Wise Money Decisions

Last week I mentioned that one reason I haven’t started my taxes is the likelihood I would receive a corrected 1099.  Sure enough, the next day I received a corrected 1099.

I came across this Kiplinger article that explains why so many 1099’s have to be corrected and reissued.

I figured it was only a matter of time.  The ink is barely dry on the new United Airlines and U.S. Airways policies to charge a fee for a second checked bag.  And now more airlines are following suit.

I haven’t been following this story closely so I don’t know if my list is exhaustive, but I’ve seen Delta, Continental, and Northwest announce a second bag charge.

The baggage section of Delta’s website still shows two free bags.  But the Atlanta Journal Constitution reported on March 24, 2008 that Delta will charge a $25 fee starting May 1.

Continental makes it very clear on their website they’re charging $25 for a second checked bag starting May 5, 2008.

Northwest’s website also shows a $25 fee for the second checked bag, although it was harder to find.

I hope the javelin policy doesn’t change.

Let’s suppose I’ve booked a flight on American Airlines.  I want to know how many bags I can check.  I know the answer can be found at the American Airlines website, but I don’t want to navigate through their site.  So I go to google.com and type:

how many bags can be checked on American

The American Airlines website pops up first and I find my answer. 

Right?

Not So Fast

Actually, the American Airlines website doesn’t show up until hit #91.  It doesn’t even show up on the first page unless I’m set up for 100 hits per page.  And then it shows up at the bottom.

That means there are 90 sites discussing how many bags can be checked on American that are presumably more important than the American Airlines website. 

Including such internet heavyweights as Cranky Flier, the Luggage Security Coalition, Air Gorilla, a page about the O.J. Simpson trial, a site about hiking the Inca Trail, a guy posting a comment on a bulletin board about sunglasses being stolen from his checked luggage on a flight from the Dominican Republic, and a site explaining why it’s a good idea to write the date on plastic bags before you put food in the fridge.

Which site supplanted American Airlines in the #1 spot?  Click here to find out. 

Post Script

If I’m not in the #1 spot, I was when I wrote this.

For a couple years I’ve thought about whether to do a traditional IRA or a Roth IRA.  I haven’t come to a firm conclusion.  Until this week.

Whether to do traditional or Roth is important because the “wrong” decision can mean paying thousands of dollars of extra tax. 

I put “wrong” in quotations because contributing to either is a wise money decision.   Choosing between the two is like picking between A&W and Parker’s root beer.   On any given day one might be slightly more delicious, but you can’t go wrong because both make your life better.

Also note that you don’t have to choose between the two.  You can do both.  And it’s probably smarter to do both.  More on that later.  But it’s also nice to figure out whether one is better than the other.  If one is better, you’d like to focus on it more.

Your Current and Future Tax Rates Drive the Decision

This article assumes an understanding of the tax advantages of IRA’s and 401(k)’s, both traditional and Roth.  If you’re not sure how IRA’s reduce your taxes, you may wish to do some background research first.  Try this Motley Fool article on traditional versus Roth IRA’s (I haven’t read it, but Motley Fool is usually good at explaining basic concepts like this).

It’s well understood that the key factor in choosing between traditional versus Roth is your tax rate now versus your tax rate later.  If you have a higher tax rate now, you want to contribute to a traditional IRA.  If you have a lower tax rate now, you want to do a Roth.

There Are a Few Other Reasons

For most people the decision is driven by the tax rate expectations.  But there are a few other smart reasons for choosing one over the other.  Someday I’ll do a more exhaustive look at all the reasons that might push you toward one or the other, but for now I’ll mention two:

• Traditional and Roth IRA have different restrictions on when you can withdraw contributions and earnings without incurring a penalty;
• Making contributions to a traditional IRA may lower your income sufficiently that you can take advantage of a deduction or credit you’d otherwise be phased out of, such as the student loan interest deduction or the child tax credit.

Back to the Tax Rate Issue

If you had a crystal ball and could foresee that you will have the same tax rate in the future as you have right now, a traditional IRA and a Roth IRA are financially equivalent.  The problem stems from not knowing your future tax rate.

A few days ago Jonathan at MyMoneyBlog put up Daydreaming: How Can I Retire In 10 Years?   I liked the post for two reasons.  Not only is retiring early a topic dear to my heart, but Jonathan wrote something that sparked an idea.  Here’s what he wrote:

“[After retiring] if I have no other income from sources like pensions or annuities, this means I should lean towards contributing to Traditional IRAs and 401(k)s exclusively right now instead of Roth’s since my tax rate in retirement should be very low - much lower than I might have guessed before.”

Jonathan recognized a reason why his future tax rate may be lower than his current tax rate.  He correctly reasons that he should lean toward a traditional. 

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