Trovena Weblog

Everybody wants your rebate money!

Well, that's not even true.  The IRS doesn't want it.  They just want you to spend it.  The good news for them is that there is no shortage of companies out there helping you do so.  It's ironic that we, as a country, continually berate our citizenry for being poor savers (as compared to Japan, for example), yet when Uncle Sam is dolling out a few extra bucks, we're being unpatriotic if we try to save any of it!

I recently heard a story on NPR that the IRS is actually sending some people goods in lieu of a rebate check.  They are identifying people with high debt levels whom they feel are likely to blow the money on such foolish things like debt repayment rather than some shiny new toy.  In the story, the IRS sent a couple in Arizona a new air conditioning unit.  You know, because they're in Arizona.  So, instead of $1,200, they get higher utility bills.

Journalist Request: Essentially a question of tax diversification

Here was the reader question that was asked by Raj Sharan, a financial writer for the Christian Science Monitor:

"I currently contribute about $20,000 a year tax deferred into a 401(k). My employer does not contribute. Since in the future (I'm 2 years from retirement) I'll roll this over into an IRA, would it be better to pay taxes now on the $20,000 and just invest in a regular account? Otherwise, when the money is withdrawn from an IRA, I'll be paying taxes on the entire investment as regular income, not just on the capital gains. I'm assuming that my tax bracket will be the same at retirement. A Roth 401(k) seems like a better deal, but my employer doesn't offer one."

Most investors, after relatively little study of investing, realize that diversification is an important principle.  "Don't put all your eggs in one basket!"  Pretty simple, right?  Of course, loading up on tech stocks in the late 90s aside, most investors get this on some basic level.  True diversification of non-correlating asset classes, without biases towards large U.S. stocks, is rare however.

Even if investors truly understand the principles of investing, another type of diversification has to be considered, especially as investors approach retirement:  Tax Diversification.

So, here is my response to the question: