DRIP Vs. Roth IRA Investing

For years I have been debating where to put a modest monthly allocation available for retirement planning once I have hit my company's match in my 401(k). For many of us, the answer to allocation prioritization between 401(k)'s, IRA's, and Taxable accounts is initially fairly simple. First and foremost, make sure you take advantage of your company's match, if they offer one, in your 401(K). That's free money. Take it!

Then comes the hard part. What do you do with what you have left, if you have anything left?

- Do you finish out your 401(K) to the limit that you have available ($17,000 per year in 2012, unless you're over 50 where it increases to $22,500)

- Do you put that money into a Roth IRA (maximum contribution of $5,000 a year, unless you're over 50 where it increases to $6,000)

- Do you invest that money in Dividend Reinvestment Programs (DRIPs), which are taxable accounts?

- Do you consider yourself invested, and put that money toward a vacation or home addition?

The answer to this question depends on your income, what you're investing in through your Roth and taxable accounts, your willingness to be in charge of your own investment choices, and your preference of investing in your future versus yourself or your home.

As your personal financial situation changes the answers to these questions may also change.

Let's assume that someone has an additional $5,000 a year to invest after they met their company's matching contribution. For those on Seeking Alpha, the chances are that you will not be passive in the management of that money. There is also a good chance that you will want to put it into a money making investment. Therefore, leaving it in your 401(K) is probably not ideal. Choosing to put this money in your 401(K) is best for those who would rather let someone else manage their money in one of their company chosen retirement funds. Putting money into a vacation, although fun, would probably not be your choice if you are saving for retirement either.

For those who want to manage their own investments, the next best option is to invest the money in your Roth IRA, if you qualify. The reason for this is that any capital gains made within the Roth will be tax free if taken out after retirement. Another advantage of the Roth is that any contributions made can be withdrawn tax free. Therefore, if you suffer from a crisis which depletes your emergency fund and still requires you to pull cash out of your investments, you can do so up to your contribution in the Roth without tax consequences.

Within your Roth you can buy anything you can buy in your taxable account, so why pay taxes on the same stuff?

Qualification for the Roth is the key criteria here. If you are single then you have to make under $125,000 a year, with a phrase out beginning at $110,000. For those Married and filing jointly that figure rises to $183,000 or less with a phase out beginning at 173,000.

Now we face the question of DRIPs. Unlike the Roth, there is usually a fee associated with taking money out of a DRIP. Also, since it is a taxable account, anything you take out will be taxed, no matter when you remove the money (before or after retirement). So, why is this even a debate? One reason, if you have already set up the drip and you do automatic investing every month as well as automatic dividend reinvestment, then you're building a dividend machine without expending a lot of effort.

You can build such a machine in your Roth as well, but each time you want to purchase you will have to decide what is worth buying. In the DRIP, that decision is made for you. Therefore, the argument comes down to ease with the DRIP vs. tax advantages and potential for emergency withdrawal with the Roth.

Since this is a Seeking Alpha crowd, ease of investment is probably not a higher priority than tax advantage and choice of new investment, so Roth probably wins with most folks who qualify for the Roth.

For the person making more than qualifies them for a Roth, the best answer is a taxable account. May I recommend DRIPs.

The Bankruptcy of a Country

One day after the sixty-eighth anniversary of the Normandy Landings of D-Day and Scott Walker’s Citizens United Victory in the Wisconsin governor recall election, Americans need to look at what is really bankrupting our country. We are not going bankrupt because public sector unions want to ensure firefighters, police, state employees, and teachers a modest retirement based on a lifetime of public service.   

 We are going bankrupt because the middle class has been split through false theories of economics.  As a country we have lost our sense of shared purpose toward a brighter future.  Too much Ayn Rand selfishness and not enough Dwight D. Eisenhower and George S. Patton personal sacrifice for a shared society.

Our nation’s bankruptcy started in the Golden State of California with Proposition 13 based off of the false premise that lowering property taxes would boost economic growth and prosperity.  This premise has since become the religion of the Republican Party, and its sponsor Ronald Reagan the party’s saint.  Yet, the only outcome this Voodoo Economics created is a gutting of our public schools, local police, local firefighters, public parkland, national infrastructure, state budgets, and federal budget.  Combined with the prolific spending of Republican administrations from Reagan onward, the loss of revenue and the increases in spending have thrown our country’s economic future into chaos.

The citizens of California were sold on the idea that selfishness is good.  Then the country as a whole was convinced of the same false economic argument that by cutting taxes all would be well.  Selfishness is not good.   Selfishness does not lead to economic growth.  Selfishness leads to a loss of society as each person fends for themselves and does not care for his or her neighbor.  When the employee of a factory who lost his security fifteen years ago is fighting because his neighbor the teacher still has a pension and he thinks that is unfair, then society as a whole is bankrupt.  Reagan’s revolution split the middle class.  It compelled some in the middle class with dreams of future wealth to resent others in the middle class who hold the promise of stability.  It pitted those having to fend for themselves against those serving the nation through public service at the local, state, and federal level. 

This selfishness created the 401(k) retirement plan, which since its inception has practically replaced the pension as the means of retirement for almost all private sector workers.  Second to tax policies, nothing has divided the middle class more than the loss of a secure retirement.  401(k) plans have proven to be no replacement for pensions as private sector workers who paid into these plans learned in the financial crisis.  Instead, one set of middle class workers has no security and no retirement to rely upon because they were forced into 401(k) plans, while public sector workers have a mix of 401(k) type plans as well as pensions and are more secure in their future.  The argument to eliminate public sector pensions is the wrong one.   

Instead, if the middle class was united, it should be arguing to bring back pensions into the public sector.

Instead of the accolades of sainthood that Republicans hoist onto Ronald Reagan, the country as a whole will come to see him as the most divisive and destructive President we’ve ever had.  We will see his leadership of the State of California as well as of the country as the initial steps towards our moral and financial bankruptcy.  We will see the Reagan Revolution as having split the middle class, cutting it off from the growth of wealth experienced in the United States, and the creator of the greatest wealth gap in our nation’s history since the 1920’s. 

There are steps we can take to return to prosperity and reunite the country.  First we must reunite the middle class.  A strong, well paid, middle class is the most powerful driver of economic growth ever found anywhere in the world.  Reuniting the middle class through the creation of new retirement plans so that everyone can count on stability as they age would be a good first step.  A second would be a return to a progressive tax system where those who’ve benefited most from society pay the most back into it. Finally, as a country, we all need to understand, appreciate, and willingly share our responsibility to pay for the society in which we want to live.  We need to fund our public schools, our police, our firefighters, our public service employees, and our private sector employees.  We need to reclaim the middle ground as a country rather than surrendering our economic well-being to those who do not care for us.

Don’t let the Wisconsin recall make you believe that Voodoo Economics is winning.  It does not have to if you, me, and everyone we know realizes that our country is being lost because we are divided.  Remember the sacrifices on D-Day, when National Guard, Army, Army Air Corps, Navy and Marine Corps troops who represented all of middle class America stormed the beaches of Normandy to free our world from the morally bankrupt Nazi Empire.  The middle class won World War II because it was united.  The middle class can unite again.  If it does so, Americans can win back our country, our society, our stability.  Let’s unite the middle class.  Let’s regain our society.  Let’s save our country.

The Parents Pledge

Throughout my life I've seen parents who have performed wonderfully, offering their children every chance they could for a life filled with success.  I've also seen parents struggle to feed, care for, or even house their children.  Some parents with the capability to provide everything their child needed were not always willing to do so.  Therefore, I've put together a basic and relatively easy pledge for parents to take upon knowing that they will be parents.  This is simply an example.  Any parent can amend this pledge as he/she sees fit.  I just put it out there to begin the process of empowering parents to realize and then step up to their roles and responsibilities when they bring a new person into this world.  I welcome feedback on this at any time.

Thank you,

Jeremy

The Parents Pledge

I ______________ pledge to be a providing, loving, and accessible parent to my child/ren.  This includes ensuring that he/she/they have the basic necessities of healthy food, clothing, shelter, love, family, spirituality and community. I will make time to be with my child/ren; to play with him/her; to experience his/her growth.  As part of this time, I will encourage and empower my child/ren to seek out their own path in life, helping them identify their own personality, passions, and place in the world.  I will recognize my child as an individual with his/her own wills, desires, interests, and ways of solving problems.  I will, within my means, provide the financial resources for my child to pursue these passions as well as the financial literacy to take care of him/her/themselves when they are mature.  I will seek out opportunities for my child/ren to discover new interests, values, ways of thinking, and philosophies on how to live that may not always be my own, while at the same time instilling my values so that my child/ren grow with a sense of their role and responsibility to this world.       

A modest tax policy proposal

America’s tax policy is a political football that is constantly being passed, kicked, tossed, lobbed, and generally beaten by every side in the debate.  I would like to make a modest proposal on a new form of tax policy that I am sure others have made before.  The point of this proposal is to incite discussion, and generate a path forward that will resolve our country’s financial problems.  I do not have all of the answers on how to implement this idea, nor should I. This is simply a proposal to begin an earnest discussion of the topic and come to paths of implementation.  All numbers are notional, only there to provide basis of statements, not as specific proposed levels to any one part of the system.

The idea is a simple one: a progressive consumption tax based on how much one (or a family) purchases in a given year.  Consider that a family that spends $60,000 a year would be taxed at a 2% rate on their consumption.  One that spends $120,000 would be taxed at 2% on the first $60,000 and 4% for the second $60,000.  Then, a family that spends $180,000 would be taxed 6% for the third $60,000, and so on-and so forth as high as the spending goes.  Each consumption increase beyond the next $60,000 threshold would increase the tax rate of that portion of consumption by 2%.  This can be done up to a certain level, where the tax on consumption would maximize at a given level, that for the sake of this paper we could say would be 36%.

In this way, a family of modest means that does not have the ability to consume would pay the least amount of taxes, but still be taxed on consumption up to the point at which it can no longer consume.  The family that can afford to consume more would pay more taxes for that consumption, all the way up the consumption scale.  In this way, work itself is incentivized, as is savings, and consumption is taxed based on how much is consumed. 

Certain exceptions in consumption can be included in this system to allow for medical expenses, groceries, and other necessity items to be consumed without counting against the total family consumption number. I will not specifically identify any other exceptions because that is a societal process to be achieved through discussion and decision based on the needs and values of our country.

I look forward to debate and discussion on this proposal.  Of particular interest would be how to implement it, how much revenue it could bring in as compared to the current system, what the appropriate percentages and consumption levels are, and any other ideas that this proposal spurs.

Taxes

I pay taxes for government services. Whether these services are to me directly, or to someone else (and therefore me indirectly) they are services that the government provides with the money I give. I have earned this money through my labor. No one ever has, nor ever will, give me a dime. I do not regret this because it means that what I own is what I've earned.

I am happy to pay my taxes on my labor. I am also happy to pay my taxes on my capital gains. This has not been earned through my labor as much as through good investing. I find it acceptable to pay taxes on my investing windfall.

If I refused to pay taxes, or if I hired lawyers who can find loopholes in order to get out of paying the taxes I owe, I do not believe I would belong in the society in which I live. I would not deserve the benefits government provides. Even if I never personally receive a welfare check (which I hope I never have to receive), or farm subsidies, or oil company subsidies, or any other government hand out, I benefit from these actions in one way or another, even if I politically disagree with one or the other. I benefit from my nation's defense (as poorly as it was utilized under the previous administration).  I benefit from people who cannot afford health insurance getting medical care because it means they will not make me sick because they cannot receive treatment.  I benefit from single mothers on welfare because it means they do not live on the streets, compelling their children to become thieves for a living just to get by. I benefit from FEMA because it assists me (again, not well under the previous administration) after natural disasters. I benefit from the State Department because it maintains relations with other countries so that we can avoid wars and support their development. I benefit from the Department of Commerce because it supports trade and development at home and abroad. I benefit from America's state medical programs, America's highway programs, and America’s largesse in general. Even if I did not pay a cent in taxes, as long as I am an American Citizen, I benefit from the government.

I am happy to pay my taxes every year because I view that as my contribution to the betterment of my society. I feel good as I do better in life and pay more taxes. Not only does it mean that I am becoming more successful (monetarily), but it also means I am able to contribute more to my country and its people. I am honored to live in a country that is able to collect taxes and provide benefits from those taxes to its people. I would be even more honored to live in a country where everyone who could afford to contribute to our society did so willingly, and proportionally, to what they could afford.

I may not agree with the way my money is spent in every program, but I will fight that out through the political process by voting, volunteering, and possibly running one day in the future. My taxes, though, are my contribution to an America I can be proud to live in. Anyone who fights to avoid paying their taxes, in my view, should fight that through the political process as well. They should not buy their way out of that process. Otherwise, they are merely buying their way out of our society.

Returning to creativity

The creative will rule the world; the rest will watch and be entertained. Today we are on the cusp of a new world where those who can avoid being sucked into the entertainment offered by television, the internet, video and computer games will be the ones who control the destiny of the rest. This is not a world of ill-intent, as much as it is one of entertainment and interconnectedness gone awry. The addicted and addictive will surrender their personal choices and freedoms to those who can avoid these addictions. Look at yourself honestly to find out; which one are you? Only by knowing this can you find the balance that will allow you to maintain your individualism and contribute to a better world.

We have so many choices for how to spend our time, from volunteering and social activism, to lounging on a comfy sofa in front of the television or computer screen playing the latest quest computer games or life simulators. These choices do have meaning. The time we offer the world is in direct contrast to the time we satisfy ourselves in simulations. Those hours we spend with our friends, family and loved ones are hours not spent creating fake worlds, defeating fake armies, or watching fake “Reality” shows on television.

I speak about this topic from immense experience and a significant level of personal regret. As someone who loves to write, draw, play in improv scenes, study history, and discuss international relations, I have many creative outlets available. Yet, for the past several years I have enjoyed an ever increasing amount of time spent in front of the computer playing amazing war simulators, civilization creating games, and watching much of what has been offered on television. During this time I have forsaken my creative passion in exchange for the false accomplishment associated with these contrived realities. Looking back, I can see years of wasted time in a life that is of limited duration.

Asking what our world will be like if there are more people like me who have let their creativity and contribution to the world whither in order to satisfy our own desires for immediate success and gratification, I am drawn to ask what our world would be like had historical figures from the past had these same opportunities for amusement. Imagine, if you will, a world where Hitler, Stalin, and Mao had been satisfied by a war simulator? Not bad, huh? Well, also imagine if Caesar had not put the final nail in the coffin of the civil wars of the Roman Republic, leading to the stability and peace of the Augustine Empire? Take a moment to consider if instead of spending his time inventing, Thomas Edison had decided to stay amused with life simulators. What if Martin Luther King, Bobby Kennedy, and Mahatmas Ghandi were satiated by The Simple Life instead of fighting for social justice? Think of how poor we would be culturally if William Shakespeare had occupied himself watching Survivor instead of taking the time and energy to write his masterful works. These are merely a few examples of people in history who were able to use their time; some good, some bad. Most people though, have not been these creative or commanding types, I know. Yet, even if we look at the simple medieval farmer and ask, what would have occurred had s/he been seeking entertainment over accomplishment, the chances are our answer would be starvation.

I am not surprised to read reports of young adults dropping dead in internet café’s after spending several days straight playing World of War Craft without eating, or knowing that there are some people out there now who are making millions of dollars selling fake property in Second Life. These games are addictive, but that’s ok. I am not arguing against the games or the television shows, as much as for balance. Personally, I’ve spent whole nights, into the next morning, creating empires in Civilization, Rome: Total War, and Age of Empires, yet when my wife wants to do something the next day I am a total waste of mass. I know I’m not the only one who does this!

So, for everyone out there who loves to game, watch way too much TV, or even, forbid, write too much on the computer, I suggest we all try something new. Turn them off for a while and volunteer in the real world. Perhaps work on a political campaign for someone you think would be a good leader, in a soup kitchen, at a hospital, for a library, or even just picking up trash in your community. Or, if you have it in you, write, draw, invent, and make people laugh. Live, work, contribute, build, and enrich the real world. No matter how fun this amusement stuff is, if our real world gets so bad as to need that many diversions, eventually there will be no real world left in which to play and watch this pointless stuff.