Here’s a really sad commentary on the markets. My best investment for the year turns out to be about $26,000 that was withheld from funds I withdrew from a traditional IRA to put into a Roth IRA. While my other investments dropped—many dramatically—the withholding, which was for taxes, is still worth what it was when my mutual fund company set it aside for the IRS. And that’s good, because now I can get it back, as I’ll explain later.

What I did, accidentally, was the equivalent of putting the money under a mattress—something I don’t normally recommend. But this time it seems to have worked, so I asked Christine S. Fahlund, senior financial planner for T. Rowe Price: Does putting the money under a mattress make sense sometimes?

“I don’t think we’d ever say so,” said Fahlund, but she then pointed out that it does make sense to have some funds in cash or cash equivalents. How much depends on what you’re going to need them for and when.

Financial experts preach about having a diversified portfolio and reducing the amount of risk as you approach retirement. For people who have considerable time ahead of them before they retire or don’t need to tap into their retirement savings, investing in stock when the markets are down may be a good idea, Fahlund said.

Many financial experts also recommend having an emergency fund of cash or cash equivalents, such as a money market account, savings account deposits or CDs, to cover six months’ worth of basic expenditures in case you lose your job or have major medical expenses. If you’re approaching retirement, you may want to have enough to cover two years’ worth of basic expenses, in case the market tanks right after you retire—a possibility that has become more than theoretical for many retirees. If you have the cash, you won’t be forced to sell your investments at the bottom of the market. If you do have to sell when the market is sinking, chances are it could take years of savings and investing to recover.

And there are other situations in which putting part of your savings into cash or cash equivalents might make sense, Fahlund said. “If you were putting your child through college in two years, I might say mattress.” In other words, ideally, sell when the markets are good to ensure against a slump in the years the tuition bills are due. It’s advice that won’t help parents facing tuition bills now or in the near future, but when the markets recover, think about what in your future might warrant a reserve of cash.

But don’t overdo cash reserves, she said. “Otherwise you’re going to have too much that isn’t earning very much, and it’s going to come back and bite you later. You’re going to need growth in your portfolio to sustain you for a very long time.” Even those approaching retirement within five years probably shouldn’t have more than 30 percent of their savings in cash or cash equivalents, she said.

Here’s why I can get my $26,000 back. As you may know, when you save in a traditional IRA, taxes on that amount are deferred until you withdraw the funds. That’s why my transfer to a Roth IRA triggered taxes. With a Roth IRA, it’s the opposite: You pay taxes on the money at the beginning and it’s allowed to accumulate tax-free ever after. That’s one reason Roths are so good for workers at the beginning of their careers, when their tax rates are likely to be lower than they will be in the future.

At the time of the transfer, I thought I had two good reasons to take the tax hit now. One was, looking at the growing deficit and the nation’s growing spending needs, I felt pretty confident higher tax rates were inevitable, a view that has been reinforced by the current economic situation. I’m not expecting my earnings to fall any time soon, so, if I’m right, I probably will be paying higher taxes in the future.

I also thought I would be ahead of the game paying lower taxes on an investment that had fallen in value. But I was wrong. Since I paid taxes out of the investment I was transferring, I reduced the amount of money that would work for me in the future. In the meantime, the value of the investment I had transferred has dropped much farther.

The good news is that you’re allowed a “do over” when you have converted a traditional IRA to a Roth. I was able to reverse my earlier conversion to the Roth. When I file my taxes next spring, I should get back the withheld $26,000, which hasn’t lost a dime.

In an environment when everything else is sliding backward, standing still comes to feel like a triumph.


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will get in the way as it always does regardless of which party has the upperhand at the moment.
In the meantime, lets teach our children and grandchildren the lessons of this folly. Point out those greedy leaders to them, teach them know the difference between what is honest and what is not. Point out that being dishonest doesn't just hurt one individual, it can hurt a nation and a world.
This is an opportunity to teach our children to find a way to not only help themselves but others as well. We re going to have to find creative ways to live through these times just as others before us have had to do. Learn to eat leftovers, grow a garden, learn to can foods, learn to sew, barter, pay cash. Teach them to think before they toss something out. Ask them to if they can find a way to update it, repair it, turn it into something else they can sell or trade just as others before us have had to do. Learn to eat leftovers, grow a garden, recycle and reuse. You can grow food in a hanging planter or dish or pan. It doesn't take much space for some plants (i.e lettuce, radishes). Learn which ones.
I've been through tough times before and learned I can survive them. So can you. Take it day by day and remember nothing lasts forever
Posted: November 29, 2008 10:19AM EST thefinalhorseman says:
look folks.......both sides have been doing this since pre-world war one. you could probably go back to pre civil war...no sense cutting each other's throats here...do something positive and get rid of all the d**n lawyer-politicians. every one of them is on the take...every one of them has lobbyists in their pockets...and just look at how paulson and bernanke wiggled off the hook by having congress agree to not holding them culpable...as far as im concerned we should play salem witch hunt with the whole bunch.

this will never end until we are all slaves...so live with it or dont...this has not been america since 1913. if you dont believe me, read thomas jefferson
Posted: November 29, 2008 8:58AM EST FAITHCARR says:
When GW took office, we had a 5/3 house, stock options, 401K, paid for vehicles. Then I lost my job to corporate greed, and all our savings went bye bye just trying to keep what we had. Then he lost his job to India. Then we lost the house. Then he was laid off because of government tax cuts.

Along with all of this we lost our health insurance.

Oh yeah, sure, it was all Clintons fault. Then it was the 2006 Dems fault, now it's going to be Obama's fault.

Have the republicans NEVER been in charge of ANYTHING, ever?

To read these comments one would think the country was some socialist bastion of democratic rule. Rather than a completely corrupt corporatacracy. OH please!

I used to be "middle class" now I'm gardening for food not flowers. Keeping chickens for eggs and leaving my old car in the yard of my 30 year old mobile home.

Thanks, greedy, selfish, "American" aristocrats. Hope you enjoy to million dollar homes, and your $500 bottles of wine. I'll think of you every time I harvest a cabbage from my winter garden.

Perhaps some day soon, your gated communities will become your prisons
Posted: November 29, 2008 7:09AM EST TISTE47 says:
if you watch congress on c-span you seen this coming with all the fan/fred testimony since bush w was warning since 2002. then you could have prepared. also i could see it just by watching who and how eople were getting credit--some going bankrupt and having another house in less than 2 years.
then there is the war for oil lie. we certainly have got any of it. oh that might be because when iraq requested service from our top few oil companies dem congress (2006 dem win) held it up in congress so long that iraq finally went elsewhwere to get help producing. way to go dems now we can just totally fund the war. maybe we actually thought that if we helped democratize parts of the mideast (muslim) world--they could put up the fight on jihadist and we wouldn't have to have it ongoing with our military--you know how many 911 do we need to see the threat
Posted: November 29, 2008 12:05AM EST dveronic says:
No the Republicans were not completely responsible for this fiscal mess, but a stupid occupation of another country will drain your national bank account in time. Doesn't anybody study history these days, GWB? Weren't the British there in the 20's? There's enough blame to go around, but we won't get ourselves out tearing each other down. God help, Barack. He's got a lot of work to do. Ever seen pictures of Lincoln before and after the Civil War? The same thing will happen to Barack
Posted: November 28, 2008 10:46PM EST boboh7 says:
BTW: Even most bankers who run our economy do not understand the larger effects and function of their niche actions in the overall system. You (and they) can easily learn all about our economy by reading a recent book titled "Web of Debt" by Ellen Hodgson Brown, J. D. The book is quite readable without requiring a PhD in economics
Posted: November 28, 2008 10:37PM EST boboh7 says:
Our present mess has greatly accelerated beginning with Reagan and continuing ever since (including in Clinton's terms. W has been by far the worst of all. Right now our interest on the national debt is nearly more t5han taxpayers can pay. When that happens our currency will devaluate as has happened in other countries in the past. For instance, I have postage stamps in my collection fr0m Germany in their post-WWI devaluation which were to mail a letter - and they cost 10,000,000 marks each - a mark had been worth about 25 cents. Your money in cash will also devaluate the same as stocks and bonds. It's like runaway inflation: before you can cash your paycheck it becomes almost worthless
Posted: November 28, 2008 10:29PM EST FlowReedaFranko says:
RedKing that was hyterical although it took me 5 minutes to get it!!
Posted: November 28, 2008 10:05PM EST jmppl2e says:
Moved to 90% cash back when the democrats took control of congress in 2006. Moved the last 10% to cash 3 weeks before the housing meltdown. I am making 5%+ in interest and sleeping well at night. B. Frak and the democrats are the blame! You should have seen it coming. No income and you can buy a house. Give me a break. No drilling for oil and what do you get, higher gas prices. Now we have this little problem! I will never let the democrats take control of my money (401K) and when obama gets in watch gas go back up. He want to bankrupt the coal industry and stop off shore drilling. Watch your wallets then
Posted: November 28, 2008 9:41PM EST redking says:
I don't think Bill Clinton consulted with anyone before his oval office BJ. What government official would be in charge of that?