The economy grew for a second consecutive quarter at a rate of 5.7% in the last three months of 2009.  Most of it however was fueled by slower reduction in inventory and increase in equipment and software purchases. That's a good thing for economic growth. The boost in GDP was also partly from an uptick in consumer spending which grew at an annual rate of 2% in the fourth quarter, compared to 2.8% in the third quarter (mostly from the Cash for Clunker program.)

 

This unfortunately, does not signal an improved employment rate in the near future as employers will more than likely increase hours for the existing workforce than hire additional employees.

 

According to Reuters / University of Michigan, consumer sentiment index rose to 74.4 in January, a considerable rise from 56.3 last February indicating improved confidence among households. In spite of that, the jitters continued as global economic news emerged, such as the tightening of credit in China, financial woes in Greece, Spain and Portugal, not to mention the building populist tension in Washington.

These news managed to cloud over the good news in earnings reports as three out of every four companies (Boeing, Ford, Netflix, etc.) reported earnings that beat analysts' estimates. And these profits were not merely from cutting jobs and reducing costs but from increase in sales.

 

The stock market ended the first month of the new decade with losses across the board.  Dow fell by 3.5%, ending a series of six continuous monthly gains. S&P 500 was down by 3.7% and the NASDAQ (the big winner of 2009) fell by 5.4%. 

 

If one were to go by the common belief that January usually sets the tone for stock market performance for the rest of the year, we would be looking at this trend to continue. However, 2009 was an exception with January ending in the red but the rest of the year turning around in quite a surprising manner. Living in the age of exceptions, would it be at all surprising if things turned out quite differently the rest of the year? It remains to be seen. In the meantime, we're watching the markets closely and with cautious optimism.  

 

Previously, individuals with a modified adjusted gross income of more than $100,000 could not convert their IRAs into a Roth IRA.  Starting in 2010, that is being changed due to the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).  The highlights are:

 ·       The $100,000 modified adjusted gross income limitation has been eliminated. Hence, higher-income earners can now convert their IRAs into Roth IRAs.

·       Investors who are married and file separately, who could not convert at all, will also be allowed to make conversions.

·       For 2010 only, investors can defer taxes due on the conversion and spread the payments equally over tax years 2011 and 2012.

 

The conversion can result in a significant tax bill but with potentially tax-free income in later years. In addition, Roth IRAs do not have Required Minimum Distribution requirements unlike IRAs, 401(k)s and other tax-deferred retirement accounts.  There could however be penalties on distributions if the minimum holding period requirement is not met after each conversion, in addition to the minimum age requirements. Like all financial decisions, the pros and cons need to be analyzed based on your specific financial situation.  Please consult your tax advisor to determine if such a conversion is a viable option for you.