Will we see more income equality?

Economic data should show, if it isn't already, that the ridiculously rich have gotten considerably poorer in the Great Recession. The super wealthy have not been immune to the collapse in asset prices.

Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning one ten-thousandth of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.

The gains for the merely affluent were also big, if not quite huge. The cutoff to be in the top 1 percent doubled since the late 1970s, to roughly $400,000.

By contrast, pay at the median — which was about $50,000 in 2007 — rose less than 20 percent, Census data shows. Near the bottom of the income distribution, the increase was about 12 percent.

Some economists say they believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

The whole article is an interesting read. It brings forward (data) points such as:

• The Mei-Moses index, which tracks art prices, has fallen 32% in the last 6 months
• Income distribution was relatively flat in the U.S. in the 1950s and 1960s
• For the super-rich to return to their old levels of wealth quickly would likely require another asset bubble
• Incomes of the wealthiest Americans rose the most during the stock market bull markets
• "Since 1980, tax rates on the affluent have fallen more than rates on any other group"
  

The article also weaves the tale of John McAffee, of McAffee anti-virus software fame, into the overall article. So if you're interested in what's happened to him, now you can find out.

What about the recession's effect on the mass affluent? Well, the original article authors did a follow-up blog post responding to a comment one of the orignla article's readers asked. Their argument is that the upper middle class will fare relatively better than other income groups, and bring up a better unemployment rate for the managerial and professional class and favorable tax policy as supporting points.

Startup Investing

It's not easy to invest in startups, at least not the ones that you would like to invest in (i.e., non-shady ones with a chance of generating big returns). Startup investing is for the stouthearted. But even if an individual has the stomach, she might find her money not wanted due to competition from larger investors. BusinessWeek offered some tips to get in on early stage companies, if you're so inclined.

1. Do you qualify as an "accredited investor" under the current SEC definition?

2. Do you have reliable information about the company's finances?

3. Can you gain entrée through personal connections to the company, its existing investors, or its board? Do you work in the same field as the company, which could make you a more attractive investor?

4. Have current shareholders listed to sell on one of the secondary market platforms?

One of the hurdles for a mass affluent investor to overcome is the requirement to be an accredited investor.

a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;

The accredited investor rule comes straight from the Securities Act of 1933. From what I can tell, the dollar amounts haven't been adjusted since 1982.

One of the illiquid securities exchanges mentioned in the article, SharesPost, promotes having access to sellers of Facebook shares. You don't necessarily have to be a Russian billionaire to buy into the Facebook party.

Taxes originally designed for the wealthy now hit the mass affluent

Money Magazine has a short article on taxes that used to exclusively hit the wealthy, but, because of their not being adjusted for inflation, now hit lower income earners.

• Social Security benefits get taxed if you have more than $25,000 in income, the same as 1984
  

• The Alternative Minimum Tax (AMT) that now affects over 4 million taxpayers, up from less than 20,000 in 1970

• The capital-loss carry-forward amount hasn't been adjusted for inflation since 1978, and still stands at $3,000

I won't do any editorializing.

FHA loan limits have increased

Good news for any of the mass affluent in the market for a new home. The FHA has increased the loan limits of its loan guarantee program. Insured mortgages equals lower rates. (To see what I mean, compare the differences in rates between jumbo mortgages and insured mortgages.)

The stimulus bill allows FHA, Fannie Mae and Freddie Mac to guarantee loans of up to 125 percent of the median home price in high-cost markets, up to a maximum of $729,750 for one-unit properties. The cap for two-unit properties is $934,200; three-unit properties is $1,129,250; and four-unit properties is $1,403,400.

The floor limit for FHA loans in "normal markets" remains $271,050 for one-unit properties, $347,000 for two-unit properties, $419,400 for three-unit properties, and $521,250 for four-unit properties.

What are the high-cost markets? You can find the list on the FHA Web site (it's an Excel spreadsheet). Basically, the markets center around the major U.S. cities; New York, D.C., Los Angeles, Denver. etc.

This rule can limit your 401(k) contribution

(Welcome to those visiting from the Carnival of Personal Finance #178. Read more about the Carnival of Personal Finance. Subscribe to this site.)

There is a little mentioned rule for 401(k) contributions that could limit the contributions (free WSJ Digg link) of the mass affluent or other high earners. The rule is in place to prevent a 401(k) plan from favoring highly compensated employees. Highly compensated is defined as making $105,000 or more in 2008 (this increases to $110,000 in 2009). The basics of the rule are:

higher wage earners can't contribute more than two percentage points more of their salaries than lower wage earners. For example, if highly compensated workers defer 6% of their wages and lower earners save only 2% of their wages, the plan would fail the nondiscrimination test.

This is not a new rule, but it will affect more highly compensated employees as rank-and file employees cut back on contributions to the 401(k) plan to pay other bills. If a 401(k) plan fails this rule, contributions from the high earners in the plan are limited or even returned.

Safe harbor and SIMPLE 401(k) plans not subject to the nondiscrimination test

The IRS has more information on 401(k)s for sponsors and participants at its 401(k) resource guide. Digging through the IRS site you can find that safe harbor and SIMPLE 401(k) plans are not subject to this nondiscrimination rule. A safe harbor 401(k) plan allows employers to make matching contributions or contributions for all eligible employees. The employer contributions are fully vested immediately. A SIMPLE 401(k) plan has different restrictions from the traditional plan, most notably that it's only available for companies with 100 or fewer employees who received at least $5,000 in compensation.

Real estate driven tax changes

I wasn't really paying attention to this before, but I've seen quite a few stories on the Housing Assistance Tax Act of 2008 over the last week. (The about.com story gives better examples.)

A few things the new law encompasses

• First-time homebuyer credit of up to $7,500
• Property tax deduction even if you don't itemize
• Better tax credits for low-income housing and renovating old buildings
• More relief for 2005 hurricane victims
• Changes in capital gains exclusion for real estate
• Reporting of credit and debit card payments

Being a law written by our Congress, there are of course other provisions in it (why can't our laws ever be simple changes?). I'm interested in the first-time homebuyer credit and the changes in the capital gains exclusion for real estate.

First-time homebuyer credit

The first-time homebuyer credit is a credit up to $7,500. The 'credit' has to be repaid though over 15 years. And there is an income limit of $95,000 for individuals and $170,000 for married couples filing jointly, so those in the mass affluent segment may not qualify due to income.

Changes in capital gain exclusion for real estate

Previously, the tax laws allowed a homeowner to exclude up to $250,000 in gains (or $500,000 for joint filers) as long as the homeowner owned and lived in the house for at least two years out of the five years ending on the date of sale. Now, any gains will need to be allocated based on usage. Only gains allocated to time spent living in the property as a primary residence will qualify for the tax exclusion

OK, an example really helps to understand this.

Here's an example: Suppose a married couple buys a home on Jan. 1 next year for $600,000, says Mr. Olivieri of White & Case. They plan to hold it as an investment. On Jan. 1, 2012 -- three years later -- they begin using it as their principal residence. They live there two years and sell it on Jan. 1, 2014 for $1.1 million, for a profit of $500,000.

Under the old law, they would have been able to exclude the entire $500,000 gain from their taxable income, Mr. Olivieri says. But under the new law, they could exclude only two-fifths of the gain, or $200,000, since the other three-fifths would be considered attributable to the three years the home wasn't their principal residence, he says.

New version of Fidelity Active Trader Pro

Fidelity has released a new version of its Active Trader Pro, and Barron's has provided a review. The direct link to get more information about Active Trader Pro on the Fidelity site is here. The application is only available to Fidelity customers that have traded 36 times over the past 12 months. By comparison, a tool like TD Ameritrade's Command Center is available for all TD Ameritrade customers, regardless of the TD Ameritrade's trading volume.

Commissions drop from as much as about $20 a trade to as little as $8 for active traders, and ATP itself is free to those who qualify. Transactions can include options as well as stocks and exchange-traded funds. As you trade more, ATP tosses more tools your way, all usable within the app, including Dow Jones news services (an affiliate of Barron's), Level II quotes and interactive charting. Those who trade 120 times or more over 12 months are eligible for Fidelity's back-testing tool, Wealth-Lab Pro.

Again, Fidelity's competitors offer cheaper trades, and free back-testing tools that don't have a minimum trading volume requirement.

The options-order entry screen allows you to create strategies with as many as four legs, so that you can be selling and buying calls at four different strike prices. Options traders will be able to view the greeks, which measure a particular option's potential risk and reward over time from the option's chain displays. They also can use a multi-leg pairing tool that displays bid/ask spreads. They'll also be able to find historical options charts.

Historical options charts are a big draw for me.

Overall, I didn't see anything in the review that would cause me to switch to Fidelity so I could use the tool, but for existing mass affluent customers that are active traders, the tool is worth checking out.

Brown bagging it

I bring my lunch to work most days. I've been doing this for a couple of years, and it looks like I'm not alone in brown bagging it. I probably save anywhere from $50 to $75 a week by making my lunch at home. (That's money I can use for a cocktail or two after work!)

It's not just the young, entry-level workers who are cutting back. In March, after price increases of 10% to 20% at his favorite midtown Manhattan eateries, Marc Haskell gave up his gourmet spinach salads and turkey wraps and began packing turkey sandwiches from home. The 47-year-old executive vice president of the Glazier Group, a restaurant and hospitality company, says he now saves around $50 a week on lunch.

Eat healthier

I remember when I was a kid my mother used to make my father lunch to take to work. This wasn't necessarily to save money (although that was a plus), but to make sure he didn't eat junk at lunch. You can eat much healthier by bringing your lunch.

Are high mutual fund minimums good?

High mutual fund minimums can be a good thing. The mass affluent segment should investigate funds with higher minimums. Here's a story that gives reasons why (free WSJ Digg link).

But there are reasons for considering paying up. Of course, by raising minimums some funds are being picky about who they let in the front door. But in some cases, they also are trying to control costs and protect shareholders. The fewer shareholders a fund has to deal with, the less it has to spend on annual reports or account maintenance. That can translate into lower annual fees. High minimums can also cool off asset inflows into a hot fund.

Once I'm invested in a good fund, I want the fund to restrict who else can invest. Basically, I want the manager to only have enough money that he or she can invest well. If the fund gets hot, and new money pours in, the manager has to start investing in worse and worse ideas that are going to lower overall returns.

Let me give a simple, canned example. Let's say I have $10,000 in a fund that owns a single stock that returns 20% a year. Therefore, leaving out fund fees for simplification, the fund returns 20% to me a year. Now the fund let's in another investor who invests $10,000. The fund manager invests the new money in a stock that returns 10% a year. Now since I own 1/2 the fund, and the new investor owns the other 1/2, I essentially have $5,000 invested in a stock that returns 20% a year, and $5,000 invested in a stock that returns 10% a year. This has put me in a worst position than when I was the sole investor in the fund.

Discouraging frequent redemptions is another feature I look for in my mutual funds. Frequent redemptions by other shareholders causes either the fund manager to keep cash on hand instead of investing it, or to sell investments to raise cash, potentially selling investments that still have room to run.

Have over $100,000 in cash but want full FDIC insurance

Here's a tip in the Journal's R.O.I. column about how to get full FDIC insurance on deposits over $100,000 (free WSJ Digg link) (the money has to be broken up across multiple accounts).

[...] you can take part in a program known as CDARS run by Promontory Interfinancial. Details are here. This allows you to deposit your money in one bank, which will then parcel it out in federally-insured $100,000 lots to various other banks. Net result: The whole thing is insured.

With CDARs, someone else is breaking up the money into less than $100,000 chunks for you. Their Web site says you can get full FDIC protection up to $50 million. And there aren't any fees. Sounds like a useful service for a mass affluent depositor.

Taxes for the mass affluent to increase

How's that for a headline? This outcome is predicated on the fact that Barack Obama wins the Presidency. The CNN story delves into how Obama's tax plan defines wealthy:

Indeed, under Obama's tax plan, married couples with at least $250,000 in gross income are likely to see their taxes go up if Obama is elected president.

But what about single filers? The line for them would likely be about $200,000, according to an Obama adviser.

The purpose of this post isn't to talk about whom to vote for, but to lay out facts. Are higher taxes on the wealthy good or bad? I have my opinions, but won't go into them here. The mechanism for the increase is simple:

Obama would restore the top two income tax rates to their pre-2001 levels of 36% and 39.6%. Currently they're 33% and 35%.

Impact of the proposed plan on taxes

From what I've read, McCain would keep the rates as is, if not lower them. The latest issue of Fortune has a story with a comparison chart prepared by the Urban-Brookings Tax Policy Center of how taxes would change for the various income levels (unfortunately, the story isn't online. It's the one titled The Evolution of John McCain.) For the $112,000-$161,000 level, McCain's plan decreases taxes by $2,614, and Obama's plan by $2,204. At the $161,000-$227,000 level, McCain's plan decreases taxes by $4,380, and Obama's plan decreases taxes by $2,789. And at the $227,000-$603,000 level, McCain's plan decreases taxes by $7,871 and Obama's plan increases taxes by $12. Obama's plan really starts to increase taxes at the $227,000 and above income levels.

Does Obama's plan really just soak the 'rich'?

The 'not-so-rich' rich that these changes would impact are of course not happy.

Such rhetoric leaves Hammer steaming. "I don't mind paying my fair share, but people act like they're just talking about Bill Gates," he says. "We would definitely feel a hit if our taxes went up." Although a year ago he would not have considered voting Republican in November, now he's not so sure: "Do you vote your heart, or do you vote your wallet?"

[...]

Like Hammer, many facing higher taxes don't consider themselves part of the exalted crowd. They have good incomes, to be sure, particularly compared with the median household income of $48,200. Of the 149 million households filing federal income taxes for 2006, some 3% reported income between $200,000 and $500,000; fewer than 1% claimed income above half a million dollars.

But many also live in high-cost areas with expenses to match—and feel burned by talk of "taxing the rich" that doesn't recognize that $250,000 stretches a lot further in the South or the Midwest than in Manhattan or Silicon Valley. "There is a huge difference between what politicians define as rich and what many Americans would call middle class," says Patrick Anderson, CEO of the Anderson Economic Group and co-editor of The State Economic Handbook.

I understand the point of the family profiled in the story, things are getting tougher for the mass affluent, especially in high cost areas like the coasts. Times are getting tougher for every other American. What isn't seen in the online version of the article, but is in the print version in BusinessWeek, is that the family is posing for a picture in their hot tub, with their pool in the background. If they are looking to get a little sympathy, that isn't the scene they should have painted. I'm sure that the photographic editor had a lot to do with the setup, but still.

130/30 mutual funds sucking wind

I still haven't pulled the trigger on a 130/30 fund yet, and maybe that's a good thing (free WSJ Digg link). Most 130/30 funds are trailing their benchmarks, and the article blames managers who aren't good at going both long and short.

Some are run by managers with relatively little short-selling experience. Take Fidelity 130/30 Large Cap Fund, introduced in April and ahead of the broader market since then. Skipper Keith Quinton is a stock-picking pro; his Fidelity Tax-Managed Stock fund is in the top 10% of Morningstar Inc.'s U.S. "large blend" category for the past three years. But his shorting experience? Thirteen years ago, he ran a trust fund that made bearish bets. Fidelity says its trading desk has long experience with short sales.

Other funds are run by skippers who may have experience shorting stocks but lackluster stock-picking records. The managers of RiverSource 130/30 U.S. Equity Fund, which so far this year trails the broader market, have been in the bottom half in recent years at stock funds they've run. RiverSource declined to comment on its managers' performance.

My search for good hedge fund-like investments for the mass affluent continues.

More air travel problems

More flight cancellations

I found the articles I referenced at the end of this post on air travel. Airlines are going to be cancelling more flights, according to this Middle Seat column (free WSJ Digg link). (Yep, another post about this column. It's really excellent, both the column and my posts!) But wait, they're doing this to better passengers overall experience. From the column:

Airlines and airports say they have new procedures to prevent prolonged delays aboard airplanes, and the number of planes left sitting for three hours or more has recently declined.

But there's a trade-off: more cancellations.

Fliers are having to swap one travel nightmare -- being stuck on a plane -- for another -- being stuck in an airport. Carriers defend the choice, saying that being quicker to cancel flights rather than risk leaving planeloads of people marooned allows airlines to recover more quickly from disruptions. And, they say, airports are a much more comfortable place to while away the hours than cramped planes. Passengers have better access to essential services at airport terminals, some of which now have started to keep concessions open all night during weather disruptions and provide essentials like blankets and baby diapers. Some airport vending machines have been stocked with overnight essentials like toothpaste.

It's working too. The number of planes waiting more than 3 hours to take off is down, but cancelled flights are up. Is this a good thing? Is it better to wait in the airport than on the plane. A couple of choice points on this question.

[...] Sometimes it doesn't make sense to impose deadlines -- a flight may be very close to leaving after three hours elapse and neither passengers nor crew want to start over.

"Why should you mandate a pilot to return to the gate when he's No. 2 for takeoff?" asks David Barger, chief executive of JetBlue
Airways Corp.

[...]

Widespread cancellations don't sit well with all passengers. Dory Dean Alford, a sales manager who has "platinum" status with American because of her frequent travels, has been left stranded six or seven times by cancellations in the past year. Sometimes, she'd rather try to get where she's going than get left for a day or two. "I'd rather sit three hours because I can get home sooner," she said.

I was a beneficiary (victim?) of this move to more quickly cancel flights at the end of April, on a flight to New York. New York was experiencing thunderstorms, and the airline cancelled a slew of flights into LaGuardia that day. We were fortunately able to get on the first flight the next morning, and we were staying with relatives, so there were no additional hotel costs. We were also notified of the cancellation before we even left for the airport, so we didn't even have to drive to the airport only to drive back.

We were travelling with a small child, so in this instance I didn't mind the cancellation as much. It would have been a nightmare waiting at the airport for the plane's delayed departure, boarding the plane, and then waiting to get clearance to take off to fly to New York.

If I were travelling by myself, coming home from a business trip for example, I would have preferred to risk it and have the airline keep the flight and board me. As long as they have movies to show on the plane and they keep the air conditioning on, I can sit in those seats for hours waiting to take off (which I've done many times). Throw a kid into the mix however, and my story rapidly changes.

Fares will increase

At the end of this BusinessWeek article on the Delta/Northwest merger, there is a prediction on how much fares will increase and what the ramifications are:

[...] That would boost the average cost of a round-trip ticket from $280 to roughly $340.

While the increase may seem small, Kovacs believes it would be enough to price the hoi polloi out of the market and reduce the number of passengers on U.S. carriers from 299 million to 240 million a year. But that may be the price the airlines—and their passengers—must pay for profitability.

From what I've read, even though the number of passengers would decrease, since airlines are cutting their capacity, flights would still be just as crowded. The mass affluent will be able to handle these price hikes, but for some of the less well off, air travel will become an unaffordable luxury.

So prices are going up and the chances of flights being cancelled are going up. Sign me up.

The public's suggestions for fixing the airlines

Finally, CNNMoney offers reader feedback on how to fix the airlines. The writers thesis was that if airlines raise prices and if they also improve the flying experience, customers would be willing to pay. He had many readers agree with him, including:

"Give me back the meal, take my luggage at no additional charge, give me my window or aisle seat without an upcharge, and increase the price of a ticket," wrote Norm from Haddonfield, NJ. "I use and need the airlines and am willing to pay my share to keep them alive and well. Charge what you need to charge. We'll get used to it....just like $4 gas. Stop beating me to death with these ridiculous additional charges."

Yes! Yes! Norm for President! Stop nickle and diming me and put the price in the fare and give me a pleasant flight experience. But do I really think that when airlines raise fares to where they're finally covering their fuel and other costs that they'll improve service? Nope.

U.S. rations silver!

I'm trying a sensationalistic yellow journalism headline for this post. Maybe I can get it into the New York World or New York Journal. So put aside the dire headline and delve into what's happening with U.S. Silver Eagles, as told by the Wall Street Journal (free WSJ Digg link).

The government rationed food during World War II and gasoline in the 1970s. Now, it's imposing quotas on another precious commodity: 2008 dollar coins known as silver eagles.

The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can't make them fast enough. In March, the mint stopped taking orders for the bullion coins. Late last month, it began limiting how many coins its 13 authorized buyers world-wide are allowed to purchase.

"This came out of nowhere," says Mark Oliari, owner of Coins 'N Things Inc. in Bridgewater, Mass., one of the biggest buyers of silver eagles. With customers demanding twice as many as they did last year, Mr. Oliari would like to buy 500,000 a week. But the mint will sell him only around 100,000.

[...]

The rare shortage offers a glimpse into the growing love of a commodity known as "poor man's gold." With more silver mined than gold traditionally, silver has always been far cheaper than gold and today has less than 2% of gold's value.

But silver is growing in popularity, and some investors are betting that its value will surge as inventory shrinks. Big investors are loading up on silver eagles, which are the only American silver coins allowed in individual retirement plans. For small investors, they are an accessible way to get into the metal boom.

"Unlike gold, these coins can be bought by regular citizens," says J.R. Roland, a Brownsville, Tenn., judge who recently began buying the coins -- and trading them on eBay. "In these economic hard times, silver coins are a great way to invest."

While these coins are fun to collect and trade for numismatists, I don't think they make a great investment, even for the mass affluent segment. There are better ways to invest in metals, such as through ETFs or mining stocks. Since the U.S. Mint only sells the coins to wholesalers, individuals are always paying a markup over the real value of the silver in the coin.

The U.S. Mint makes silver, gold and platinum bullion coins in weights of 1/10, 1/4, 1/2 and 1 troy ounce. The gold and silver coins started being minted in 1986, and the platinum in 1998. They have face values on them and are legal tender, but the value of the metal in them is far greater than their face value, so it wouldn't be a good idea to use them at the grocery store. I think it would be a nice to have a complete set of the coins going back to 1986, but purely from a collector's, 'let's give it to the grandkids one day', point of view. Several other countries also mint some beautiful bullion coins, such as Canada and China.

SmartMoney's annual broker survey - E*Trade comes out on top

On the heels of Barron's online broker rankings comes SmartMoney's annual broker survey. It makes an interesting general observation:

Each year we take an in-depth look at the industry's performance, and it wasn't long before we noticed something new: a blurring of the lines between key players. For years online brokers could be divided into two camps — discount brokers known for cheap trades but not much else, and "premium" discount brokers with higher prices but more products and services. Now that's pretty much out the window. Scottrade may be a discount broker, but it's also opening new branches at a furious pace, giving it more outposts than Charles Schwab. And some traditional "premium" discount brokers now rival discounters when it comes to price: The average commission charged by discounters like Firstrade is about 15 percent less than that of premium players like Fidelity, down from nearly 50 percent just four years ago. "We're all in this arms race," says TradeKing CEO Don Montanaro.

The rankings are done from the perspective of a customer that trades 20 times a year and has $50,000 in an account, which can be the mass affluent segment. E*Trade comes out on top (page 4 of the online article) overall for the second straight year. TradeKing, which was first in Barron's online broker rankings, placed third overall in the SmartMoney rankings.

More on Health Savings Accounts

I've covered my decision not to use a Health Savings Account. Now comes another story asking if HSAs are right for you (free WSJ Digg link).

Not my experience

High-deductible plans have premiums that are often 20% to 25% lower than those of health maintenance organizations, usually the cheapest type of comprehensive plan.

This wasn't my experience with the HSA/consumer driven option I had. The premium savings were a little over 12%. These savings weren't nearly high enough. I hope in next year's options a 20-25% premium savings is available.

Young and healthy workers who are unlikely to incur many medical bills are most likely to benefit from high-deductible plans, says Wendy W. Bunnell, a benefits attorney and consultant in Minneapolis.

High-income individuals and families who can afford to pay their own medical bills with cash up to the deductible limit also may benefit. While paying for some care directly, they can use an HSA primarily to invest tax-free and fund medical care in retirement. (You can submit receipts for reimbursement at any time, even years after the money went into the HSA.)

I do see the benefits in using the tax-free money for retirement medical care, and the HSAs seem like a good fit for the mass affluent. I'll need more than a $500 premium savings to use for funding an HSA to make it worthwhile though.

Think of the children

Time has almost run out to do some year end tax planning to avoid the 'kiddie tax' for older children. The kiddie tax taxes childrens' unearned income over a threshold at the parents' tax rate. It was designed to discourage the wealthy or mass affluent from shifting investment income to their children to avoid taxes. Once the child's unearned income exceeds the threshold, it gets taxed at the parent's presumably higher tax rate. As an aside, to show how arcane our legislative process is, the change in the kiddie tax for 2008 was part of an Iraq spending bill.

The change to the kiddie tax is that the child's age limit is being raised to under 24 from under 18, although this only applies is the child is a student. If she's not a student, then the limit changes to 18 and under from under 18 (in other words, the limit is being raised by 1 year). The impetus for 2007 taxes will be to have any dependent children between 19 and 23 to recognize any unrealized gains in 2007 to avoid being taxed at a higher rate in 2008.

Let me throw out a hypothetical. Let's say there is a 20 year old student who is really good at stock trading and makes a decent amount of money trading stocks in 2008. Her capital gains in excess of the threshold will be taxed at her parents rate, regardless of the fact that her gains may not be enough to be in that marginal tax bracket. Seems unfair.

Harvard increasing aid for mass affluent

Harvard is increasing financial aid for middle class and upper middle class families (which the mass affluent segment would fall into) (free WSJ Digg link). From the article:

Under its new program, to take effect next fall, the Cambridge, Mass., school said undergraduates whose families earn up to $180,000 a year would be asked to pay 10% or less of their incomes annually for the cost of Harvard, which now totals $45,620.

[...]

Under the new policy, families making $120,000 to $180,000 will be asked to pay 10% of their incomes. A family earning $120,000 would pay about $12,000, compared with more than $19,000 under current student-aid policies. Families earning below $120,000 would pay a declining percentage of their incomes, down to zero at $60,000 and below.

There is no mention about what families making more than $180,000 will have to pay.

This is great news. The rising cost of education is a problem for many American families. It's good that Harvard is recognizing this. Families making less than $60,000 will not be expected to pay anything for a Harvard education for their children, which will hopefully open this door to some very smart but low income students. Loans are being eliminated from Harvard's financial aid package and being replaced with grants. It's also nice to see a school reduce the burden on the middle class. I don't think any family, lower income or upper middle income should have to mortgage their future to get its children a top notch education. Should they have to make sacrifices? Yes, absolutely. But they shouldn't have to burden themselves and their children with massive debt.

The link to the Harvard release can be found at the Harvard Gazette.

I also found this story about changes to financial aid that Duke University recently made. It gives a little bit of color on what other schools are doing:

Princeton University gained national attention in 2001 when it announced that it would eliminate all loans for students qualifying for need-based aid. Davidson, Amherst and Williams colleges have also eliminated loans.

How to sell hybrid cars to America

Prius hybrid
Originally uploaded by Leonid Mamchenkov

Toyota has rolled out (literally, the exhibit is in trailer) a traveling show aimed at educating America about hybrid cars. Despite their popularity, hybrids remain small sellers.

Still, hybrid vehicles overall remain a niche product, mainly purchased by affluent consumers on the coasts. Hybrids of all kinds made up just 1.5% of all new vehicle sales in 2006, with the Washington, D.C., area, Oregon and California ranking in the top three for the highest percentage of hybrids sold among new cars, according to R.L. Polk & Co.

In Indiana, where Toyota made a stop in July, hybrids made up about 1% of new car sales last year. Mississippi, Louisiana and Oklahoma ranked in the bottom three, with hybrids making up a maximum of 0.6% of new car sales, according to R.L. Polk.

What I really need is a truck that gets 50 mpg, but that can still haul all my cargo.

Wrap accounts going bye bye

A recent WSJ article delves into how brokerages are trying to keep customers (free WSJ Digg link) now that wrap accounts are no longer legal. The background is that the courts said brokers couldn't act like investment advisers and get a fee for managing money. Will this be a bum deal for customers who liked to actively trade? Maybe.

Of course, the brokers don't want to give up these potentially lucrative customers, so now they are trying to convert the customers' wrap accounts into nondiscretionary advisory accounts, and are even lowering account minimums (which will potentially allow more of the mass affluent segment to have these accounts).

To help lure clients into its Strategic Advisor account, UBS this summer lowered the investment minimums to $50,000 from $100,000 in investable assets. Citigroup Inc.'s Smith Barney has a minimum investment for its Smith Barney Advisor program of $25,000, which it recently broadened to include household assets.

Most affected is Merrill Lynch, the largest player in fee-based brokerage accounts with about $100 billion in assets. The firm is pitching its nondiscretionary advisory account, known as Merrill Lynch Personal Advisor, as the main alternative to fee-based brokerage accounts, Merrill brokers say.

So what is the difference between the old wrap accounts (fee-based brokerage accounts) and the nondiscretionary advisory accounts? The nondiscretionary advisory accounts

can hold individual stocks and bonds, mutual funds, exchange-traded funds, and cash investments -- investors can get more comprehensive advice from a registered investment adviser, but still call the final shots since the adviser must get the client's permission before making changes.

Customers are also being converted into traditional commission based brokerage accounts. I personally feel that the commission based accounts are the way to go, with a good discount broker, like Schwab, TD Ameritrade or E*Trade.