Reader Mailbag: Computer Failure

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. When should we refinance?
2. What is rich?
3. Is debt snowballing still valid?
4. Precious metals investing
5. Retiring rapidly
6. Roth IRA ineligibility
7. Uneven estates
8. Where would I live?
9. Is kitchen renovation needed?
10. Next president?

My desktop computer seems to finally be going through its death throes, which means that I’m spending a lot of time (a) working on my laptop (which isn’t the most optimal place for me to work), (b) looking for a replacement desktop machine or at least some parts for this one, and (c) moving data completely off the failing computer.

I’m pretty sure it’s a faulty power supply that caused some damage elsewhere within the machine, if you’re curious.

Q1: When should we refinance?
We bought our first home in August of ’09. We currently owe $120K at 5.25% interest, 30 year fixed mortgage. I’ve been seeing interest rates as low as 4.5%, and I am wondering if we should look into refinancing while the rates are so low. I don’t know if it matters, but we did get the $8,000 first-time home buyers tax credit, and if we sell in the first few years, we have to pay part of that back — is refinancing considered selling, since you are basically paying off the one mortgage and getting a new one?

– Julie

The general rule of thumb for refinancing is that you need to have a 1% difference between rates to make it worthwhile. In your case, that rule might not be hard and fast, for two reasons.

First, refinancing is pretty cheap right now. The up-front costs of refinancing are incredibly low – you can likely find refinancing for $1,000 or less.

Second, you’ve just started on your mortgage, which means that the vast majority of your interest is yet to come. This swings the balances more in the direction of refinancing.

You really need to do two things. First, shop around and find the best deal you can. Next, use a refinancing calculator like this one to figure out whether or not it adds up for your specific situation.

Q2: What is rich?
I live in a country located in Eastern Europe. The minimum monthly wage is 120euro, the average wage perhaps 500euro.

I have been thinking a lot about money and personal finance – mostly because of the money trouble I was recently in. All my life I always thought we were poor, but perhaps we weren’t. Maybe we were middle-class. However, I have the impression we must have been poor probably because I constantly heard “We don’t have the money”, “Money’s tight” or “We can’t afford it”. I heard that A LOT.

I never had fancy clothes, telephones, computers or the like. We never had fancy cars or a fancy house with new furniture or equipment. I didn’t have a lot of pocket money. I lived with little money during my student years. Mom and Dad also lived with little money when they attended Unis in their late 40’s. I could never spend as much as I wanted. Mom and Dad always owned money to someone. I remember going on vacation a total of three times in my life.

However, thinking back, we never faced the possibility of starving or being homeless. We were never cut off of power or water, we were never sued for money. Me going to Uni was never a question. I had a computer and also a piano. I didn’t have to work summers after school or Uni. I could take on the risk with starting my own business (which I did) and its cost of 2500euro. We are now having gas installed, the total cost for which was 1600euro so far.

So maybe we never were really poor. But then what happened to the money earned? Was it well-managed or not? I can’t figure it out. I don’t remember my parents buying anything expensive, I remember them always oweing money to someome, I remember living tight. Did they not make enough? Hm, from what I remember they did make quite enough. But I’d never seen them talk about money with me present, nore make a budget or save. They didn’t even talk about saving or making a budget, let alone writing it down. They never talked about long-term financial goals. They did, however, use the word “loan” and “owe” quite often.

Too bad I was too young to remember what they used to make and spend. I got really curious about it – did my parents manage money well or bad? I think “bad” is a safer bet.

Did I mention the house we live in is huge? Over 110 sq.m.! 5 rooms on the second floor, 2 rooms on the ground floor, 1 really big room there as well, basement with three rooms and an attick, a garage with a small semi-opened barn to it, one big open terrace with a tiny (2x2m) sheltered “summer kitchen” and one closed terrace facing the street, plus a front yard (5x5m) and a back yard (4x4m), and a long paved way from the street to the house door, probably 2x20m. The two-story family house was built by my grandfather and my dad got it as heritage, he was raised there. Point being, my parents didn’t pay for it.

So what do you think? Were we rich or poor? Did my parents manage their money well?
– Raya

My perspective on “rich” and “poor” is a little different. Were your parents happy? Did they fight a lot? Were they stressed out by money or work or other stresses? Did you have a happy childhood?

If those things are all true, then they were rich. What else, really, does life have to offer than joy and low stress? You can have all the material stuff in the world – a big home, a shiny car – but if you spend all of your time stressed out and working, is it really worth anything?

I think that the usual way of looking at “rich” and “poor” – in terms of one’s possessions – is just a way of keeping score against others at the expense of your own internal happiness.

Q3: Is debt snowballing still valid?
Do you still recommend doing the interest rate snow ball if it will take several years to pay of your highest interest debt? We’ve been making equal extra payments on our 3 debts that we want to pay off, one is a small student loan of $7,000 at 4.125%, a large student loan of $30,000 at 4.75%, and a pesky second mortgage of $50,000 at 9.125%. If we focus all of our extra repayment power on the mortgage, it will still take at least 3-4 years if not more for us to finish it, but if i put it towards that small student loan, we could pay it off pretty quick, though i guess it doesn’t really help us much interest wise. I do think it would be fabulous to not have that second, esp considering the market right now and our underwater status, but 3-4 years seems so far away… I’m not sure what to do. I fear putting all of my eggs in the mortgage basket, but we do have every intention of keeping our house and maybe i would feel better if we weren’t carrying so much debt on it.

– Michelle

Absolutely. Regardless of how long it takes, you’ve still got to pay off that debt.

If I were you, though, I wouldn’t do a straigt-up debt snowball. I would focus all of my extra payments on that second mortgage because of the very high interest rate.

Don’t worry about it being far off. Instead, focus on looking at the forward progress you’re making on each statement on that mortgage. Notice how the interest you’re paying is steadily going down and the principal you’re paying is steadily going up. That’s progress you can see. Compare the statements to the previous ones to see the progress. That will help keep you motivated.

Q4: Precious metals investing
Do you invest in precious metals?

My brother monitors the ups and downs of gold and silver value on a daily basis. It is his private passion. Through this obsession he has been urging me to get involved and notifies me when it’s a good time to buy. Is this worth my time and money? Would it really count as diversifying my portfolio?
– Linda

I don’t invest in precious metals. They’re too volatile and speculative to have much interest for me, and they’re currently riding a bubble fueled by people who are quite willing to advertise on behalf of gold investments on talk radio stations.

Gold and silver are riding high at the moment, but at some point, those buyers will become sellers. Remember, gold isn’t like a stock or a bond – it doesn’t return dividends or payments to you for merely holding it. At some point, buyers will want a return on investment and they will sell.

If you want to include precious metals as part of your portfolio, make sure it’s a small part and make sure your whole portfolio is well-diversified.

Q5: Retiring rapidly
I am obsessed with retiring early. However, I havent really taken advantage of all I needed to do. I’ve done the matching of a 401K but that’s it. I must say for 38 I dont feel I am where I need to be for retirement.

I read your article on how to retire early by 40. Wish I had that information at 20. My question is….I am 39 if I did the 20% of my gross payday how long would I have to work to achieve earlier retirement? It would seem being older and starting the program I wouldnt have to work 20 years doing it like a 20 year old.
– Chris

If you’re 39 years old and you start saving 20% of your gross income for retirement, you’ll likely be ready to retire at your actual retirement age – somewhere around 60 – with a very healthy retirement plan for you.

If you choose to save less, you’ll have to keep working much later in life and likely retire with less in the bank.

The truth of the matter is that the earlier you start saving for retirement, the easier it will be. Once you reach the age of forty, it becomes much, much harder to make it to a “typical” retirement age with adequate retirement savings.

Q6: Roth IRA ineligibility
I am a biologist and unfortunately don’t have a ‘real’ job. I am a government contractor (specifically, an ORISE fellow). This means that I work at a US Army base and do everything that the Federal employees do, except I don’t have benefits. I don’t have a W-2; I have a 1099. I pay taxes quarterly; they are not taken out of my paycheck.

I would really like to set up a Roth IRA since I don’t have any company retirement benefits, but I have heard that I may not be eligible for one due to my science fellowship. The CPA firm that does my taxes told me this. It’s not considered ‘income’ but a fellowship, which means no one knows the tax rules regarding my status.

So I was wondering if I set up a Roth IRA, am I allowed to have it? I really don’t want to sic the IRS on myself, but I would like to start saving for retirement while I am still in my 20s. Do you have any advice? Also, is the Vanguard Targeted Retirement Funds the best option for those of us who have no idea what we are doing?
– Cammie

I can’t see any reason why you would be ineligible for a Roth IRA unless your income is very, very high. It may be that you’re ineligible for the typical government retirement plan (TSP) and people are confusing that for a normal Roth IRA.

A Vanguard Target Retirement fund is a very good option for retirement. It’s quite literally the investment I’m using for my own retirement and I wouldn’t have my money in there if I didn’t believe in it.

If I were you, I’d sign up for that Roth IRA today and try to get some 2010 contributions in place before the year ends.

Q7: Uneven estates
Five years ago, as a single mom of a young son, I married a man with 6 children of his own. We decided to have one child together, and a few months ago we had a son. Recently my parents, who are millionaires and who are currently doing their own estate planning, expressed a desire to place the money they intend to leave to me in a trust, and structure it in such a way that when I die the money in the trust will then go to my two biological sons. (Fearing, I believe, that if I died and my husband later remarried, their assets would never pass to their grandchildren.) When my husband learned of this plan, he told me that he disapproves of the idea of some of our children inheriting a great deal more than others. He wants to modify our own estate plan in response, so that my son and our son together will inherit less from us as a result of them anticipating a substantial windfall from their grandparents. I feel, however, that trying to do this is unfair to my sons. What my parents choose to do with their money is their own affair; I want my sons to have a share of the fruits of MY labor if I am in a position to leave them an inheritance someday (God willing). What’s your take on all this? If you were in our shoes would you try to even things out?

– Katie

I am intimately familiar with a situation not too much unlike this one and I can certanly say that it’s uncomfortable.

First of all, you have to respect that your parents are going to do with their money what they want to do with their money. It’s their decision. I think you have to let that sleeping dog lie.

Now, as for your own estate, my suggestion is simple. If you disagree on the principle, divide the estate in half. With one half of it (your half), split it evenly among all eight children. With the other half, divide it evenly among the children not receiving the large trust (the other six).

This would essentially mean that your estate has fourteen “shares.” His six children would each get two “shares” and the other two would each get one “share.”

That’s how I would handle this unless you want a great deal of conflict.

Q8: Where would I live?
If you could live anywhere in the world, where would you want to live and why? Please don’t include family relationships in your answer.

– Ellen

I would live in a coastal area with a warmer climate. It wouldn’t have to be on the coast, just near it. The area would have to have a good school system in place or access to good reasonably-priced private schools. Southern Oregon or northern California would be possibilities.

Honestly, I haven’t researched such a question in depth. Much of our criteria for where to live involves being near family and friends. Home is where the heart is and for us, our heart is with the people around us.

If we were to leave Iowa, we would probably live in Washington state, near the coast, somewhere south of Tacoma. This would allow us to be near a significant number of people we care a lot about, perhaps the greatest density outside of the upper Midwest.

Q9: Is kitchen renovation needed?
I need some perspective: should I renovate my kitchen?
My family has lived off of the 10-10-80 rule years (give 10, save 10, live on 80).
We are a one income family, and my wife home schools our kids, so they spend the better part of most days in the home.
All my kids love cooking. And we entertain a lot. We really like our house. We love our neighborhood. We don’t think it’s wise for us to move.

But our kitchen is tiny! We make it work, but it’s not fun. We’ll need to replace our appliances in the coming year. The question is, should we renovate? The only way to grow our kitchen is to move a load bearing wall, which means I can’t do it without professional help. In sum, the renovation to get the kitchen of my wife’s dreams will cost roughly $30,000.

I could totally exhaust our savings, and almost cover it.
Or I could take out a home equity loan, and make a couple changes to our budget, and cover the additional cost of about $350 per month.

A kitchen renovation will probably not increase the value of our home to offset the cost. So this it really about living in the house. This would make my wife’s life much easier, and it would help with entertaining.

But here’s the final piece of the puzzle: I am a pastor, actually a church planter. We started a new church three years ago here. The work is going well and the church is growing. But I live with a sense that the whole thing could fall apart. I think it’s that fear that keeps me from making the investment in this renovation.

Can you offer me some insight or perspective? Can you tell me, renovate that kitchen! Or tell me I’m a fool, don’t renovate, and make it work!
– George

I would keep building my savings until I could cover the entire expense without depleting my emergency fund. You’re going to want an emergency fund on hand in case of the unexpected.

Once you have that savings in hand, go for it. If a kitchen remodel is something you deeply personally value, then it’s something you should do.

Remember that the kitchen remodel will add some value to your home, so if things do collapse at a later date, you will have an increased home equity.

Q10: Next president?
Who do you think will be the next president of the United States in 2012?

– Shaun

Like any midterm election, it depends entirely on the economy. If the economy is rebounding in the summer and fall of 2012, Obama will win re-election. If the economy is stagnant, he won’t.

Almost every single time a president has faced a midterm election since World War II, the economy has decided things. Bush won in 2004 on the back of a rebounding economy. Clinton won in 1996 during a rebounding economy. Bush lost in 1992 during economic troubles. Reagan won in 1984 on the back of a rebounding economy. Carter lost in 1980 due to economic troubles. Ford lost in 1976 due to economic troubles (and the shadow of Nixon).

I think you have to go back to 1972 to find a midterm election that wasn’t just about the economy, and then you have to go back to one of the most inept modern political campaigns ever, that of George McGovern. Who would have thought that naming a person who underwent electro-shock therapy as your running mate would undermine your credibility?

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. Michelle says:

    Q6 – He can only contribute to a Roth IRA up to $5K or his total income from wages, whichever is lower – meaning if he made $3K he could only contribute $3K, not $5K.

    So, if his fellowship is not considered wages, then his CPA is right, he probably cannot do a Roth at this time unless he takes a second job with actual wages and allocates the income to the Roth.

  2. Adam P says:

    “Were your parents happy? Did they fight a lot? Were they stressed out by money or work or other stresses? Did you have a happy childhood?

    If those things are all true, then they were rich.”

    So if it was true that the writer’s parents fought a lot, they were rich?

    Is your writing getting sloppier lately, or just me?

  3. Courtney20 says:

    The answer to Q6 is *completely* wrong (and Michelle beat me to the punch). Fellowship income is considered a stipend, NOT wages. It is not taxed for social security and medicare, and no income taxes are withheld on it (though it is certainly taxable to the recipient). If Cammie has no other source of income and is not married (a spouse’s wages count for Roth eligibility, which is how I was able to contribute to mine while still in grad school) then she cannot contribute to a Roth IRA. It’s highly unfair and ought to be changed, but thems the rules.

  4. bethany says:

    Trent, I love your blog and hate to be a pedant, but 2012 will be a second term election. 2010 was a midterm election.

  5. Johanna says:

    Q7: First of all, Trent’s suggested solution is exactly what Katie’s husband wants (giving less – not nothing – to Katie’s two children and more to the other six children) and Katie doesn’t want. So basically, Trent is saying that Katie needs to give in to her husband, and if she doesn’t, any resulting conflict is all her fault.

    Second, if the idea of Trent’s suggestion is that Katie and Mr. Katie each get half of the estate to allocate as they please, why is Katie obligated to give most of her half to the six children that aren’t even hers? That doesn’t seem right either.

    Third, if there is a God and if God is truly willing, none of these children will be inheriting anything until they’re well into middle age or beyond. The best time to share the fruits of your labor with your children is while you’re still alive and they’re still young. Help them acquire the skills they need to be capable, independent adults, and their monetary inheritance won’t matter so much.

  6. Courtney20 says:

    It also seems like there’s some deep underlying problems in Q7’s family if her millionaire parents don’t consider their step-grandchildren family. I mean, I can understand the whole trust thing to prevent their biological grandchildren from being entirely left out – but why not set up a trust for ALL the grandkids?

  7. Interested Reader says:

    @6 maybe they aren’t close to the step grandchildren and don’t know them very well and therefore don’t want to leave the money. Q7 never indicates how much time the step children spend with her and her husband or how often they interact with the grandparents.

  8. Johanna says:

    Q2: Very, very few people have so much money that they can afford absolutely everything they want. Most people have to say things like “We don’t have the money” and “We can’t afford it” at least once in a while – to themselves, to their friends, or to their children. The fact that your parents said those things doesn’t mean they were poor.

    I think this is why personal finance blogs and communities attract people from such a wide range of walks of life: because the core ideas – setting priorities, achieving balance with your money – apply to almost everybody.

    It sounds to me like you’ve discovered that “rich” and “poor” are relative. Compared to some people, you’re rich, and compared to others, you’re poor. Sometimes there’s not much more that you can say than that.

  9. valleycat1 says:

    Q9 – 3 considerations in the decision: As a church planter who’s been at the current church 3 years, is there a likelihood you’ll be moving on, possibly to another town, in the next several years? Will the kitchen re-do be in line with other houses in the neighborhood and current buyers’ expectations for a house in this price range? Is the $30K expense mostly due to the construction, or are you pricing in top of the line fixtures/appliances? We just re-did our kitchen but purposely scaled down from our “dream” to realistic less expensive options because ours is not a top of the line house in a top of the line neighborhood – and we expect to be in it at least 10 more years & will get our enjoyment out of it – & we are very happy with the results, having stayed well within our budget.

  10. Beth says:

    @ Joannna: Kudos on that last paragraph!

    I suspect we’re only seeing part of the picture here. I mean, what about Mr. Katie’s parents? What about the biological dad of her first child and his parents? What about the six children’s mother and her parents? Will all children be penalized accordingly? This is a very slippery slope!

  11. Beth says:

    @Q2. I just finished reading Dicken’s A Christmas Carol, oddly enough :)

    For me, being rich and “living the good life” has little to do with having lots of money. I feel rich because I have people I love and though I’m not a high earner by any stretch of the imagination, I have enough to help others.

  12. Kevin says:

    I think the outcome of the 2012 presidential election will hinge entirely on whether or not Sarah Palin gets the Republican nomination. If she does, then Obama will win re-election handily. If it instead goes to a Mitt Romney or someone with broader appeal, more moderate views, and the ability to not constantly sound like a complete idiot, then Obama will have a real fight on his hands.

  13. Wes says:

    My wife and I are stuck in the middle of a situation similar to Q7. Her grandparents, to say the least, do not have good family relationships, so they have decided to split their estate between two of several grandchildren, my wife being one of the two. Understandably, my MIL wants to adjust their will to make things more equitable for my BIL. That’s fine with us because, like Johanna said, we were raised to be capable adults and we could care less how much money anyone leaves us.

    The highlight of Trent’s response is that you can’t really worry about how anyone chooses to split up their own money. No one is entitled to receive it, but the parents are entitled to do whatever they want with it. I think it would be just as fair of them to leave it all to the cat as it would be to split it up among the grandkids.

    I certainly don’t think there’s some “deep underlying problems” (from #6) evidenced by the grandparents’ decision not to include step-grandchildren in their will. Personally, though, I believe there are deep underlying problems with anyone who believes they, or their children, are entitled to anyone else’s money besides their own.

  14. Daria says:

    Kudos to Beth and Joanna,

    They brought up exactly the same points I was going to bring up. My older sister is my step sister. She was the only grand-daughter on her mothers side and she is her mother’s only child. She inherits everything on her mothers side and her mother’s family handled their finances well. On my parents side, she will get 1/5 of their estate (if there’s anything)according to their will. I am not aware that there is any jealousy among us siblings that my sister has been and will be the beneficiary of her mother’s family’s good fortune. I give that credit to my parents who have loved all of us and made sure that each of us siblings get along and enjoy each others company. Right now, even before any of us inherit anything, there is a vast discrepancy in income and assets because it has been according to our abilities and interests and work ethic. If there was going to be any jealousy or envy, I believe it would have already started.

  15. Mary says:

    What if Katie (Q7)and her husband purchased life insurance policies on him benefiting his children? The money would pass outside of the estate directly to his kids, just like her kids’ inheritance, and the actual estate could be split evenly when the remaining parent passes away. In this way, they have tried to even things up (his concern) without cutting anybody out (her concern).

  16. Kevin says:

    Poppycock! The children have a right to their parents’ money, and if the parents don’t like it, that’s too bad – a judge will throw out their will and divide everything up equally anyway.

    It’s already happened – Google “William Werbenuk.” He had a clear and legal will that left everything to his son and nothing to his daughter. The daughter took the estate to court, and the judge completely disregarded the will, and instead divided the estate up 50/50.

    Also, when you die, the government (i.e., the taxpayers) have first dibs on your estate. If they decide you had too much money, they’ll take a big chunk of it (the precise percentage seems to change every year, depending on the political winds and the degree of the socialist bent of whoever happens to be in power at the time). It’s called an “estate tax.”

    The precedent has been set. When you die, your wishes don’t matter. The vultures will descend and loot your estate while your corpse is still warm. Welcome to socialism, folks. Not quite what you had in mind, is it? Too late to turn back now.

  17. Wes says:

    Interesting thoughts, Kevin. Sensationalism aside, it is true that the government has “first dibs” on the estate, but this reality does not necessarily discredit the normative belief that children don’t have an entitlement to an inheritance. As it pertains to this discussion, I think it’s safe to say that we’re actually concerned with the ethical implications of divvying up what’s left after taxation.

    Also, I would like to add that Werbenuk v. Werbenuk Estate was heard in British Columbia, so it would only be precedent in that jurisdiction (I assume; I don’t know much about Canadian law). Further, precedent can be overruled. And the specific facts of that case do not lend itself to be a legal precedent for disregarding all wills in all circumstances.

  18. valleycat1 says:

    Q8 – Since Trent answered precisely as not requested, I’ll give my 2 cents – disregarding any family, job or money limitations, I’d choose to live in a high rise luxury apartment in an interesting urban area – on my short dream list are San Diego CA, Boise ID, NY NY, and Vancouver (Canada, not WA). I’ve lived the rural life & small town live & small city life but am more of a city girl myself.

  19. jim says:

    “working on my laptop (which isn’t the most optimal place for me to work”

    You should be able to hook your desktop monitor up to a vga port on your laptop and use your regular keyboard and mouse as well. That would be better ergonomically.

  20. Johanna says:

    @valleycat1: Interesting answer. Would you mind elaborating on what you like about Boise? I’m surprised to see it on the same short list as NYC. But I’ve never been there.

    My answer: I’m a city girl too. I’ve lived in both a big city (with an endless variety of things going on) and a medium-sized but compact city (where absolutely everything is within walking distance), and I don’t know which I prefer. Where I currently live (sprawly suburbs of a medium-sized city) sort of combines the worst of both worlds. But this is where my job is. So it goes.

  21. Scott says:

    Re: Question 10, 2012 is not a midterm election, it is the end of the term.

    Midterm denotes years like 2010, when the president is in the middle of his term.

  22. jim says:

    Reading Johanna’s comment I now see her point and I don’t like Trents idea of splitting the estate in Q7 as much. I do think Katie’s husband is wrong personally.

  23. jim says:

    Kevin said: ” It’s called an “estate tax.” The precedent has been set. When you die, your wishes don’t matter. The vultures will descend and loot your estate while your corpse is still warm. Welcome to socialism, folks.”

    The first estate tax was passed in 1797. The precedent was set by our nations founding fathers. We’ve had the current estate tax system for over 90 years. For the past 70 years the tax rate has been going down. In the 1940’s the top estate tax rate was 77%. If practiced properly, socialism doesn’t cut tax rates on rich people in half over 70 years.

  24. David says:

    A word to the wise: if you occasionally use “optimal” as a synonym for “best”, you may pass for a stylist. But if you use “most optimal”, which means “most best”, you will pass only for a clown.

  25. Michelle says:

    Trent – the President’s term in 4 years. The election that occurs in the middle of that term (necessary because all House terms are 2 years, and 1/3 of the Senate is up for election every 2 years) is called a mid-term election. Because it’s in the MIDdle of the President’s TERM. When the President is up for re-election, it’s just a re-election.

    Maybe I’m being nit-picky (like my issue with calling a Representatives “Congressman”. He or she isn’t a “Congressman”, because a “Congressman” would have to be a member of both house of the Congress simultaneously), but it really makes you sound bad when you use terms inappropriately.

  26. jim says:

    Michelle, They call themselves Congressman or Congresswoman or Congressperson. The words are used routinely on House.gov website.

  27. Interested Reader says:

    I think it’s really bad that a self proclaimed political junkie doesn’t know the difference between mid term and re elections.

  28. Michelle says:

    @Jim – I don’t care if they call themselves Care Bears, it’s not correct.

  29. Wes says:

    Michelle,

    M-W: Congressman: a member of congress; especially: a member of the United States House of Representatives.

  30. valleycat1 says:

    #20 Johanna – We are looking at eventually relocating to Boise (though not to a downtown luxury apartment). We don’t have any family or friends in that immediate area, but it came out on the short list when we were checking out the features we want to live near. We’ve gone there a few times & recly spent a week there mostly in downtown. It’s easy to get around, very clean, lots of restaurants with reasonable prices, & a wide variety of events going on. They have a huge extensive riverwalk through town with a couple of big municipal parks with museums & a zoo, + the university’s cultural & educational offerings. Any more & their chamber of commerce will hire me!

  31. Sheila says:

    Bring your snow shovel, valleycat1. We had 8″ on Dec. 1 and it’s still hanging around. Unusual, actually. Boise was never a place I wanted to end up, but I’ve grown fond of it in some respects, politics notwithstanding. Don’t forget the great botanical garden with outdoor concerts and the Shakespeare festival.

  32. Amy B. says:

    I really like the idea of #15 (Mary) to the question of unequal estates (purchasing life insurance and then divvying up the money accordingly. It is a way to create the equity the parents want. I would further recommend a trust be the beneficiary, and that way the trustee can carry out the parents’ wishes that grandparent money + life insurance is divided equally. Plus, it is flexible enough that if circumstances change, it can be adapted.

    Further, the grandparents don’t even need to know that these arrangements have been made, nor do the kids. Parents then rest easy knowing they’ve averted a family conflict.

  33. Sara says:

    Q6: If you are eligible to contribute to an IRA, you don’t have to sign up by the end of the year. You actually have until April 15 to make contributions for the previous year (in other words, you can contribute to a 2010 IRA until April 15, 2011).

    Even if you are not eligible for an IRA, don’t let that stop you from saving for retirement. You can still invest in a target date retirement fund, but you will have to pay taxes on earnings.

  34. wren says:

    Q2. I am seriously hoping that the pitfalls of writing in a second language made that question sound more shallow than intended.

    Do you have enough to eat? Did you ever wonder where you would sleep and if you would be safe from the elements while sleeping? Were you appropriately clothed for the season and those clothes clean, decent and fit you? If you got sick, was there ever a quesiton of not seeking medical care because of money? If you need supplies for school, did you have them? Did you ever have utilities cut off because there was not money to pay the bills?

    If you answer “yes’ to all those questions, you were not poor. You may not have had everything you wanted — and who does? — but that is not poverty.

    Also, what does it matter if your family was rich or poor now? Does it make you less o a person if they were poor or a better person if they were rich? No, it does not.

  35. marta says:

    Wren, I get your point, but you are making the same mistake as Trent — the one Adam P pointed out in comment # 2. ;)

    The way it reads, if she did ever had utilities cut off or if she ever wondered where she would sleep, she wasn’t poor at all.

    Nitpicking aside, I have to agree it doesn’t matter that much now.

  36. deRuiter says:

    I’d sign up for that Roth IRA today and try to get some 2010 contributions in place before the year ends.” And get yourself in trouble with the IRS! Trent, you’ve got to know tax law before you give tax advice! Cammie, get a part time job, and you can contrubute up to $4,000. per year to a ROTH. This would be a fine use of a coupole of nights a week, or the weekend, and it would start to build your retirment savings tax free when you are young, so you have the power of compounding go to work for you early.

  37. Tracy W says:

    Is it really a deep, underlying problem that the grandparents don’t consider the stepchildren the same as their own grandchildren? They presumably haven’t known their stepgrandchildren from little babies, and it’s a long-standing human behavioural pattern that people give extra support to their biological relatives. Not a rule that everyone sticks to all the time, I can think of plenty of exceptions myself, but on the other hand, it’s common enough that if it’s a sign of a deep, underlying problem to prefer your biological kin then it’s a deep underlying problem with humanity in general.

  38. Jeroen says:

    Q4: I -personally – think that precious metals are a bubble at the moment. It would have been great if you bought 5 years ago. Now? not so much. Unless you believe in some sort of apocalyptical crash of the US economy, but then you should invest in canned food and bullets. ;)

    @Kevin: It’s really getting on my nerves when people keep using ‘socialism’ for ‘anything the government does, that I don’t like’. Get this: as long as they are not seizing the methods of production, it’s not socialism. It might be authoritarian, totaliltarian or abusive, but it’s not socialism (which has no monopoly on authoritarianism, totaliltarianism or abuses of power).

    For the record: I’m not a socialist, but words mean stuff.

  39. sara says:

    Q2: I can very much relate to why this person wants to know, years afterwards, if their parents where really as poor as they said. I have been asking myself that for some time, not to bring my parents down but more to get a perspective on my past.
    My parents where always complaining about how poor we where, and it’s only since I make my own money that I have been able to put their behaviour into perspective.
    No, they where not poor as in one meal away from the poorhouse-poor; they where lower middle-class, in a Northern European country too (so they really had nothing to complain about). But endemic anxiousness, paranoia, wrong choices and being emigrants didn’t help, and they did lack a sense of security and realism.
    The question I asked myself when I was 16 was: are my parents whining? The question I ask myself now that I am 36 is: how can I stay away from paranoia and wrong choices, and especially, how do I stay realistic about money?

  40. Marle says:

    On the inheritence question, it seems like it makes sense to have both parents divide the inheritance in half and each choose what to do with their half. But how it would end up wouldn’t necessarily be fair or what either person wants. If she were to only have her inheritence go to her biological children, he would be mad because his children would get significantly less. If she has her inheritance go to all the kids but she doesn’t, she’s going to feel miffed that she’s leaving stuff for his kids but he can’t leave anything for hers – including the one that is his as well as hers. There’s no way to divide this up so that she can do what she wants and he can do what he wants. They’re going to have to figure out someway to agree.

  41. Kevin says:

    @Jeroen:

    I appreciate your comment, but one of the definitions of Socialism is “An economic system based on state ownership of capital.” Thus, in discussion the state’s confiscatory treatment of estates (that is, they’re going to take some, and THEN whatever’s left can be distributed according to the deceased’s wishes), I think the term is applicable here.

    But in general, I agree with you that the term is thrown around a little too loosey-goosey these days. I just think it was actually justified in my example.

    Part of the thing that bugs me about the whole estate tax is how much and how frequently it changes. It seems both the exempt amount and the percentage taken can vary wildly from year-to-year. If it was a clear-cut case of what’s “right”, why does it change so drastically? To me, this gives it an appearance of not being a case of fairness at all, but rather a case of how much the government thinks they can get away with.

  42. Interested Reader says:

    Kevin, does that mean you think that income taxes are socialism?

  43. Johanna says:

    @Kevin: You realize, don’t you, that under your interpretation, ALL forms of taxation are “socialism” – since they all involve the state “taking some”?

  44. elderly librarian says:

    I agree with Johanna, if you are comfortable financially, the best time to share your assets with kids may be when they are young adults and need help starting out in this tough economy. We have no control over the ‘estate tax” or any other policy coming in the future from the government. They can’t even make up their minds right now about the tax cuts.

  45. Wes says:

    I also agree that it might be best to share assets with children when they’re younger.

    However, many people will probably still have a chunk of cash to leave their children when they pass, assuming they saved responsibly in preparation for the uncertainties of old age. This might not be the situation for Q7, but parents should balance the benefits of sharing wealth with their young-adult children today against the benefits of being prepared for medical expenses, unusual longevity, and other unknowns of old age for tomorrow.

  46. kristine says:

    Q1: is refinancing considered selling, since you are basically paying off the one mortgage and getting a new one?

    Was this question ever answered?

  47. kristine says:

    To me, poor means worrying about having enough to eat. Not being able to have warm enough clothes when it is cold out, and getting sick from that all the time. Not being able to go to the doctor, or the dentist. Worry that you will continue to have the roof over your head. That is poor. And being “working poor” means working full tine, often working very hard, maybe even 2 jobs, and not making enough to eliminate the above concerns.

    If all those needs are met, you are not poor, but you might not have as high a standard of living as those surrounding you, or that you would like.

  48. Des says:

    RE: #46 & Q1 – No, refinancing is not selling.

  49. jim says:

    Taxation does not equal socialism.

  50. jim says:

    “Part of the thing that bugs me about the whole estate tax is how much and how frequently it changes. It seems both the exempt amount and the percentage taken can vary wildly from year-to-year. If it was a clear-cut case of what’s “right”, why does it change so drastically? To me, this gives it an appearance of not being a case of fairness at all, but rather a case of how much the government thinks they can get away with.”

    The estate tax has been changing year to year because is what Bush & the Republicans did in 2001. They passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (also commonly refered to as the “Bush Tax Cuts” ) so that the estate tax changes phased in over a few years. But the law only changed the rates for 2002 to 2010 and had a ‘sunset’ provision so it didn’t go past that.

    Before 2001 the estate tax rate had not changed at all since 1984. The exemption did nothing but go UP which is what we should reasonably expect it to do over time due to the impact of inflation.

  51. Kevin says:

    Of course income tax doesn’t equate to Socialism. Income tax doesn’t presume ownership of capital, it merely presumes a mandatory contribution of the fruits of labor.

    But the problem with the estate tax is that it presumes that the government has a right to confiscate an arbitrary component of an estate that has already been taxed.

    Say I have a great job, and by the time I die at age 80, I have $5 million in my bank account. Not stocks or bonds, not sheltered in a Roth IRA or anything, just cash in a bank account, that I saved AFTER paying income tax on it. The estate tax will take a portion of it, even though I’ve already paid tax on it.

    The only reason they can get away with this gross injustice is because I’m dead, and not around to complain. It’s patently unfair and a gross perversion of government authority. THE MONEY HAS ALREADY BEEN TAXED! in what universe is it fair to tax it AGAIN?

  52. Johanna says:

    Kevin, I’ve refuted your “but it’s already been taxed” argument at least twice before, in that other thread where we were talking about the estate tax. If you’re not buying my argument, it would be nice if you at least pointed out what you think is wrong with it, instead of just repeating “but it’s already been taxed” with more capital letters and more exclamation points.

    Once again, my argument is this: Pretty much all the money in circulation has “already been taxed,” since it’s all been income to somebody at some point. I earn some money for doing my job, I hire a plumber to come and fix my sink, and I pay her with some of the money I earned. To say that she shouldn’t have to pay income tax on the money because I already paid income tax on the same money would be absurd. The plumber and I are different people, so there’s nothing inherently wrong with taxing the money once when it’s income to me and again when it’s income to her.

    With the estate tax it’s the same. My parents and I are different people, so they pay tax on the money when they earn it, and I pay tax again when I receive it as an inheritance. And if I use some of *that* money to hire a plumber, she *still* has to pay income tax on it. See how it works?

  53. kristine says:

    Johanna,

    Gold star for clarity. An excellent way to explain it!

  54. Interested Reader says:

    Your income already gets taxed multiple times before you are dead.

    My income has been taxed multiple times in ONE DAY! It’s horrible this socialism that’s been around since, um, well before my parents were born.

    One day I got taxed an extra time 4 different times (3 sales tax, 1 gas tax — I was xmas shopping).

  55. AnnJo says:

    @Johanna: “My parents and I are different people, so they pay tax on the money when they earn it, and I pay tax again when I receive it as an inheritance.”

    Technically, as I suspect you know, the estate and gift tax is imposed on the estate and not on the recipient. If the inheritance were taxed as income to the recipient, it would be subject to the recipient’s marginal tax rate and the recipient’s deductions, and it would be difficult to apply rates like the 55% top rate (effective at the level of even relatively small estates)that existed before the Bush tax cuts.

    The estate tax issue is mostly about emotions and demagogy, not revenue. For that segment of the political spectrum that relies on reviling “the rich,” it serves as a great tool to appeal to the envious. But even before the Bush tax cuts, the estate tax generated a negligible percentage of federal revenues (about 1% I think), and probably cost the federal government more than that in lost income and corporate tax revenues due to distortions in economic activity to avoid, evade and minimize it.

    If maximizing tax revenues while minimizing economic distortions were the primary goal of tax policy, politicians on both sides would lose a lot of sound bites, but the government would have enough money and the economy would be a lot stronger.

  56. carmen says:

    Re: Katie’s inheritance dilemna for her children:

    Firstly I understand Katie’s parents decision. At the present time, why would they want to leave money to the other children?

    Given this, I still feel very uncomfortable with anything other than an equal split amongst all the children by the two parents concerned. I would not, under any circumstances, try to adjust this on the basis that two of the children MIGHT receive a large inheritance from Katie’s parents.

    Nothing in life is certain and to plan otherwise in such a sensitive area is illogical and unfair on the children in question, in my opinion.

    Also, there has been no mention of likely inheritance from his side of the family. It would not be unreasonable for Katie’s husbands parents to exclude at least one of their children from their will (Katie’s first son: adjust for that too?)

    Finally, I can see the husband’s point of view that the proposal mentioned is unfair, on some of the children. Is the answer really to try to balance this out (and is that really possible?) by also being unfair, on some of the (other) children? I really don’t think so. All it could do is cause resentment.

  57. carmen says:

    I’ve thought of another way to look at this: Katie and her husband should make their estate decision as if they know nothing of Katie’s parents estate plans.

    It is only because they are aware of what Katie’s parents are planning to do (which could change) that this is an issue.

    Without keeping track on all potential inheritance streams that could ever come our childrens’ way (haha!) and adjust for them periodically, it doesn’t make sense to make decisions on information that changes all the time and is also incomplete (eg old Aunt Agatha decides to leave one of the children $10k because they’re her favorite etc.)

    It’s all so up in the air that I really can only see equality as an option.

  58. jim says:

    My original response has been in moderation for most of a week. SO I’ll repost this bit without the link to the IRS 970 pub doc:

    Q6: The key here is that Cammie is getting a ‘fellowship’ which may not qualify as income.
    Cammie says:
    “The CPA firm that does my taxes told me this. It’s not considered ‘income’ but a fellowship”

    That seems straight forward the CPA told you that you’re not eligible for a Roth IRA.

    IRS publication 970 says:

    “You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship is compensation ONLY if it is shown in box 1 of your Form W-2, Wage and Tax Statement.” (I put only in all caps for emphasis)

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