Reader Mailbag: Difficult Things to Write

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. Handling small rollover
2. Parents who don’t plan
3. Loan payoff or retirement contribution?
4. Roth conversion and inheritance
5. Setting sportsmanship example
6. Fundraising
7. Is bankruptcy right?
8. Mortgage and the IRS
9. Roth for student loan repayment?
10. Thoughts on tablet PCs

Over the past week, I’ve had to write three separate notes that were very difficult for me to write. I spent an awful lot of time simply thinking of how exactly to say something that needed to be said, but was very difficult to say.

I can’t tell you the number of drafts I went through on each of these notes, but what I found is that with each re-drafting, the message somehow became easier to share.

By the time I was happy with the note, I was at peace with the message, too.

Q1: Handling small rollover
My first job out of college was an apprenticeship where I earned $1,000/month and lived in housing provided by the program. The employer matched 50% of my contributions to my 403(b), up to 6% of my contribution/3% of theirs. It was only $30 a month from them, but it was better than nothing, so I did that while I worked there.

The program ended and I’ve started a new job and now I don’t know what to do with that old 403(b). It’s under $2,400 (which wasn’t bad at $90/month for two years!), so I can’t open a Vanguard IRA to roll it over into that. At the same time, I do have to get it out of their plan, and I can’t afford to pay the extra taxes on it this year, so I need to roll it over somewhere pretty immediately.

My instinct was to open a ShareBuilder IRA because I already have my savings at ING Direct, but if I put it there, I have to decide what to direct it toward, like pick my own stock or ETF.

So should I open a rollover IRA somewhere else that has targeted retirement dates like my old allocation (2050 expected date)? A CFP who used to work for Schwab mentioned to me that they have really low minimums, but I talked to them today and they have higher expense ratios and their farthest date is 2040. Or is there a stock or ETF I could just dump all $2,400 into through ShareBuilder and leave it for the long haul?

(For my current contributions, I’m squirreling away my money in a savings account until I can get the requisite $3,000 to open a Roth IRA at Vanguard like you and so many others have recommended.)
– Kelly

A couple questions pop up here. First, why do you say you can’t open a Vanguard IRA? Is it because many of their funds have an initial contribution limit of $3,000? Their STAR fund, for example, has a minimum investment of $1,000.

Once money is in an IRA, you can move it around as you please, so if it grows in the STAR fund, you can move it to whatever you like in a few years, like a Target 2050 fund. This is what I’d probably do.

I’d use a similar strategy with a Roth there. Start off in the STAR fund, then shift to another fund when you hit the $3,000 mark.

If you’re going to use a provider that only has a Target 2040 fund, I would ask if they intend to have a 2050 fund in the future. If that’s true, there’s no reason not to initially put your money in the 2040 fund, then move it to the 2050 fund in a few years.

Q2: Parents who don’t plan
My husband and I have no credit card debt, a very small emergency fund (but we’re faithfully contributing to it), and will need at least one car within the next few months. We have $2K saved towards this, which will not be enough, so we’re facing choices regarding what sort of car to buy and whether to pull the money from another area of savings. Our only child is turning one soon. We own our home, are not under water, and pay a little bit extra toward the mortgage each month.

In short, we could be doing better, but we could be doing much worse.

My concerns are not directly under our control. My parents made some not-so-wonderful financial decisions years ago, but persist in making increasingly bad ones of late. Luckily, they have no credit card debt that I know of, but both have let it be known that they do not want to work. My dad has a modest 401K that, combined with SS, is getting him by. My mom has no savings whatsoever, but is unemployed. She stubbornly insists that people have pushed her out of jobs, but after it happened a few times, we started catching on that perhaps she needs a bit of professional help (which she refuses to get) in order to survive in the modern workforce.

I’m terrified. I wanted to stay home with our child, but I stayed working because I want the best opportunities for him. Now I’m noticing comments from both parents indicating that they have no intentions of taking care of themselves when money runs out. A conversation with my mom this morning revealed that she thinks that she is a victim and my husband and I have just been very lucky to be able to support ourselves. She seems to think she’s in the 99% and we’re in the 1%, when, believe me, as illustrated by our situation above, we are very soundly in the 99%. In her eyes, though, we are abundantly wealthy and not sharing with her. Now, I know that many hard-working people who want to work are out of jobs right now. That is absolutely true for many people. And it is absolutely true that we have been fortunate enough to have connections who have helped us along. But those connections came through friendships and networking, other things in which my parents do not invest. And my mother is not in the group of people who were laid off or who lost their jobs due to the market: she was replaced because she did not want to do the job the way the job was meant to be done.

My parents do contribute to our childcare, which is an invaluable support for us. We do not pay them for this, but they only have him about 6 – 8 hours per week. I don’t want to pay my son’s grandparents to take care of him, but if I did (since I can), it would not be enough to really change their needs or situation. Should I pay them? There are other dysfunctional behaviors going on there, though, so I do not want to increase the amount of time my son spends there.

I know I’ve included a lot of details and I know I’m passing pretty harsh judgement here, especially on my mother. I want to put my anger aside and address this issue with them, but do not know how to do so. I think they would be reluctant to sit down with us – I think they feel defeated and defensive. But this knowledge that at some date in the not-so-distant future I will be taking care of them even though they could prevent that is gnawing at me. How can we address this with them without making them feel attacked or more defensive?
– Ellen

Before you enter into any sort of discussion with them, you need to decide for yourself if you’re going to take care of them in the future. Are you going to take one or both of them into your home? Are you going to financially support them?

Those are difficult questions to answer, but until you’re clear on what you’re willing to do (or not willing to do), a discussion isn’t realy going to go anywhere other than down a road of resentment and anger.

I might also suggest seeking some counseling for yourself, as I am very afraid that resentment and anger is going to come through on your side as you discuss this. While it might be your parents’ “fault,” it’s still up to you to be in control of and understand your emotions.

Q3: Loan payoff or retirement contribution?
Would it be better to pay off $35000 balance equity loan @ 5.99 in next five years by additional $4800 annual additional payments or contribute $22500 pre-tax catch-up contributions to Thrift Savings Plan for next five years.Currently earning 6.0%.Base salary of $56508 and first mortgage balance of $135000 @5.65% value of house $220000. Currently 55 years old with $135000 TSP balance under FERS retirement plan and hope to retire in 7 years.

– Mark

If your central goal is to retire in seven years, you need to be throwing everything under the sun at your retirement plan.

You’re nowhere near where you need to be to retire with a healthy level of annual income in retirement, especially when you’re facing a mortgage that’s more than double your annual salary plus an additional home equity loan.

Even if you throw everything you can into your retirement plan, I’m still not convinced you’ll be able to retire in seven years. You’re going to still have (at least) your mortgage hanging over you at that point and only a low-end Social Security and a relatively small amount of income from TSP and FERS. I would hold off retirement until 65 at least, which gives you three more years to build savings, earn FERS years, and bump up to a higher Social Security level.

Q4: Roth conversion and inheritance
My husband and I decided to do a Roth IRA conversion this year on an old rollover IRA. We converted $6000 of it, leaving the other $4000 to be converted next year (trying to divide up the tax impact). That was the easy part, and it went smoothly. Here is where it gets complicated. His mother died very unexpectedly about two weeks later, leaving my husband and his three siblings as the heirs of her estate which includes a paid-for house, and an annuity. Everything I have found says that we will owe taxes on the annuity, and it will be treated as income (because it’s an annuity, and not cash or property). The amount we are expected to receive from the annuity will effectively put us over the $169,000 married-filing jointly income cap for Roth IRA’s. As a result, do we need to undo the Roth Conversion?

It seems like such a simple question, but I can’t find an answer anywhere! I am so frustrated and overwhelmed – I am pretty comfortable with taxes, and manage to do them just fine every year with the help of Turbo Tax. I am just starting out with investing, but I feel like I am picking it up pretty fast, and doing okay. But this has totally thrown me for a loop, and I just don’t know what to do. Any insights and help you can offer would be very greatly appreciated!
– Lindsay

My understanding is that you would now have a Roth IRA for which you’ve exceeded the income limits. The solution, unfortunately, is that you’re going to have to pay a tax penalty until this contribution issue is resolved, which basically means taking the $6,000 out of the Roth and putting it in your pocket.

I would absolutely contact a tax lawyer here, though. Their consultation fee should be low enough that it’ll be more than worth it to save you from an audit or an unwanted tax or fee.

Unexpected events like this are one of the reasons it’s a good idea to wait until the very end of the year to make these types of financial moves.

Q5: Setting sportsmanship example
How do you set a good example of sportsmanship for your kids? My son is just getting into sports and some of the kids out there really act arrogant and rude and so do their parents. If you turn on the TV and watch sports, you see people pounding their chests and even coaches getting into confrontations. How do you teach your kid sportsmanship in this environment?

– Reggie

The best way to set a sportsmanship example is to practice it in every aspect of life, particularly when competing. Show your child exactly how it should be done.

You should also express to your child what poor sportsmanship looks like and why it’s not a good thing. Ask them how they feel if someone acts like that toward them.

The key, though, is to walk the walk. At every opportunity, act in a fashion of good sportsmanship. Your kids notice more than you think.

Q6: Fundraising
I read with interest your comments on how you happily buy things from children in your neighborhood that come to your door for fundraising. Why do you do this? I usually just look at it as a waste of money and tell them “no thanks.”

– Phil

I have a very good relationship with my neighbors. They keep an eye on my house when we’re traveling, they receive packages for us, and our children play together. We have even closer relationships with some of the neighbors, including regular dinner parties with them.

Part of maintaining that relationship is to be involved with them. When one of their children comes knocking, they’re not just bugging me for money. They’re learning how to sell things. They’re practicing interacting with people in situations that are a little less easy than usual. This is useful for them.

In the future, my children will be doing the same thing. They’ll go around to our neighbors, knock on doors, and go through that same experience. It’ll further cement that connection to our neighbors.

To me, that’s worth paying $10 for a $5 item once every few months.

Q7: Is bankruptcy right?
I am a 44 year old female, single and unemployed for the past year. I am questioning whether I should file bankruptcy. I have two outstanding debts, one is a personal loan with a $17,000 balance. The other is a credit card debt of $4,000. I am currently not late, or have ever been late on any of the monthly payments. But because of my difficulty finding work, I’m afraid that situation may change. Do I claim bankruptcy? I’m afraid of what it may do to my credit. I currently drive an old vehicle and am afraid that when I do get a job, I’ll need the credit to purchase a new vehicle. Any suggestions? I’ve talked to a bankruptcy lawyer and she says I meet all the criteria and could easily claim bankruptcy but I am very hesitant. What do you think?

– Dolores

I wouldn’t claim bankruptcy now because this is debt you can easily get through if you’re employed.

Instead, I would hold onto that option until you really need it. Bankruptcy is something of an “emergency” button: it devastates your credit, but can help clean up a disastrous situation.

You’re not in a disastrous situation yet. I think bankruptcy would be premature. Wait and see if you find a job, then use bankruptcy only as a last resort if you’re falling months behind on your debts.

Q8: Mortgage and the IRS
I am at a point in my life where I need someone to point me the right direction. If feel stuck in a mortgage and therefore stuck in a relationship (engaged). I have an FHA loan, which my understanding is I have to be in the home for @ least three years as the primary residence. The mortgage is in both my and my fiancé’s name. I claimed the $8000 tax credit under my social because he had been audited that tax year and the company that gave him a ‘great deal’ on his taxes had actually messed his taxes all up. This month will be two years lived in the home. My dilemma is I do not want to marry this man. If I were not in a mortgage and facing paying $8000 back to the IRS (which I do not have) I would have broken up a while back. I have tried to make it work and live out the last year. I basically hide from him as much as I can. I just can’t stand to be around him anymore. I try to just lay low and not stir anything up. What I am looking for is a starting point to find a way out. Can you point me in the right direction as far as resources for FHA loans & the first time home buyer credit? Do you know what sort of attorney that could offer advice/help? Do you have any advice for my situation? I am dead set on not marrying this man. I am not in love with him. I could move home to live with mom for awhile if I were to leave him, but I feel chained to him because of this mortgage, my fear of ruining my credit score, & my fear of being indebted to the IRS.

– Rihanna

If I were you, I would contact a lawyer immediately. This sounds like a mix of issues – taxes, property issues, and so on. I would probably start with a property lawyer.

If you’re in a situation where you’re hiding from the person you own the property with and it’s interfering with your quality of life, I wouldn’t worry about the legal fees here. Just get into a situation where you’re safe and you’re not faced with legal entanglements.

Lay everything out on the table for this lawyer. Don’t hide anything, because if you do, you’re rendering his advice null and void. He’ll be giving you advice based on what he knows of your situation, and if what he knows is wrong because you left out or altered pieces of it, then his advice is going to be wrong.

Q9: Roth for student loan repayment?
I’ve been reading your blog for some time now and listening to various personal finance podcasts, and understand that the initial investment made into a Roth Ira can be pulled without penalty. The reason I ask is…my husband and I, both in our mid-30s with one child, have been aggressively paying down his student loan debt (now at $26k), making payments of anywhere between $600-$1,100/month based on our income (we’re both self-employed so it varies month to month). His Roth balance right now essentially matches his principal balance of 18k. With the markets performing so terribly right now, would it be more advantageous to pull the principal in his Roth so we can bring the balance down to $8k, and hopefully pay that off within the next year? We did not make any contributions in 2011 to either of our Roth IRAs to meet our debt paydown goals. Is this the right strategy or are we jeopardizing our long-term investments? In the next 2-3 years, we are considering moving and another child.

– Cherie

If you do this, you’re probably pushing your eventual retirement back by a year or two. If that’s an exchange you’re willing to make, go for it.

I usually hesitate to encourage people to go this path, however, because this is simply putting a burden on your future self. Given a choice, I would almost always encourage people to carry a burden now rather than later.

Dave Ramsey put it best when he said, “Live like no one else so you can live like no one else.”

Q10: Thoughts on tablet PCs
Now that the iPad has been out for a year and a half and other good tablets are out there, what are your thoughts on them? What would cause you to buy one?

– Sanford

If your primary use of the internet is web surfing and media consumption (watching Netflix, watching YouTube videos, etc.), then a tablet PC is just about perfect for your use. They come at a pretty good price and take up very little space in your home.

The iPad is the best one, not because of any hardware issues, but because of the application support. There are so many apps that do so many different things for the iPad these days. (I secretly drool over the boardgame apps.)

I have actually thought about giving an iPad to someone close to me as a gift this Christmas. It’s an expensive gift, mind you, but it matches that person’s needs so well.

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.