean Magic Erasers (affiliate link). They clean up things you previously thought were unclean-able with so little work it truly does seem like magic.

Mr. Clean has a dirty little secret though. His erasers aren’t really magic. In fact, there really isn’t anything special about them at all. They are nothing more than a cheaply mass produced foam called Melamine foam which is often used as insulation and in sound proofing.

How much you can save buying Melamine foam

At about a dollar per eraser, the Mr. Clean Magic Eraser doesn’t seem like a bad deal at all.  Until you price melamine foam that is. Those clever enough to search for melamine foam will find it for sale at a fraction of the price of a Magic Eraser.  I found it on Amazon for as low as $9 for 100 pieces  (AL) with much smaller or larger quantities also available if you don’t have the shelf space for 100 magic erasers.

That comes out to about 9 cents per eraser which is less than 10 percent of the cost of a magic eraser.  That is a pretty good deal.

It’s not really the same is it?

I bought some of these generic melamine foam blocks to try out. Yes, they are the same. The clean the same, look the same, smell the same. They really are the same.

Disclosure

Links to Amazon.com appearing in this article are affiliate links. 10% of all revenue generated from these affiliate links goes to support the charity chosen by ABC readers.