Mailbag for Friday, April 20, 2007

Marketplace Staff Apr 20, 2007

Mailbag for Friday, April 20, 2007

Marketplace Staff Apr 20, 2007

TESS VIGELAND:
I’m Tess Vigeland and it’s the time on the show when we turnover the mic to you, and find out what burning questions you have for us, us, of course, being myself and our economics editor, Chris Farrell. Hey, Chris. How are you doing?

CHRIS FARRELL:
I’m doing well, and hopefully I can quench people’s thirst for knowledge.

VIGELAND:
Oh, excellent. But before we get to answering your questions, take down our Web site address. It’s Marketplace.org, and click on the contact button, or you can give us a call at 877-275-6669, that’s 877-ASK-MONY. Well, Chris, you’re always suggesting that our listeners educate themselves about personal finance by doing a lot of old fashion reading. Well, our next caller is a regular listener and he’s also a regular reader. At least all the books that you recommend, but, of course, he has slight advantage. He’s a librarian. And he is calling from his library in Virginia. Hi, Clint.

CLINT:
Hi.

VIGELAND:
How are all the books doing in your library?

CLINT:
Good. They’re circulating well, which is what we like to see.

VIGELAND:
Good circulation is good for everybody, right?

CLINT:
Right.

VIGELAND:
So what’s your question for Chris today?

CLINT:
OK. Well, my question involves my father’s 401k plan. I would like advice on contacting the 401k administrator to kind of ask them to expand their investment options.

VIGELAND:
This is your father’s 401k plan? But it sounds like maybe you’re managing it?

CLINT:
I try to advise my parents on financial matters.

VIGELAND:
So is this 401k plan through the company?

CLINT:
The company approved it through their last union contract, but the union actually is the administrator, and they hire someone to actually run the plan, as far as I can tell.

VIGELAND:
OK. So what is available on the plan currently?

CLINT:
Basically, all the funds that’s there are all load funds and no index funds and they’re all loaded funds.

VIGELAND:
Chris?

FARRELL:
Is there a company match?

CLINT:
No.

FARRELL:
Let’s divide into two. First thing is contacting the administrator of the union. You’ll get unreceptive ears. Whether or not they’re not gonna change, I don’t know. And I don’t know how long their contract is. But I think it’s worth the phone call. And I do think that one of the things – the Pension Protection Act of 2006 really has woken up a lot of administrators that this is exactly what they should be doing. And they should be looking at fees a lot more closely. There’s a lot of pressure toward bringing these fees down.

VIGELAND:
Chris, it seems, like, if they don’t go along with it, and this is a retirement fund that does not offer a company match, what would you say about getting out of the 401k, and him starting his own retirement investment plan?

FARRELL:
I would not get completely out of the 401k. It’s automatic. So you don’t have to think about it.

VIGELAND:
Couldn’t you do that with an IRA?

CLINT:
I think they’re both actually, both my parents are actually maxing out their raft.

FARRELL:
OK. Because that was gonna be my other suggestion that, you know, there’s no match. They stay in with the 401k. Maybe you can get some better options in there, but they do get a mix of pretax money. But then a nice mixture with the raft, that money – the gain will be tax-free when they withdraw that in retirement. Maybe they’re paying too higher fee than they should. But the fact of the matter is they’re saving for their retirement. Sounds like you’ve done a good job at setting them up in a balanced portfolio. Yes, it could be better. But your parents are in a good situation.

VIGELAND:
All right. Does that help you out, Clint?

CLINT:
Yes, that’s great.

VIGELAND:
OK. Terrific. Thanks for the call.

CLINT:
Sure, thank you.

VIGELAND:
All right. Let’s reach in to the e-mail bag. Are you ready for a little electronic question here, Chris?

FARRELL:
Absolutely.

VIGELAND:
OK. Well, Tommy from Middletown, New York, just learned of a very complex and somewhat frightening situation. About a year ago, his ex-wife helped their 17-year-old daughter get her first credit card. And she made minimum payments on it for a while, so that her credit score was boosted. But then she started, of course, as we all know, getting other credit card offers. And what happened was, she actually ordered these credit cards, and, in fact, lied about her age to get more credit until she was $20,000 in debt in a span of a few months.

VIGELAND:
So he wants to know, first of all, how the credit companies can allow this to happen and not check somebody’s age? Of course, I would guess, that they don’t wanna check the age because the more credit you rack up, the more fees they’re gonna get. And he’s also wondering, given that she was a minor when all these happened, is she completely liable for this $20,000 debt?

FARRELL:
I just wanna make one point at front. Why does a 17-year-old need a good credit score?

VIGELAND:
Good question.

FARRELL:
I mean, that’s my basic problem that I have with a lot of these credit cards. I mean, there are circumstances where it is important to start building your credit score. But for many 17-year-olds, it doesn’t really matter. If it’s your child’s first credit card, what you want to get them, what I would recommend getting them is what we called a secured credit card. In essence, you have a $500-checking account, and it’s linked to the credit card. Now, it turns us to the specifics for the situation. It depends on how much money you wanna spend and how much you wanna turn this into a learning experience.

FARRELL:
But if it were me, first thing I would do is consult a lawyer. Once you have consulted a lawyer, you will contact the various credit card companies, you’ll get into a negotiation.

VIGELAND:
So do you think it’s actually possible that she could not be on the hook for this full amount?

FARRELL:
I think that it is possible that for negotiation you could reduce it somewhat.

VIGELAND:
OK.

FARRELL:
But you’re gonna be on the hook. It’s a life long lesson, and I would say, the one thing is, she learned it at 17. And she learned it while you are there to help out.

VIGELAND:
Yeah, it’s a lot earlier than some of the rest of us learned it. I can say from personal experience.

FARRELL:
Well, usually, we’re on our own at that point.

VIGELAND:
Yep. Well, no matter how dire your situation might seem, it might have a pretty simple solution. Click on the contact button on our Web site, it’s Marketplace.org, or give us a call at 877-275-6669, that’s 877-ASK-MONY. Well, as we’ve just heard being a parent is really difficult. But, you know, Chris, sometimes, being a child isn’t so easy either, especially when you’re like our next caller. And you have to make some really important decisions on behalf of your parents. Deborah is calling from Boise, Idaho. Hi, Deborah.

DEBORAH:
Hi.

VIGELAND:
What do you do there in Boise?

DEBORAH:
I work for the USDA Forest Service. I’m a performance accountability and a host.

VIGELAND:
OK. Well, I understand that you have a situation with your mother. Tell us a little bit about that.

DEBORAH:
Mom had, for years, relied on a good friend to be her financial planner. And the woman was very smart about things. This woman passed away at the end of August. And shortly after that, my mother was hospitalized and she hasn’t been home since. She’s been in and out of the hospital.

VIGELAND:
Oh.

DEBORAH:
And she’s back in Cincinnati.

VIGELAND:
Oh, wow. So who is in charge of your mother’s care at this point?

DEBORAH:
We have a health care power of attorney that my sister manages that mom’s coming up on the last few days of her 100 days for Medicare for a given event, and we hope to move mom out here.

VIGELAND:
Is your sister on the West Coast as well?

DEBORAH:
Three of us are in Boise, one is in Orange County, and one is in Montana.

VIGELAND:
Oh, wow. So nobody really near mom at this point.

DEBORAH:
That’s right. If mom can get healthy enough for a move, we would like to move her in the near future to, and assist living out here. And I’m so overwhelmed with all the Medicare implications that her illnesses have brought to bear. And now, with the different state, I’m nervous about what will Medicaid cover in one state and it’s not the same thing in another state, it’s just really difficult to know how much money anything’s gonna cost.

FARRELL:
Right. And does she ever own a home?

DEBORAH:
She does. It’s been appraised at $150.

VIGELAND:
So, Chris, obviously, lots of questions here and probably depended upon other elements of her mother’s finances, right?

FARRELL:
That’s right. I mean, there’s a couple of things. I mean, the big investment, and it sounds like you’re already making it, is you’ve entered the world of Medicare and Medicaid, and probably, particularly Medicaid. I think it’s wonderful that you’re gonna move, or it sounds like that’s what you need to do. And the reason why I raised the home is that this is an area that can get a little bit complicated with Medicaid. But it may make sense depending on the market to wait a little bit on selling the home. But you are gonna want to sell the home in order to have that money available for her. Particularly, if she’s gonna move into an assistive living center because that would certainly help out a lot with the assistive living.

DEBORAH:
Mm-hmm. But we do have a few other assets. And I had thought that I would liquidate, and then try to get the house on the market in the near future because some of my family have the benefit of a paid family medical leave. Others are given a leave but no pay. So I was trying to come up with a way to give them some money so that we could go back every other week or so. And that’s when I found out that, well, Medicaid kind of frowns on that if they see that you’ve kept that money within five years before applying for Medicaid.

FARRELL:
Right. Now, I don’t want you to spend to it. I think that that is a wonderful idea. Unfortunately, there is a whole industry that has a reason. How to basically get rid of assets so they qualify for Medicaid? That’s not what you’re doing. So I would check with an elder care lawyer. And you don’t wanna play any games. You don’t wanna do anything fancy. But it seems to me this is exact, you know, you’re doing, you’re spending the money and your mother’s spending the money, it’s really her money that’s, that’s being spent in order to get her healthier and to get her cared for. Because this is a different situation than trying to, you know, trying to hide assets. What you’re really trying to do is get her healthy so you can move her to Boise.

DEBORAH:
Right. Correct.

FARRELL:
That’s a very different situation.

DEBORAH:
Yeah.

VIGELAND:
All right. Does that help you out, Deborah?

DEBORAH:
It does. I know there’s a lot of people in this same situation.

VIGELAND:
Absolutely.

DEBORAH:
It’s totally great to have this little discussion.

VIGELAND:
OK.

CHRIS FARRELL:
Yeah.

VIGELAND:
Well, thanks so much for the call and best of luck.

DEBORAH:
Thank you. Bye-bye.

VIGELAND:
Bye-bye. Well, whatever your question is, chances are we’ve already done the research. So give us a call and let us impart wisdom unto you. It’s 877-275-6669, that’s 877-ASK-MONY. Or visit our Web site, it’s Marketplace.org and click on contact. This is Marketplace Money from American Public Media. And let’s reach once more into the e-mail bag. We’ve got a (INAUDIBLE) from Rowley of South Carolina writing in, and he owned a piece of commercial property that he unwillingly had to sell to the city. I think we call that eminent domain.

Well, they, they needed it to build an extra traffic lane so they can just come in, and basically, tell you that they’re taking your property. But he wanted to make the best of the sales, so he obtained something called a 1031 exchange that’s supposed to shield the proceeds from a tax (UNINTELLIGIBLE). First of all, a little bit more about that, what’s a 1031?

FARRELL:
Right. 1031 exchanges had become increasingly popular. And what you’re doing is you have a four-unit rental apartment complex. You sell it. So, you owe capital gains, but you wanted to fur it.

VIGELAND:
OK.

FARRELL:
If you exchange it for a like property that’s used in trade or business or investment, you can defer your capital gain. It’s a little bit of a two-step because you have to identify the property. And then there’s all these rules that the IRS has for how you can do it and not run a thaw of the IRS regulations. But it has become increasingly popular, I would say, really the best tenures.

VIGELAND:
OK. Well, then, then that kind of answers his question because his plan was that he was gonna use this money to buy a home. But what you’ve just told us is that if the land was originally commercial property, he can’t use it to buy a residential property.

FARRELL:
That’s right.

VIGELAND:
So what options does he have then if he can’t take this business and turn it into a house? Can he turn it into something else?

FARRELL:
Yes, he can. Let’s say he could turn it into buying, you know, a four-unit apartment complex, as using an earlier example. There’s a fair amount of flexibility. The exchange is for a property that is productive use in trade, business or investment.

VIGELAND:
Let me ask you this. If he decided, given this advice, that he wants to, instead, just take the money, can he give that back and take the cash back? He knew he has to take the tax hit.

FARRELL:
Here’s the deal. If it doesn’t work, he’s just gonna pay the tax.

VIGELAND:
OK.

FARRELL:
You know? My theory is no one ever want poor-paying capital gains.

VIGELAND:
All right. Well, that’s all the questions we can take on this week’s show, but leave your question for our future program on our voicemail. It’s 877-275-6669. That’s 877-ASK-MONY. Or visit our contact page on our Web site, Marketplace.org. Thanks so much, Chris, as always.

FARRELL:
Thanks, Tess.

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