Mailbag for Friday, March 16, 2007

Marketplace Staff Mar 16, 2007

TESS VIGELAND:
I’m Tess Vigeland. And if you’re a regular around here, then you know this is the time in the show where you tell us your financial questions. And with the help of our own economics editor, Chris Farrell, we’ll answer them as best we can. Hey, Chris. How are you doing?

CHRIS FARRELL:
I’m doing well. How are you?

VIGELAND:
I’m pretty good. Are you ready to answer some questions?

FARRELL:
Yes. I am. Send them my way.

VIGELAND:
All right. Well, before we get to the answers, we want everyone to take down our Web site address. It’s Marketplace.org. Click on the contact button. Or if you prefer, you can give us a little ring a dingy. It’s 877-275-6669. That’s 877-ASK-MONY. All right. Well, I know when we talk about personal finance, it’s music to your ears. But for Gene, who happens to be our first caller, music is finance. He’s calling from Charlotte, North Carolina, where he is with the Charlotte Symphony Orchestra. Hi, Gene.

GENE:
Hello.

VIGELAND:
What instrument do you play?

GENE:
I’m the principal clarinetist with the Charlotte Symphony.

VIGELAND:
So what’s your favorite composer and piece of music?

GENE:
I would have to say whatever we happen to be working on at the moment.

VIGELAND:
Oh, excellent answer.

GENE:
That’s where my focus is.

VIGELAND:
So I understand that your son has gotten into a pretty bad real estate deal. Tell us a little bit about that.

GENE:
Yeah. I’ll give you some background. As you said, I’m in Charlotte, but my son lives in LA. And he recently bought a condominium. He earns about $35,000 a year. And the condominium cost $309,000. A mortgage broker found a financing deal for him, which they refer to as an 8020 deal.

VIGELAND:
Mm-hmm. That’s where you pay an 80 percent of your mortgage with one mortgage. And then on top of that, you have a second mortgage for 20 percent of the purchase price.

GENE:
Exactly right. And the 80 percent portion is being financed at 6.99 percent, which is not too bad. But the 20 percent portion is being financed at 11.635 percent.

VIGELAND:
OK.

GENE:
And in the month of December, he couldn’t come up with the January payments. And that’s when I heard from him. I was gonna just send him a check for $400 a month to help him out. And I thought some more about it and I came up with the idea of taking out a mortgage on my home, which is paid for, and just paying off his second mortgage with that money, and make interest only payments on the mortgage that I’d take out. And those interest only payments would be about the same amount that I was gonna send him just to help him out.

FARRELL:
Right.

GENE:
But at the same time, I would be getting a tax benefit for making those interest only payments. And it would reduce his monthly payments by about $600 a month if I just pay off his second mortgage.

FARRELL:
OK.

VIGELAND:
Chris, isn’t this, it sounds to me like throwing good debt at bad debt?

FARRELL:
Yeah. Here’s the issue. As a parent, you wanna help out your son. You’re now, however, deeply involved in the Los Angeles condo market. And you’re also on the hook, really, in terms of this real estate investment. Now, if you’re forecasting farther down the road, I think there’s a strong case to be made just as in other parts of the country for the weakness in the market. But the simplest and most straightforward route to take is to, for him to sell it. Get out from under, which essentially too expensive an investment for him. I actually think there’s a lot of consequences to this decision in terms of your financial intertwining with your son in whether or not that’s really a good thing to do. This isn’t gonna be a great investment for you. But as a parent, I can’t tell you not to do it. And if you are going to do it, it’s not a bad strategy you’ve come up with. But I still like the plain, no fuss, no muss. Sell it. Help your son out if you he continues to need some help. But you’re not financially intertwined.

GENE
Right.

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

GENE:
Yes. It does.

VIGELAND:
Terrific.

GENE:
I certainly appreciate it.

VIGELAND:
Well, thanks for the call.

GENE:
Bye-bye now.

VIGELAND:
And how about we reach in to the e-mail bag now. We’ve got Michael from Indianapolis, Indiana. And he heard our recent buzzword segment on wage insurance. And he wants to know how he can find out more information like that. Who can qualify, how to apply. And all of his research is turning up tons of articles about it. But there are no references to any federal Web site or government agency for information or an application. So, Chris, I believe the answer here is that we don’t actually have this legislation yet, correct?

FARRELL:
No. There is wage insurance out there.

VIGELAND:
OK.

FARRELL:
There is a program. The current form of wage insurance, as it exists today, excludes younger workers. It’s for those workers 50 or over. So you lose your job, you take a new job. But it pays you less. So then what the wage insurance kicks in, it subsidizes on the job training, and it sort of helps you make up some of the income that you’ve lost up to $10,000. So it’s essentially a way of rewarding people to take a job and then help out for the fact that they’re making less money than they did before. But it’s not advertised. And it is an absolute disgrace. And I’m gonna send you to where you could find it. But it’s gonna take perseverance. So you need to go to the Web site of the Department of Labor, DOL.gov. And then you’re gonna click around, and what you want is the trade adjustment assistance section. And then you’ll scroll down, and you want the alternative trade adjustment assistance. And then they’ll further confuse you. They don’t call it wage insurance. They call it wage subsidy.

VIGELAND:
All right. Terrific. Well, if you’ve got a question that you just can’t seem to figure out by yourself, give us a call. We’ll try to help. 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. And we spell that M-O-N-Y. Well, a lot of people have to operate heavier dangerous machines at work. But I doubt very many people operate the kind of machine that our next caller, Thaddeus, does everyday. He’s calling from North Attleborough, Massachusetts. Hi, Thaddeus.

THADDEUS:
Hi. How are you doing?

VIGELAND:
So tell us what you do in your professional life.

THADDEUS:
I’m a Massachusetts National Guardsman. And I fly a UH-60 Blackhawk helicopters as an instructor pilot.

VIGELAND:
Wow. What kind of training does that require?

THADDEUS:
It starts off in a flight school, which is about a year. And then you spend a few years just figuring out how to really fly the helicopter. And then go to a couple of more certification schools to become an instructor.

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

THADDEUS:
Well, I just came back from a deployment.

VIGELAND:
Where were you?

THADDEUS:
We were in northern Kuwait about 25 miles from the border of Iraq.

VIGELAND:
How hard was it for you, and your wife, and your family to maintain your finances while you were away?

THADDEUS:
Well, for Jane and I, it was our second deployment. So we had kind of worked out, with some of the rough spots from our initial deployment. And having Internet access in Kuwait really smoothed out any of those rough spots, where neither – at no time that one of us not have a complete access to whatever we needed financially.

VIGELAND:
And how long have you been back stateside?

THADDEUS:
It’s been about five months.

VIGELAND:
Well, we’re real glad to have you back. So what can we help you out with today?

THADDEUS:
When I was deployed, I was promoted in my civilian position. And that promotion, and my wife’s income have put us over about $160,000 to $165,000 a year. And my wife has a Roth IRA that she’s been contributing to some sort of, some required meter. But I wanted to be sure that we weren’t gonna run into tax issues by exceeding any kind of income limitations for the Roth IRAs or any other kind of investment vehicle.

VIGELAND:
Chris, this is a great question. I think a lot of people are, are quite clear on what kind of limits there are to retirement accounts like this.

FARRELL:
Right. Has she contributed to the Roth IRA this year?

THADDEUS:
We did – this past year, and we kind of got to buy this year because, well, I hope, because I was deployed. My income, while deployed, is tax-deferred, or tax-free. So my actual annual income for tax purpose is about $1,200.

FARRELL:
OK.

THADDEUS:
So, but for ’07, it’s where it’s gonna become an issue.

FARRELL:
All right. You can put up to $4,000 into a Roth IRA every year, but it phases out. So if you’re filing jointly, the phase out starts out at $150,000 to $160,000, then you can’t contribute. If you’re an individual, it’s your modified gross income, $95,000 to $110,000. So the issue will be, you know, it’s fine. It can continue to compound.

THADDEUS:
OK.

FARRELL:
Even if you are above the adjusted gross income, you’re absolutely fine. But sounds like you’re probably not gonna be able to add to it in 2007. But you have no issues for 2006 for what you’re doing right now.

VIGELAND:
So, so is that really where he just leaves it in the account, or should he roll it over into something else where he can keep contributing?

FARRELL:
Well, the thing about the Roth, it’s a terrific investment because the money that’s in this Roth, when it gets withdrawn in retirement, is tax-free.

VIGELAND:
Mm-hmm.

FARRELL:
Now, most of us, in our 401K or regular IRA, when you withdraw that money in retirement, it’s taxable income. So it’s a very nice thing to have this balance of, personally, I think the Roth is probably the best investment vehicle out there, if you qualify. So I would just leave it, let it to compound, and then, hopefully, through the wonders of compound interest, you’ll have a fair amount of money to withdraw tax-free in retirement. But in terms of – your spouse, if she is working and she doesn’t have a retirement plan at work, depending on her employment, she may wanna look into a SEP IRA or see if she just qualified for a traditional IRA.

THADDEUS:
She actually has a 403B through work. She’s an educator.

FARRELL:
OK. So you’re . . .

VIGELAND:
Not a profit, no.

FARRELL:
. . . at, you’re, you’re, at least you know, and then, just make sure you’re putting the maximum, taking full advantage of that.

THADDEUS:
OK.

VIGELAND:
All right. Well, welcome back and thank you so much for your service.

THADDEUS:
Thank you.

VIGELAND:
Are you moving up in pay grade? If not, maybe you’d like to start saving money a little better. It might work out to be even better than raise. Give us a call. We’re at 877-275-6669. That’s 877-ASKMONY, or just visit our Web site. It’s Marketplace.org and click on the contact button. This is Marketplace Money from American Public Media. All right. One more dip into the e-mail bag. You’re ready for this, Chris?

FARRELL:
Mm-hmm.

VIGELAND:
Here we go. And we got Matt from Coral Gables, Florida. And Matt has a friend who’s been diagnosed with cancer. She’s also the mother of three children. And there have been some fundraising activities to help pay for some alternative treatment options and help her family out with all the expenses that go along with a, a critical disease like this. Matt wants to know if there’s a way to set up some kind of fund that would help qualify all these donations as tax-deductible for the people who are contributing to this cause. Is there a way to do that?

FARRELL:
It’s difficult. When you give money to a charity, the donor gets a tax deduction, right?

VIGELAND:
Mm-hmm.

FARRELL:
However, charities, then, can’t say this money is gonna go for this particular individual.

VIGELAND:
Right.

FARRELL:
So here’s what you do. If you want to have some tax benefits, go to your church, local nonprofit that specializes in people who are suffering from cancer. Tell them what you wanna do. What they might be able to do is set up a trust at a bank. The donation is not tax-deductible. So that’s not still not gonna work. But the money that the trust fund gives to the family can come in as tax-free income to help out in certain circumstances. So that’s one avenue to pursue.

VIGELAND:
And, you know, I think that, that we should remind everyone that in a – situation like this, where it’s a donation for someone you know and, and a cause that you really believe in as, you know, a single person, the people who are donating really aren’t gonna care whether it’s tax-deductible or not. They’re gonna contribute.

FARRELL:
You’re right in that. They’re gonna contribute. They’re gonna help out. You’re gonna look at the family and see, well, where can I help out the most? Is it with money? Is it setting up a 529 plan for the three children? And so, at least, relieve some of that financial pressure. I mean, you know this family. You know their circumstances. If people want to give them money, they wanna help out, they wanna help out with time, your absolutely right, Tess, the tax deduction is not the critical issue.

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

FARRELL:
Thanks, Tess.

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