Reader Mailbag: Communication

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. Converting to Roth IRA
2. Going part time
3. Short sell our home?
4. Going back to school
5. Pushy in-laws
6. Healthy but tasty lunches
7. Which debt to repay first?
8. Should we refinance?
9. Underwater loan
10. Frugality costing more money?

My best friend (besides my wife) sometimes has interesting issues when it comes to communication. He reads his email perhaps twice a week, plus he sometimes forgets to charge his cell phone and leaves it without charge for days. He doesn’t have a landline. He also sometimes keeps strange hours at home.

Needless to say, there are times where it can be very tricky to get ahold of him. I recently spent three days trying to track him down.

Q1: Converting to Roth IRA
I have about $7,100 in a 401k from my old employer in FL and have not contributed to it since 2009. I moved to NC from FL in July 2010. NC has state income tax, something new to me but I’m adjusting. I am a 36yo single female state employee making $43,650 a year and I’m required to save 6% of my gross income in a state plan, to which the state contributes 10.5% (of my income, not my contribution.) I will not be vested until July 2015, provided I stay with the state that long and don’t take any breaks in working. I plan to increase my retirement contribution gradually to 10% after I pay off some moving debt next month. The 401k is my only retirement savings thus far.

Should I convert my 401k to a Roth IRA and split the taxes over 2011 and 2012? I know you will probably say yes and I am leaning that way. I wish I’d done it last year so I wouldn’t be paying taxes on the $2000 my 401k has gone up since early 2010.

If I do convert, how are the taxes determined? Is it by my current tax bracket? Does the conversion increase my income for those two years? Do I pay state taxes on the conversion, even if I didn’t earn any of the income in North Carolina?

Should I figure out my taxes and increase the FICA withheld on my paycheck?

Do I have to convert the 401k before filing my taxes?

Am I missing anything here?
– Shannon

This is probably a good move over the long haul. I would certainly do it.

The $7,100 will be treated as regular income, so you will have to pay income taxes on it. If income tax rates in 2011 are the same as they are in 2010, you’d owe about $2,300 in additional taxes from that $7,100 in income.

Now, if you’re not prepared to pay that out of pocket, you should increase your FICA withholdings. That’s probably the safest way to do it.

If you do the conversion now, it will count towards your 2011 taxes, which you’ll file in 2012. You can do it at any time this year.

Q2: Going part time
At my current job, I have the opportunity to switch from full-time to part-time, meaning our (my husband and I) yearly gross income would be reduced by about $30,000. Plugging this new salary into our current budget, we’d only be able to save $2,000 a year (saving for a car and other long-term items is already included in the budget).

I have student loan debt of $5,000. Monthly payment is $82 at 2.5% interest. We just built a new house and have a 30 year mortgage fixed at 4.125% with a $1,493 per month payment. There is a second mortgage at 6.55% on a 5 year balloon with a monthly payment of $245. We are paying $500 per month instead. To have it paid off within five years, we would need to pay $549 per month.

Our monthly expenses include putting a total of $400 in Roth IRAs & 401(k)s and about $400 in company stock (getting a 15% discount). We will be needing a new (used) car within a couple years. I’m currently budgeting $360 per month intended for car repair and/or purchase. We have $20,000 in emergency savings.

My big question is: Should I go part-time? It would allow me a better chance to pursue my side business, which I’ve been doing in my spare time for the last few years, making a very small profit (around $5,000 a year), but it’s my passion and makes me feel like my life is worthwhile. I just can’t get past feeling like a complete moron for wanting to give up $30,000 a year!
– Liz

I gave up a little less than that each year in order to write a blog, so I can’t exactly say you’re a “complete moron” for wanting to go part time to pursue a dream.

If you believe that your family’s finances can hande it, then you should make that leap now while you can. It sounds as though your family will make it even if your expanded side business has no additional earnings. That seems like a very good situation to me.

I would make sure that (a) I didn’t burn any bridges during this transition and (b) I had a business plan in place for the side business that I hoped to expand.

Q3: Short sell our home?
We were $23,000 in debt. I quit my lower paying job and got a job with the family company. Due to some good success. We will be debt free by August. Right now, we are planning a move to Atlanta (currently outside Chicago). I am hoping to start grad school work in August. I am waiting on an acceptance letter (hopefully). We decided that no matter if I get in or not, we are moving anyways. My current job allows me to work from home and I can work anywhere. My wife started a photography business that is turning a good profit right now so financially the move is great. Plus, the cost of living is much lower, my wife’s family is there, and the 2 grad schools I want to get into are there.

Like many folks we bought a house a few years back at the height of the market and now want to sell it. We owe 169,000 on a 2 Bedroom 1 ½ bath townhouse. Most sell for between 155 and 185 depending on the normal factors. To get our house ready to sell, we would need some light carpentry work to fix a few things plus we would need to replace all of our windows. So we have to put some money in to sell it the normal way.

Our realtor suggested we short sell the house. I have read up some about it but we are apprehensive because of how it might affect our ability to purchase another house when we would want to.

The other part of this story is my wife is pregnant (due in July) with our third kiddo and we do not have maternity coverage. We just did not plan on having anymore kids so this was a complete surprise for us. We have 20,000 in savings. Which we estimate will cover the birth of our child. And we will be saving another 1,000 a month between now and july to cover other expenses to move ourselves. I want to preserve this cash and my worry is that the best offer on our house would mean we owe the bank a few thousand all the way up to a $10,000 sucking up our savings just to preserve our credit.

So ADVICE??? We are emailing and calling everyone we know to ask for advice. Short sell the house and move to pursue our dream? Or hope we can sell it for enough to preserve our cash flow?
– Ted

Your best route, given your overall situation, is to sell this property. You do not need that extra payment clogging up your cash flow with a third child on the way.

If I were in your shoes, I would directly contact the lender and discuss the situation with them. What is their stance on short sales? I would gather as much information as possible before contacting them so that you have a realistic estimate of what your property actually would sell for.

If you’re willing to cover the deficiency in the sale (if there is one), then there’s no reason a short sale would necessarily have to have a negative impact on your credit, provided of course that your lender acts reasonably.

Q4: Going back to school
I am currently working as a bank teller and this is absolutely not the job I want to be doing at this point in my life. I am 24 years old, graduated from Penn State University in 09 with a Business Management degree and have found it extremely tough to find work doing anything that I find interesting or would be willing to do as a career. I have about $40,000 in student loans at about 6.8%, and $2,800 in credit card debt that I just transferred to a 0% for 12 months credit card. I found work after graduation but quit that job because of many different factors. Then I was unemployed for about 6 to 8 months and am now working a $11/hr teller job.

I am almost certain that I want to go back to school and become a teacher. I had a application in, but decided to put it off till next year because I don’t think it would be wise to take on more student loan debt at this point (probably my smartest financial decision that I’ve made yet.) I am working on curtailing my expenses, and am living at home with my mom. I really want to go back to school and become a teacher. I figure I can save approximately $7,000 and then get student loans for the 1 year program that would be required to become a teacher (about 15-20k). Do you think this is practical?
– Ryan

Right now, you’re sitting in the middle of a disastrous job market. A lot of graduates are having a hard time finding work in their field of choice – not just you.

It sounds like this crisis has made you rethink what you want to do with your life, and I’ll say that being relatively young and without a marriage or children will make this process much easier than it otherwise would.

Before you go back, though, make absolutely sure that you want to be a teacher, as it is another year invested, another $7,000 invested, and a complete restart of your career path.

Q5: Pushy in-laws
One of my in-laws has been pushing my husband and I to meet with their ‘financial adviser’. When I say pushing, I mean every time we talk. This included our Christmas Eve visit during which the ‘adviser’ had phoned to chat.

I know that my in-law has purchased an annuity from this ‘adviser’, and that they don’t pay for this person’s services, hence this is a a commissioned based operator.

My question is this: my in-law might be pushing us just because they are being pressured to do so, or could it be that they would receive some form of reward for providing this ‘adviser’ a lead?
– Evan

They may or may not be receiving a referral fee. It is very hard to say in this case.

In any case, it is never a good idea to make a significant financial move because of a pushy relative or friend. That’s a horrible reason for any sort of financial move.

Thank them for their suggestions politely, but do your own research and find your own answers.

Q6: Healthy but tasty lunches
You often say that you just eat leftovers for lunch. Knowing your diet restrictions [I’m a vegan for the time being due to medical concerns, but I sure do miss cheese and some meats at times], what do you eat for a tasty lunch when you don’t have leftovers?

– Ron

I usually have a handful of frozen meals banked. Frozen vegan burritos, frozen leftovers packed up as an individual meal, and other such items litter our freezer, ready to be pulled out if needed.

If I can’t find those things, I’ll often just eat a big pile of mixed raw vegetables as a finger food at my desk. Carrots, broccoli, cauliflower, and so on tend to tide me over quite well.

On occasion, I’ll make a peanut butter and banana sandwich for lunch.

Q7: Which debt to repay first?
My husband of 1 year and I came into our marriage with one major debt each: “My” student loans, a lower amount and a lower interest rate (3.88%), and “his” investment property mortgage, about 1.5x the amount of the student loans and at a higher interest rate (4.875%). After some discussion we are both on board to do the snowball method to pay both of these sums down, which is great. The question is, which do we attack first? Do we pay down the investment property’s mortgage first since it has the higher rate, or do we tackle the student loans first since it’s a smaller amount? Again, we are definitely going to be paying them back as fast as possible and before their terms are up. My feeling is that we should take out the student loans first since the amount is smaller, and since whether or not the property is paid off it is still an asset (sell-able if there is some crisis and income producing in general) whereas the student loans are just deadweight. My husband would prefer to pay off the investment property first since its interest rate is higher. What do you think?

– Andrea

Your real question here is whether having a stronger cash flow faster is more important or whether maximizing every dollar you invest is more important. Is it more important to pay off a debt – and eliminate a monthly payment – right away? Or is it more important to pay the minimum total amount on the loans?

They both have compelling arguments. I don’t think there is a strict right or wrong answer.

My judgment would probably come down to a look at what you guys are planning on doing in the future. Are you going to have children in a year or two? Are you planning a major move in the next few years? If the answer is yes, I’d pay off the smaller loan with the lower interest rate first. If not, then I’d pay off the higher interest rate loan first.

Q8: Should we refinance?
I want to add onto our house but I’m worried about whether we can afford to do this or not. We have a morgage and 2 new cars and 4 kids; my husband works and makes great money and I’m disabled. We can refinance our morgage for the addition so it’ll still just be one morgage payment. Both car payment together are 535 a month and our morgage is 750. If we refinanced it would be around 960 a month and we’d have to pay our own insurance of about 100 monthly. I really want to do this but in todays economy is it smart to go ahead with this?

– Annie

Given the information you’ve stated here, I would not add any more debt payments to your current load.

Right now, you have a disability stream of income (small, but reliable) and your husband’s income (apparently larger, but not as reliable). All of this is banking on your husband keeping his job. If he loses that job, you are in deep trouble.

Do not add onto the house until your financial situation is secure enough that you could survive for many, many months on just your disability income. If you can’t honestly say that’s possible, then you shouldn’t be bringing more debt into the situation.

Q9: Underwater loan
I am 58 year old woman who lives with her husband of almost 5 years in a condo that belongs to me. At one time this two bedroom condo was worth around a $192,000 but now is probably worth $33,000, at two different times I refiid for the equity which gives me at this time a $107,000 interest only mortgage, with only one income, my husbands, who brings home approx $42,000, with bring home pay approx $38,000. I am unemployed at this time. Our mortgage payment is 710.49 and we have a HOA fee of a $195.00. Recently I was surprised to hear my father, who is a Real Estate agent advised that we would be better off just walking away from this condo we are what they call underwater, that the loan was one of those loans that made the economy crash, my husband thought it made a lot of sense. We researched and found that banks are also modifying loans but we have remained current in our payments so from what we read you usually have to be delinquent at least 3 months before they will even begin to consider modification. So we made this month the month to start not paying though I don’t feel like it would be to late to catch up with the missed payment I feel intuitively that we shouldn’t do it, but I am not making the money or the payment. My husband says we can’t afford to save the exact mortgage payment monthly and it is what we read we should do until this is resolved? I am hearing all kinds of arguments for and against and am just confused, I am starting an at home babysitting service, that will bring in around the same amount that I was making at my last job but I am wondering if I should work. I have some health issues so standing on my feet for awhile is out of the question. We also have lots of debt which we are now hearing that the banks usually only consider modification when your credit is good and that does not define my husband or I. I would love to read your opinion.

– Tammi

I just ran the numbers and it looks like a 30 year fixed rate mortgage at 4.5% on the amount in question results in a monthly payment of $542.15, which is significantly lower than your current payment while also building equity. This is approximately the type of loan you would get with a loan modification, provided you’re eligible for one.

As for whether you have to be late to get a loan modification: it’s not a requirement, but it helps. The problem is that there are so many bad or borderline bad mortgages out there from lenders that have let a lot of people go in order to remain solvent. That means there are many more potential modifications out there than there are agents to deal with them, so they deal with the urgent ones first. If you’re not late, you’re probably not urgent.

As for walking away: what does your game plan look like if you do that? Your credit will be even worse than it currently is. Will you be able to rent? Are you going to have credit needs in the next few years for a car loan or anything like that?

Many people believe that walking away will solve all of their problems, but often it just creates a new set of problems.

Q10: Frugality costing more money?
One question I have for you is, “have you ever found your frugalness to cost you more money?” An example would be (not a great one, but it demos my point) running back home for your grocery coupons because you forgot them and therefore paying twice as much in gas. Sometimes I feel frugalness can cost us more, no matter how careful we plan (and I love to plan).

– Jackie

If you’re burning a gallon of gas to retrieve $2 worth of coupons, then you’re not being frugal with your time or with your money.

Frugality means looking at each situation as it comes about and doing what you can to maximize the value you get from it. We’re all human and we all make mistakes sometimes. You’ve just got to stand up from a mistake, look at the new situation as it is, and make the best choice you can.

One particular choice (like your coupons) might be frugal some of the time (when they’re in hand) but not at other times (when they’re a 20 minute car trip away).

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.

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