Reader Mailbag: Parent-Teacher Conferences
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. Medicare, Social Security, and 401(k)s
2. Water cooler and cable TV
3. Helping people in need
4. Handling an underwater house
5. Bad babysitter
6. Retirement savings troubles
7. Cloth diapering for big kids
8. How to cut own hair?
9. Work from home tactics
10. Choosing where to put Roth
When I was a kid, I dreaded parent-teacher conferences. I always was sure that my teachers were going to say something terrible about me to my parents, whether or not there was any reason for it or not.
Yesterday, as I was talking to my son about his upcoming conferences, he expressed the same fear. I told him he would be fine – after all, he’s doing everything above grade level and is almost disarmingly polite.
Still, I couldn’t help but see a reflection of myself in him with that little worry.
Q1: Medicare, Social Security, and 401(k)s
My primary employer offers a 401(k), but offers no matching and the company though which they have the 401k charges relatively high fees. In the past I have opted for a Roth IRA as my primary retirement investment option. I would like to diversify a bit and have been looking at the individual 401k option. I have my Roth IRA through vanguard and have been looking at the individual 401k plan as well. My self-employment income is as an independent contractor and is only around $10,000-$15,000 a year. Apart from 401k employer matching and the maintenance fee of the firm is there any tax deferred saving in an individual 401k vs. a traditional 401k all things being equal? Why this question is important: with self- employed income one pays double social security and double medicare. This can quickly add up to a large tax bill, so I was curious if the medicare and social security are deferred, or if an individual still pays the full amount in the year the income is earned.
I think you’re asking several things at once here, so I’ll try to address all of your concerns. First of all, Social Security and Medicare (FICA taxes, in other words) are taken out of gross wages, not net wages.
In other words, the amount you have to pay is calculated before you deduct your 401(k) or other pre-tax contributions. In other words, if you’re looking to reduce your Social Security and Medicare contributions through additional contributions to your retirement, you’re out of luck.
You also seem to be asking whether or not you’ll have to pay FICA taxes in retirement. FICA is only tacked onto earned income through work. Investment income is not charged a FICA tax, so you won’t be dinged with that in retirement (unless, of course, you’re still working, in which case you’ll pay FICA on your work wages but not pay it on your retirement income).
As for an individual 401(k) versues an employer-sponsored 401(k), you mentioned the big differences – the provider, the investment options, the fees. You’ll also have to make sure that you’re investing self-employment income only into the individual 401(k).
I’d really advise you to spend some time getting a strong background on 401(k) plans. Wikipedia is a good starting point (as it is for many things), but you should follow through with more references as well. I suggest starting with the 401(k) entry, particularly the section on small businesses and sole proprietorships.
Q2: Water cooler and cable TV
While I’m completely on board with you with regards to the relative value of Netflix streaming and cable and how streaming is more cost-effective, I do have one problem. At work, there are several shows that people discuss around the office. The events on last night’s episode of The Walking Dead or the twists and turns of Breaking Bad are often conversation topics in my workplace (let alone the sports events), and ditching cable means that you’d miss out on that.
Honestly, I’d use the same approach in this situation that I use when talking sports. I’d just read a plot summary of relevant shows before leaving for work in the morning.
The only sports I follow with real depth are baseball and college basketball, but people often talk about other sports as well, so I often read ESPN.com or other sports sites to get a summary of today’s big sports stories, mostly as conversation fodder.
I don’t see any reason why you couldn’t more or less do the same thing with other programs. There are many sites out there that have plot summaries of episodes. Just read them, then you can at least follow the conversation and offer up a few tidbits.
Q3: Helping people in need
Over the past week, I’ve been approached by two people selling trinkets in a ‘whatever you can give’ manner. The first was a deaf man in an airport and the second was a women in a parking lot saying that her children were hungry. I gave each person $5, but I couldn’t help but wonder if I was helping them or if there was something more substantial that I could do for them. Any advice on situations like these?
I usually trust my gut instinct when it comes to situations like this. Sometimes, I do nothing at all, particularly if I feel like there is no need involved. Once, I had a guy in a shirt and tie ask me for ten bucks so he could buy a beer or two outside of a baseball game. At that time, I was probably more needy than he was.
If I feel like someone does need a hand, I usually try to give them something they can use rather than just handing them money. Money can easily be converted into something wasteful. It’s much harder to do that with a sandwich. Sarah and I have given away lots of food over the years in this fashion, along with other items (I once gave a younger teenage girl my coat).
Yes, sometimes you’re going to get scammed. I’m fine with that, as long as I know I’m able to sometimes help someone with a genuine need.
Q4: Handling an underwater house
We currently live in a house that we bought at the wrong time. We have 25 years left on a 30 year, 6.5% fixed rate. We owe 196 and the house is probably worth 140. We currently have about 2500-3000 per month left over. We have some nominal student loan debt at low federal rates (2%). We have 6 months living expenses saved in an e-fund. We would eventually like to move (and may need to for employment purposes) and potentially rent out our other house (probably at a few hundred per month of a loss if we aren’t there). Would it make more sense for us to start saving the 3K per month for a potential move or devote that money towards paying down the mortgage. We are not going to walk away, despite being underwater. I am aware that this decision may not represent the best fiscal decision, but if we needed to move and didn’t mine the few hundred loss per month, what would you recommend?
The “right” decision here really comes down to the likelihood of the move and the timeframe of that move.
When you say you would “eventually like to move,” does that mean you are absolutely moving in one year, or are you possibly moving in three years? Those two options give different answers to your question.
The longer your timeframe for the move and the lower the likelihood you will move at all, the better it is for you to put money into your mortgage. It will essentially return at 6.5% for the lifetime of your mortgage because of the reduced interest. If you can possibly get the mortgage down to refinancing territory, that’s even better.
If your move is highly likely and in a short time frame, then you should be saving for moving expenses, as that’s a more immediate need.
Q5: Bad babysitter
If someone does a poor job of babysitting your child, should you pay them? I had a neighborhood girl watch my baby the other day for three hours. When I came home, my baby was crying hysterically with a wet diaper and the babysitter was in the living room listening to headphones and playing on a laptop. Should I have paid her?
My philosophy is to pay them, but never hire them again and do not give them any positive word of mouth referrals.
For starters, they might have a completely different set of expectations about the situation than you do. While most parents would probably be upset walking in on that situation, it might be a normal situation in that person’s household.
For another, not paying the person for their service – even if it’s shoddily done – will end up reflecting much worse on you than them. If you don’t pay a person, they could pursue legal action, but more likely they will simply drag your name through the mud throughout your community.
Pay the person, then move on with life and don’t deal with that person again.
Q6: Retirement savings troubles
I know what I want to do….fully fund IRA’s for my wife and I plus contribute at least enough in our 401k’s to maximize employer matching, plus put at least $200/month towards college saving for our 4 month old daughter. The issue is determining whether that is realistic or the best course of action given our financial state and the transitions we are currently going through. If it turns out that I can’t fully fund the things listed above, how would you go about prioritizing them?
Circumstances: Right now I live and work in Boulder, Colorado and my wife and daughter live in Kansas City. She accepted a position that will bring her out here in May and there will be no gap in her income. I share this because right now we are trying to sell our KC house ($1255 monthly mortgage including taxes). I have a month-to-month place here in Colorado for $800. Right now I am neither optimistic or pessimistic about our prospects of selling our house. We have had a number of lookers but no offers. I have looked into management companies and feel we could cover virtually all of our payments with projected rent minus management fees. I understand there will be costs due to vacant months and repairs in this scenario….I’d rather sell.
I am not eligible for 401k participation until I’ve completed one year of employment. I do not currently have a Roth IRA or any other form of active retirement savings in place. I have something like $15,000 from my previous job that I will eventually roll over. We enrolled my wife in a Roth IRA ($8k) but we only contribute $150 a month into it. She participates in her work 401k and has about $23k currently.
I currently have about $14k in an Ally savings account serving as an emergency fund. Additionally I have about $8k in various Bank of America checking and savings accounts. This number is usually lower (more in Ally) but I wanted funds available quickly for popup house repairs, etc while it is on the market. My issue comes when trying to get a good budget in place to determine how much we can divert to college and retirement savings. Right now I’m not sure what my wife’s monthly net income will be. I don’t know how long I’ll have to pay both a mortgage and rent. We have very little debt apart from our mortgage…basiclly $6k in low-interest student loans that sets us back about $100/month.
We have not started college savings yet and I’d like to open either a 529 or Coverdell as soon as possible. My only hesitation is the fact that we’re not fully funding IRA’s and I’ve heard those can be used for education expenses with the same benefits. Should I just put more in the IRA we have setup? My wife and I prefer something that is specifically for college and not just lumped into other savings.
I know that with investing, taking action is better than waiting, even if you end up changing or correcting courses later on. This line of thinking makes me want to fund as much as I can as soon as I can. The conservative inside of me wants to assume I’ll be stuck with rent and a mortgage for a longer time and wants to have as much cash on hand as possible to cover contingencies. Any thoughts?
If you use an IRA for educational purposes before age 59 1/2, you will owe income taxes on at least part of the money withdrawn (from a Traditional, you’ll owe money on all of it; from a Roth, you’ll just owe money on the gains). However, you won’t be subject to the additional 10% penalty for withdrawing money early.
On the other hand, with a 529 college savings plan, you won’t owe income taxes on any of the withdrawals if you use it for educational purposes. The thing to always remember is that if a complete disaster strikes, you can always tap the money saved in any of these accounts. You’ll just have to pay a tax penalty on them.
If I were in your shoes, once I had a solid emergency fund in place, I’d focus on targeted saving, like retirement or educational saving. Given a choice between the two, I’d focus on retirement savings first and save any excess for education. You can always find other ways to finance an education (student loans, working for a year, etc.), but you can’t find other ways to make retirement work.
Q7: Cloth diapering for bigger kids
Our grandson is 7 months old and has outgrown the cloth diapers from Bum Genius. He’s a big baby, obviously, and wears size 5 Huggies. What did you use when your kids outgrew the cloth diapers?
We loved the BumGenius diapers (they’re adjustable for a lot of smaller baby sizes), but there was a period where they were still in diapers but had outgrown the BumGenius sizes. I am very thankful that this happened much later than 7 months… our 22 month old wouldn’t even wear stage 5 Huggies yet and can still wear the BumGenius ones just fine.
So, what did we do during that interim period? Sarah tried making a few because she enjoys sewing projects. We also ordered a few from a now-defunct person selling them on Etsy, and Sarah bought a few cheaply-made ones off of eBay (I just pulled one out and the tag has what I believe to be Korean writing on it, so I have no idea what the brand is).
All of them worked fairly well, though they tended to be a bit more of a hassle. We kept using the BumGenius liners as extra padding and absorption in the bigger diapers.
Q8: How to cut own hair?
I can’t believe you really cut your own hair? How exactly did you do that? Did you stare into a mirror while doing it? If I could do it well at all, I’d do it, because I’m tired of dropping $20 every month or two on a haircut and have hair care products constantly sold to me.
I use two mirrors when I cut my hair. I stand in front of a wall mirror and I hold a handheld mirror in the places where I need it while trimming.
I would not cut my own hair if I were not simply using clippers. With clippers, you’re mostly just worried about missing a few spots, which can easily be checked by running your hands through your hair and examining things with a mirror. With a more stylish cut, you can’t quite do that.
I’ve done it enough times over the years that I basically trust myself. I just check things over when I’m finished, so I often don’t even need the mirror while I’m doing the actual cutting.
Q9: Work from home tactics
I’m in IT and have recently (well 5 months now) taken a job that has me working full time from home. I do get out to the customers pretty often but the house is my office. I have 2 smalls kids and a wife who mostly understands that work means work. Do you have an article on making the best of it?
I don’t have an article on the topic per se, but I do have some pointers.
First of all, designate a spot as your work spot. Make sure that this spot is just for work and nothing else. If you don’t have that, it’s going to be incredibly easy for non-work distractions to sneak into the picture.
Second, when you’re away from that work spot, don’t work. Treat it as your office. Don’t duck in there every five minutes when the family isn’t paying absolute attention to you at the moment. When your day is over, let it be over and stay away from your work spot. Your family needs you.
Finally, minimize the scheduling of personal stuff during your typical work periods. Yes, it’s tempting to really amp up the flexibility of a work-from-home arrangement, but you’ll end up finding that you regret it because you have to slide work around to other times. Don’t do it.
Q10: Choosing where to put Roth
My husband and I are a bit behind in saving for retirement (we’ve both been grad students in seminary for the past 6 years). We’d like to get started by opening a Roth IRA. My plan has been to start with the Vanguard Star fund and contribute to it until it reaches the minimum for opening a Vanguard Roth. But, I’m wondering if it might be a better option to open an account with another company that doesn’t require a minimum amount to start. We are in the process of building up our emergency fund, and won’t have enough to start with Vanguard for awhile.
What would you recommend? I think Vanguard is the best firm, but I’m afraid of waiting any longer to open an account.
If you find a investment firm you’re comfortable with that has investments you like, there’s no reason not to open an account with them. I usually recommend Vanguard simply because that’s what I use, but that doesn’t mean that there aren’t other firms with good offerings and fees, and the $3,000 minimum can be a real stumbling block while you’re getting started.
One approach that you might consider is looking for a good brokerage that offers IRAs with no termination fees. That way, if you so choose, you can build up your IRA with them, then when you reach the $3,000 mark, you can choose to transfer your IRA to Vanguard with no extra cost. Or, if you like that brokerage, you can leave your money there.
Another approach is to simply save the money in a savings account until you have that $3,000 minimum. Honestly, with those small amounts, even the biggest market swings are going to have a pretty tiny impact on your dollar amounts.
The key thing is to start saving now, whether it’s in a savings account or at a brokerage.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.