Reader Mailbag: Spring Walks

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. Roth TSP versus Roth IRA
2. Sports gambling addiction
3. Maximizing your driving dollar
4. Easy and hard
5. Which car should I sell?
6. No interest debt
7. Investing under Social Security
8. Payday loan cycle
9. Planning for financial security
10. Taxes on parental gifts

Now that the weather is starting to become nice again, I’ve started up my morning walk routine again. During the winter, it’s much more difficult to do it as the weather is often in the single digits or lower, so the only real option is to go to the gym and use the track. I vastly prefer the outdoors.

I usually take a rather long loop around my neighborhood. I have several loops measured off for distance and I know exactly how long they are – a quarter mile loop, a mile long loop, and a three mile loop. I’ll usually set a goal before I leave the house – say, four and a half miles – and I’ll walk loops until I achieve that goal.

Q1: Roth TSP versus Roth IRA
I work for a federal agency and swapped my TSP contributions over to the Roth option when it was made available in the middle of last year. My 5% gets contributed to the Roth TSP, and the 5% employer match (maximum) goes to the traditional TSP.

Beyond the 5%, I’m torn between contributing more to the Roth TSP, or opening a Roth IRA through Vanguard. I know with a traditional TSP/401k, it’s best to contribute to the match and then go to a Roth IRA, then back to the TSP/401k if you have extra. Does the same apply with a Roth TSP/401k also?

Because both have the same long-term tax benefits for someone my age (26), the main difference as far as I can tell would be that I could pull my contributions from a Roth IRA penalty-free if I absolutely had to. I don’t believe the same can be done with a Roth TSP. Because of that, I’m assuming the Roth IRA would be the best option over 5%. Am
I overlooking something?

- Eric

The biggest reason to switch to a Roth IRA after you’ve filled your 401(k) up to the employer’s match is that most 401(k)s have relatively poor investment opportunities compared to a typical IRA. With TSP, however, that’s not really an issue. TSP offers very good retirement investing options. If I were in your shoes, I’d put everything into TSP that I could afford.

It’s true that TSP is much more restrictive in terms of early withdrawals while you’re still actively employed by the federal government. If that’s a concern for you, then a Roth IRA might be better.

However, I really wouldn’t rank ease of early withdrawal as a major factor in setting up retirement savings. It should be one of the very minor considerations, used only when deciding between two strong but roughly equal options. I think the TSP investment choices are very strong and would still lean that way.

Q2: Sports gambling addiction
My husband bets a significant portion of his paycheck on sporting events. As you might expect, he wins every once in a while, but over the long haul, he loses significantly. He controls it most of the time so I don’t make a big deal but every once in a while he bets too much and I catch him shuffling around money from account to account to cover it. This past weekend, we had a check bounce because of it. I don’t know what to do.

- Anne

Your husband has a gambling problem and he needs to sort through it. If he’s using a significant portion of his paycheck for gambling and it’s causing bounced checks, then it’s seriously damaging your financial future.

I can’t be more clear about this. Your husband is repeatedly making choices that damage your financial future. That’s unacceptable.

He needs counseling to break this gambling addiction. He also needs to understand very clearly that it’s not something you’re going to tolerate. If it continues at the rate you’re describing, it’s going to eat up your financial future and your retirement savings, and I’m not exaggerating in the least. You don’t deserve to have to work for another decade because your husband won’t stop gambling.

Q3: Maximizing your driving dollar
When we bought a car, we used short-term savings and bought a 5-year-old car in good condition. A friend said that she always buys new and drives it until it’s dead.

Assuming you have the cash to buy a new car (because loans and interest throw too much math into the mix, and we actually did have enough savings to buy a new car), what age of car gives you the most driving time for your dollar? Figuring in that an older car needs more repairs, and by around 15 years, the car is pretty much dead.

(Since I assume it differs some depending on the car, we have a Ford Focus)
- Lana

This is a number that’s impossible to calculate without a ton of information about the car. What model year is it? What factory did it come out of? What kind of weather conditions are in your area? How faithful are you when it comes to maintenance? Those questions just scratch the surface.

I agree with your friend that the best strategy is to buy a used car and drive it until it does. That’s because of the rather large “new car” premium that you have to pay.

Which used car and how old? I usually recommend that people buy the best car they can afford with the cash they have in hand. By “best car,” I mean the one with the fewest miles and the best reputation for reliability, which is something you can find out with a bit of library research using recent car issues of Consumer Reports.

I view buying a car as buying a certain number of miles of transportation, but you don’t know exactly how many miles you have. The best you can do is estimate it and look for ones that have a high likelihood of providing a lot of miles by looking at reliability data. It’s never a guarantee, though.

Q4: Easy and hard
Why does the government allow credit card companies to let people get into so much debt so easily? I racked up $25,000 in credit card debt in a year and barely realized it and now it’s a hole that I am going to be digging out of for years and years.

- Amy

The goverment “allows” it because we live in a nation where people are free to make their own financial choices, for good or for bad. If a bank is willing to lend someone money at a certain rate and that person is willing to accept that loan, that seems to me to be a straightforward financial transaction between two entities that the government should largely stay out of.

The government’s role in this should be to ensure great consumer education to children when they are in school. A strong consumer education program should be a requirement for everyone graduating high school today – but, sadly, it’s not. Many areas provide no consumer education at all and other areas provide very weak consumer education.

I don’t think the government really has a role to play in keeping people from making bad personal decisions as long as those decisions aren’t harming others.

Q5: Which car should I sell?
My husband and I have two cars that we own outright (no payments). The first is a 1998 Nissan Altima with about 175K miles, which my husband has driven for the last 7-8 years. The Kelly Blue Book is just over $2,000 (when it’s in good condition, which the interior and exterior are…see other problems below). The second is a Lexus ES300 with 220K miles, which we bought last summer when we needed two cars. The KBB for this car in good condition is $4,800, but ours (while in good condition) has a salvaged title, so I’m not sure how much it’s really worth.

The problem we have right now is that the Altima is not currently in good condition. It needs about $1200 in repairs to get it in good running shape, and for the last 6 months, it’s been parked at my parent’s house, an hour away. We’ve recently relocated to an area with decent public transportation (we ride the bus to work almost every day) and limited parking. Since moving, we haven’t encountered a situation where we needed two cars.

We’ve been thinking about selling one of the cars, but I thought I remembered reading an answer in a previous mailbag about how it’s not a good idea to sell car that’s paid off. What do you think about this situation? If we do sell one, we can’t figure out which one is better! The Lexus is more comfortable, but it has more miles and more automatic “frills” that we think will break soon (like motorized seat adjusters, digital dash displays, etc), not to mention that the gas mileage isn’t as good. We’d like to keep the Altima since it’s more economical and has fewer miles, but since it needs over $1000 of work, we’re not sure if we should fix it or not.
- Amanda

What you’re going to wind up doing here, no matter which one you choose to sell, is effectively sell one car to keep the other one on the road. Whatever you get out of one car is likely to be quickly sunk into payments on the other.

In the case of the Altima, it’s an immediate sink. You need the repairs to get it back on the road at all. With the Lexus, it sounds like major repairs are just around the horizon. You’d need a mechanic to assess which one is likely to give you another 50,000 miles. If you have a mechanic that would do this for free or for a low cost, I’d do that and go with the car he/she recommends.

I am generally in favor of buying cars then driving them until the repairs begin to mount up and make the car highly unreliable. It sounds like you may be approaching that level with both of the cars, but it’s really hard to tell exactly what state they’re in from your story.

Q6: No interest debt
I have the opportunity to borrow $15K interest free. I have to make payments on it each month but they’re reasonable payments. I know you talk about debt freedom but this seems like too good of an opportunity to pass up. I could take this money, put it in an online checking account, and instruct that account to issue a payment each month and just collect a few hundred in interest with no effort at all. Why shouldn’t I do this?

- Adam

Even if you do this, there’s still a risk. Do you have outstanding debts or collections against you? There are lots of things that could go wrong that could take away that balance, leaving you with just an unpaid debt. No debt is ever risk-free.

One reason I’d consider this is the ability to pay off existing debts. Could that $15K pay off a student loan or a car loan? If that’s the case, I’d go for it almost immediately as this is a guaranteed reduction in interest for you.

The “online checking” plan is a reasonable one as well, particularly if you’re already debt free. I would be very tempted to do this and just let it sit there with automatic payments, as you suggest. If you earn 1% and have several years to pay it off, you will make a few hundred dollars effortlessly from this. It’s not risk free, but it is pretty low risk.

Q7: Investing under Social Security
I live below my means and would like to invest and increase my assests. Unfortunetly, my income comes from social security (disability) and I have a $2,000 monthly asset limit. I welcome your advice and thank you for it in advance.

- Jim

The page on what you can and can’t own as an asset under SSI makes it pretty clear what you can and can’t do with your excess money.

You can hold onto retroactive SSI payments up to nine months after you receive them, so you can build up a decent buffer in your savings account or checking account up to the amount of nine months of benefits.

You can also invest in your home through relatively small home improvements. Coupled with the retroactive SSI payments, you can potentially hold onto enough cash to eventually pay for some home improvements which would improve the value of your home.

You can also start an IDA, which is a particularly good idea if you don’t already own a home.

There are a lot of options in your situation. You don’t have total freedom to invest, but you do have opportunities to save for the future.

Q8: Payday loan cycle
Right after Christmas, I was short on cash so I took out a payday loan. I’ve managed to make the payments on the loan but I still owe more than I borrowed because I skipped two of the payments with their permission. How do I get out of this mess?

- Ron

It sounds like you’re in a payday loan cycle, where you need to take out a new payday loan to cover the old one. Getting out of this cycle is difficult, but it is possible.

First, you need to make sure that every check you write is going to clear. You absolutely cannot afford overdrafts in this situation. Be very careful about this.

Next, when you take out a new loan to cover the old one, take out a slightly smaller loan and pay the difference out of pocket. Do whatever you can to come up with an extra $20 to make that new loan $20 smaller. Next time, the interest won’t be as great, so maybe you can swing $25. Keep doing that and the loan whittles down over time and vanishes.

To do this, you’re going to have to trim expenses more than you already are. Live incredibly lean for a week or two and use the money you didn’t spend to knock down that next loan.

You have to take this step by step, but it is doable. Your goal should always be that the next loan you take out to cover the previous one is smaller than before. If you consistently do that, you will get out of this mess.

Q9: Planning for financial security
I am fairly fresh out of grad school (just under 2 yrs), and the sole provider of my family (4 of us total).

I was able to complete grad school with a fairly managable student debt figure of $20,000 @ 2.5%, and am now past the entry-level portion of my career path, just breaking into the 6-figure realm. Because of our student income (or lack thereof), our retirement savings is in its infancy (I’m 29). We are maxing out the company 401(k), knowing we have some road to make up there.

I know your feelings on debt pay-off vs investing, but hear me out Trent. I am a bit anxious to increase my net worth, especially with time still on my side. Given that my student debt interest rate is so low, is it really so bad to make minimum payments (we’re actually doubling the required monthly payments) while stashing the rest into retirement accounts and other investment opportunities? We have no other outstanding debts (We are renting until a significant down payment for a home can be made). I really want to reach future financial security for my family sooner than later. What are your thoughts?
- Eldon

Feel free to do whatever you want, but let me paint a little scenario for you.

Right now, you’re going to have to beat at least 2.5% annual return in order to make it more worthwhile to invest than it is to pay down your debt. If you can’t beat 2.5%, you’re going to see a better net worth growth by paying down the debt quickly.

There’s no way to make more than 2.5% without taking on some risk, so let’s say you invest in stocks. Then, let’s say in two years that an international incident of some kind happens, like North Korea lobbing a missile at a U.S. warship. The U.S. stock market drops like a rock.

At that point, you need to switch jobs, but that loan is still hanging around your neck like a millstone and your stock investment has lost half of its value. What do you do?

The point of paying off debts early has nothing to do with maximizing net worth. It has to do with flexibility and monthly cash flow. Every debt you pay off decreases your monthly bills and increases your monthly cash flow, making it easier for you to switch jobs or make other major life moves.

Choosing to make minimum payments on any personal debt in order to place that money elsewhere adds risk to your personal situation. It’s risk that may never come to fruition, but it’s risk nonetheless.

Q10: Taxes on parental gifts
Every year at Christmas, my parents give each of us kids somewhere between $5 and $10K as a gift. I never really thought about paying taxes on it but my boyfriend insists that I should have been paying taxes on this money. Is that true?

- Kelly

That amount of money likely falls under the gift tax exclusion.

The IRS allows individuals to make gifts to other individuals each year up to $14,000 without the recipient having to pay any taxes at all on the gift. It sounds like your parents are giving gifts well under that level, so you shouldn’t owe taxes on that gift.

If you receive a gift over $14,000 from a family member, you should file form 709. If the gift is smaller than that, don’t worry about it – but you should keep a record of it for future reference.

Got any questions? The best way to ask is to email me – trent at thesimpledollar dot com. 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 many, many questions per week, so I may not necessarily be able to answer yours.

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