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. Infant car seats
2. Roth and 403(b) questions
3. Paying off mortgage early
4. Managing a pay increase
5. Bonds owned by the deceased
6. Using bonuses
7. Depression and the reader mailbag
8. Paying off credit cards efficiently
9. Paying for nursing care
10. Handling a small debt load
I’m currently fleshing out my travel plans for the year and making needed arrangements. I have a trip to Seattle and a trip to Indianapolis on the docket this summer, possibly with a stop in Chicago as well early in the summer.
The trip to Seattle is going to be the most interesting of the lot, I think. We’re currently planning on flying out of Minneapolis, taking our three young children on their first plane flight. I can’t think of anything more fun than corralling a five year old, a three year old, and a one year old through airport security!
In 2005, we purchased a Graco SnugRide, a rear-facing seat that worked very well for us. We have used this seat for all three children, but will be retiring it after our youngest outgrows it regardless of future child choices, as the environmental wear on the plastic makes such seats less safe after five to six years of use.
However, we have heard – and some reviews reflect this – that Graco made some changes to their SnugRide seat in 2008 (or so) and the seat is not as highly regarded. If we were to have another child, I would research the seat all over again.
Our original seat research was based heavily on Consumer Reports comparative testing, which is what I would do again. The complaints a couple years ago about Consumer Reports baby seat testing mostly came down to their tests being too rigorous, which, when it comes down to the safety of a baby, I’m fine with.
Q2: Roth and 403(b) questions
I have question regarding Roths. Lets’s talk about roth IRA first. I always get confused by what you can withdraw. I think you can withdraw your contributions anytime- is that right or you need to wait 5-yrs before you can withdraw the contributions? If the 5-yr timeline is true- how does it work? Let’s say I opened a roth IRA in 2006 and was contributing to the max till 2010. So in 2011 can I withdraw all of 5×5 =$25,000 contribution if I want or would it be only the 2006 contribution which is $5000.
The second component concerns the roth 403b. My employer recently started offering roth 403b option. I know I can convert my vanilla 403b to the roth flavor by paying taxes from outside the retirement funds. But then can I withdraw the contributions in 5-yrs if I want since I have already paid the taxes or that provision is for roth IRAs only?
You can withdraw your contributions to a Roth IRA at any time. The five year restriction means that you cannot withdraw gains within five years of opening a Roth IRA without paying a tax penalty, a restriction in addition to the age restriction of being 59 1/2 years old.
The rules (in terms of withdrawing contributions) are the same for a Roth 403(b). You’ll want to contact your investment company that holds the 403(b) for specifics on how your employer’s contributions will work, though.
My concern with this is that you’re looking at a Roth as a savings account of some kind rather than as a retirement vehicle. Remember that once you withdraw contributions, you cannot put them back. You can only make new contributions up to the annual limit. This can seriously dent your retirement plans.
Q3: Paying off mortgage early
My husband died in Oct. and my monthly income has been reduced substantially. I have $421,000+ in IRA’s and $119,000+ in a savings account. My monthly income is $2176. I’m not sure what my tax bracket is based on the annual income of $26,112. I have no debts other than my house but the utilities, insurances, utilities eat up most of this money
My mortgage is $1358.46 including $320.26 for taxes & insurance. I owe approximately $175,000 on my home.
My question is, Does it make financial sense to pay off the mortgage using a combination of funds from the two sources? I know I will pay taxes on the monies from the IRAs (in 2 1/2 yrs I will need to take the distribution) but saving over $1,000 a month is very appealing. I don’t know what the tax bite will be but I don’t think there are any funds that will return $12,000 annually. I am only getting 1 1/2% on the savings acct. so it would seem to make more sense to take the bulk of the repayment from that acct., leaving myself an emergency fund.
It sounds to me like your largest concerns are monthly cash flow and being sure that your money will last through the end of your life. Given those two concerns, I would pay off your house now rather than later.
In terms of cash flow, it’s a no-brainer. If you pay off your mortgage, your pile of monthly bills will be much smaller than before.
In terms of long-term finances, it’s a mixed bag that depends heavily on what happens to you in the future. Obviously, paying it off now puts a significant dent into your retirement money, but after that, the monthly impact on your savings will be much less. At some point (in about twelve years), you’ll have saved an amount equal to the total balance of your mortgage by paying it off now and, after that, you’ll be in better shape because of the early payoff.
I’d pay it off now, given all of the concerns together.
I also have around 15000 in CC debt that I’m looking to pay off using a debt snowball.
Following The Total Money Makeover system I’ve stopped my retirement contributions. The only thing I do do is place 10% of my paycheck into an emergency fund on ING Direct.
With my new increase in income do you recommend restarting my contributions to my 403b?
If you’re following Ramsey’s methods, you would keep that retirement level at 0% until you pay off all high-interest debt, and most likely all of that credit card debt would be high interest debt.
I think that’s a reasonable plan if you’re committed to remaining debt free. If you look to a future without debt, then getting rid of that debt as soon as possible is probably the best long term financial move.
If any of your debt is below a 10% interest rate, though, I would pay that debt off last and restore retirement savings before tackling it. The reason is that once you drop down to interest rates that low, you’re not really beating your potential retirement returns by much and you’re better off, over the long term, having money in the bank.
Q5: Bonds owned by the deceased
About a year ago my wife’s Aunt gave her some US bonds that she and her husband had. These bonds where in her husband’s name with her name on them as co-owner. The husband past about 17 years ago and the Aunt passed last year. What does my wife have to do to either cash them or put them in her Name. These bonds are before 1976 and there is 10 of them in $1000 dollar denominations.
You need to have the bonds reissued for them to be in your wife’s name. The government makes this easy – here are the forms to do just that.
Depending on the bond type, it’s going to be well worth your while to get the paperwork filled out so you can cash those bonds in. They should be matured by now, meaning that as soon as you get the paperwork in, you’ll have the cash!
Q6: Using bonuses
I am by no means a financial guru, but pride myself in reading finance books when the opportunity presents itself. I carry no debt, I religiously abid by the 7-10% of my credit limit rule since I was first issued a credit card, and have multiple months of living expenses available in a savings account in case of emergency. My question for you, however, has nothing really to do with me. This past holiday season as I was visiting with my parents, my father informed me that he received a $31k bonus from work this year. He works in medicine, and this bonus is roughly equivalent to a third of his annual salary. When asked what he was going to do with this money, he informed me he was putting it towards investments for my parent’s future. Although I didn’t say anything out loud, I couldn’t help but wonder if the money would be better put towards paying off the remaining $100k of their mortgage. After taxes, his bonus could pay off nearly 1/5th of their remaining debt. Every book I’ve read, including your website, has always pressed illuminating debt- especially large sum debt. In this post-holiday time for employed people, is it better to use bonuses for investments towards futures, petty cash, or paying off substantial debt such as a mortgage?
When you get right down to it, this is really a matter of “six in one hand, half dozen in the other.” As long as you’re not spending the money frivolously, both debt repayment and investing are very positive personal finance moves. It’s like chiding someone for eating carrots instead of broccoli when they used to be gorging on hamdogs.
That being said, if you’re trying to choose between these options, there are a lot of things to look at. What are the interest rates on the debts? What are the rates of return on the investments (over a long history)? Is the investing going into a tax-deferred retirement account? A Roth IRA?
I think your father is making a good move here. Whether it’s the best move is hard to tell, but it is a good move. If you want to plant the idea of debt freedom in his head, drop a copy of The Total Money Makeover on him.
Q7: Depression and the reader mailbag
How do you not get depressed from the stories people write to you? Sometimes I get miserable just reading them, and of course you get many many more than you put in a reader mailbag. How do you deal with hearing about so much hardship?
Usually, reader mailbag emails make me feel good. While the people may be in a bad situation, they’re actively involved in them and seeking a solution to them. They’re actively involved in their finances and working for a better life. That’s awesome.
What makes me depressed is negativity. When people bash themselves, it’s bad. When people bash others, it’s worse. When people manipulate others for their own ends, it’s even worse.
I see plenty of that, and I try my best to avoid giving it breathing room. Still, there are times where I simply turn away from my computer when the negativity gets overwhelming for me. I go play with my kids or something like that.
Q8: Paying off credit cards efficiently
I am currently 24 years old and earn about $50,000 per year. I am currently about $15,000 in credit card debt and $15,000 in student loans. I have 3 credit cards, one with about $10,000 with a high interest rate that I am trying to pay off. The second card has about $4,000 and the last one has about $1,000. I try to pay $800 per month to the first card and about $200 to the second and $100 to the first. After taxes, I make about $2,800 per month and after these credit card payments, I pay $950 for rent and about $200 in student loan payments, which total up to $2,300. The rest of the $500 that is left, I use for groceries, transit and miscellanous spending. I am trying to pay off my credit cards as fast as possible. Is there a more efficient way to be doing this?
In terms of getting rid of your debt mountain as fast as you can, you’re using the right approach for the long term. However, it’s going to feel like you’re not making any real progress for a very long time if you’re focusing on the highest balance debt first, even if it’s the highest interest debt.
Another common method for paying down debt is to pay the smallest debt off first. The reason for this is so that you can feel the success of eliminating a debt much more quickly, though it usually puts you just a bit behind the overall pace of tackling your high interest debt first.
In terms of the math, you’re doing the right thing. However, if you feel defeated by it, there’s nothing wrong with spending a couple months throwing the extra payments at the smallest debt so that you have the thrill of seeing a debt vanish.
Q9: Paying for nursing care
The issue I really want your advice about is paying for nursing home care if it comes to that. I have told my father that I won’t consume my savings for that purpose, and that they’ll have to liquidate their assets and depend on Medicaid if they need nursing home placement, even though that will stop the income right when they need it the most. I feel guilty about that, but I’m 8 years away from retirement age myself and not in the place I should be even if I didn’t have this unexpected burden. I don’t want to get to the end of my life and run out of money because of his bad decisions. I’m hoping you’ll reassure me that protecting myself is a justified decision.
I don’t think you’re necessarily wrong in doing this.
A big part of decisions like this have to do with the relationship you have with your parents, your own moral values (often based on what you learned from your parents), and the culture you grew up in. There is no inherent right or wrong in such a choice.
My only comment is that if you feel guilty about your choice, then you should probably do some more soul-searching within yourself about your issue. I cannot absolve your guilt.
Q10: Handling a small debt load
I’m 48 years old, married and one teenage son and have found myself in $12,000 of debt (car, veterinary bills, etc.). My simple question (ok…maybe it’s not that simple) is: is it smarter to work at building up my emergency fund or paying off my debt faster than I currently am (it used to be $18,000 so am making some progress, albeit slow)?
Just curious on your thoughts.
My usual recommendation is to first have a small emergency fund – typically $1,000. Once you have that, focus on paying off your debts. If you have an emergency, pay for it out of the emergency fund, then focus your next few months on building that emergency fund back up.
The idea is that it’s very important to break your routine of using debt to pay for everything in your life, particularly emergencies. It’s a crutch that just keeps burdening down your future. An emergency fund helps to break that crutch.
I think you’re making good progress, even if that debt reduction took a while. With each step you take, it’ll become an easier journey.
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.