Mailbag for Friday, May 18, 2007
TESS VIGELAND: I’m Tess Vigeland. And it’s that time in the show where we listen to you. And here with me is our economics editor, Chris Farrell. Hey, Chris, how are you doing?
CHRIS FARRELL: I’m doing well. How are you?
VIGELAND:
I’m well. And I think we’re both ready for another round of questions from listeners.
FARRELL:
Absolutely.
VIGELAND:
All right. Well, before we start answering the questions, please do take down our Web site address. It’s Marketplace.org, and you can click on the contact button there, or you can give us a call. We’re at 877-275-6669. That’s 877-ASK-MONY. And Chris, we’re going to reach into the e-mail bag, first of all, here. And I have got a doozy for you. I don’t know if you’re going to have an answer to this, but Jesse writes in from Novato, California. And he listens to the show and wonders why we don’t have pictures of Rico Gagliano and Chris Farrell on our website. He went to the cast section, and they’re missing.
FARRELL:
Well, why?
VIGELAND:
I think it’s a question for our Web masters, actually. No, but you know what, Chris, I have the answer to this question.
FARRELL:
I know you like me. I know you, I know you like me.
VIGELAND:
We love you.
FARRELL:
I’m not taking it personally.
VIGELAND:
No, no, no.
FARRELL:
I’m not taking it personally. No.
VIGELAND:
Actually, you can find Chris on our Marketplace Money Web site. Again, it’s Marketplace.org, click on the headline there that says Marketplace Money, and you’ll see a photo of Chris right next to his blog, which is a new feature on our Web site. You can go, and not only look at Chris’ wonderful countenance, but you can get terrific advice and some thought-provoking notions of what’s going on in finance. And if you’d like to see Rico, you can go our Web site and click on the Educating Rico segment, and we’ve got a photo of him right there. So there you go. Hope that helps, Jesse, and happy hunting. And our first caller is Henry, and he’s with us from San Juan, Puerto Rico. Hi, Henry.
HENRY:
Hi. How are you?
VIGELAND:
Very well. How’s the weather there in San Juan? Need I ask?
HENRY:
Oh, it is another beautiful sunny day.
VIGELAND:
Oh. Can we come and visit?
HENRY:
Oh, absolutely. Absolutely. Please, come down.
VIGELAND:
OK. We’ll be there next week.
HENRY:
You’re welcome.
VIGELAND:
How long have you been there?
HENRY:
Actually, I’ve been here for about a year now. But before that, I, I actually commuted back and forth from New York.
VIGELAND:
What were you doing in New York?
HENRY:
I worked for a Fortune 500 company as a director of operations and technology and on learning department, online learning.
VIGELAND:
So how did you end up in Puerto Rico if you were working in New York?
HENRY:
I fell in love.
VIGELAND:
With the island?
HENRY:
Well, that, too. But with somebody.
VIGELAND:
OK.
HENRY:
Yeah.
VIGELAND:
A double-whammy, then. So what are you doing now to make a living?
HENRY:
Yeah, that’s a good question. I’ve started a consulting company, a project management company. And that’s really part of the question that I have, is I did what I shouldn’t have done. I took a major risk. I cashed in my 401K.
VIGELAND:
Oh no.
FARRELL:
OK.
HENRY:
Yeah. That’s because I felt, look, I’m fairly young. I want to give starting up my own business a chance. And that’s what I used to, you know, finance the business.
VIGELAND:
Henry, you mentioned, you’re young enough that you’re not terribly worried about having taken out your 401K money. How, how old are you, may I ask?
HENRY:
I’m actually 39.
VIGELAND:
So you still got a good 20, 25, 30 years to rebuild your retirement fund. So what’s your question for Chris?
HENRY:
So the question for Chris is, I think I owe on my 401K for my taxes. I filed an extension, and now, I’m not quite sure what the situation is with regards to possibly owing on the 401K. But the funds being–having been used to finance the business, the business, really, hasn’t shown any profit. So, what can I do?
VIGELAND:
Uh-oh.
FARRELL:
Not much at this point. However, what I would do, first of all, it’s been done. You’re going to owe ordinary income taxes, plus the 10 percent penalty on the 401K. But my main piece of advice would be, hire a professional. There may be some things that you can do just to lower your overall tax bite. If you don’t have much income, then the income tax rate that you’re going to be paying on the money that you took out, that’s not going to be much. So, you know, maybe you took it out at an opportune time.
VIGELAND:
Chris, is there any benefit or drawback to the fact that he is in Puerto Rico? Are they in to the same tax system?
FARRELL:
There’s a broad misconception, Tess, that if you live in Puerto Rico, you don’t pay federal taxes. Many people don’t pay federal income taxes. But there are all kinds of federal taxes that they pay, you know? Import, export taxes, you start to pay Social Security tax. And then there are the local taxes that you’re going to have to pay. So, actually, the tax bite can be even higher in Puerto Rico than it is here off the island.
HENRY:
Chris, about hiring a professional, I’m not sure if I should hire a New York professional or a Puerto Rican professional.
FARRELL:
When I lived in New York, the person that did my taxes was from Puerto Rico, and he had actually a large clientele that went back and forth between New York and Puerto Rico, as you were doing for a long period of time. So, actually, at this point, depending on who you’ll hire, I think that you’d come out ahead either way. Because you live in Puerto Rico now and because you have a small business, I think you would want, and you’d moved from New York to Puerto Rico, I think you’d want to development a relationship down there.
VIGELAND:
And certainly, the number one qualification would be that they’re willing to do your taxes on the beach.
HENRY:
Absolutely.
VIGELAND:
All right. Well, good luck in finding that person.
HENRY:
Well, thank you very much for your advice. Really appreciate that.
VIGELAND:
Thanks for the call.
FARRELL:
OK.
HENRY:
Thank you. Bye-bye.
VIGELAND:
Let’s check our e-mail bag, and we’ve got Ellen writing in from Rochester, New York. And she and her husband are both full-time graduate students. They contributed to the Roth IRAs this year, but they’re frustrated because they weren’t able to get the saver’s tax credit when they filed their income taxes this year. Do you know why students are not eligible for this credit?
FARRELL:
Who knows what goes on in the mind of the tax writers? And then, you hear one of my favorite examples is, if you’re married but file singly, can’t do Roth, can’t do Roth conversion.
VIGELAND:
Really?
FARRELL:
Yeah.
VIGELAND:
What’s the logic behind that? Oh, wait a minute. I’m asking for logic from Congress?
FARRELL:
Exactly. I have two theories. I have two notions of what’s going on. One is that trying to limit the cost, the saver’s tax credit, and the assumption is that students aren’t exactly saving a lot of money. They’re spending what they do in a very different investment, which is investment in their education. And the other thing is that students are also eligible for a number of other credits that have to do with their education, and so it may have been felt, you know, look, there aren’t going to be that many students that are going to be able to save, aren’t going to be that many students who are going to take advantage of the credit, and they already have things like, you know, lifetime learning credit, and that type of thing that they can take advantage of. But that’s my own theory. And if someone has a better theory, I’d love to hear it.
VIGELAND:
And if anyone has a theory on why Congress enacts things like this that really don’t help people much at all, we’d love to hear that theory as well.
FARRELL:
That’s going to be one full e-mail box.
VIGELAND:
Well, that’s what we like. All right. Well, if you’ve got a question about personal finance, come to us. We’re kind of like a dollar doctor. Click on the contact button on our Web site. It’s Marketplace.org. Or call us at 877-275-6669. That’s 877-ASK-MONY. All right. Let’s hit the phones again. We’ve got Sam on the line from Denver, Colorado. Hi, Sam.
SAM:
Hello.
VIGELAND:
How are things in Denver?
SAM:
Oh, very good. Very good.
VIGELAND:
Excellent. How long have you lived there?
SAM:
Lived here around 17 years now.
VIGELAND:
OK. What do you do?
SAM:
I’m a computer engineer.
VIGELAND:
So you’re one of the folks who writes all that complicated code that none of the rest of us can decipher?
SAM:
I guess you could say that. Yes.
VIGELAND:
Well, thank you for doing that, on behalf of all of us.
SAM:
Oh, my pleasure.
VIGELAND:
So what’s your question for Chris today?
SAM:
My question for Chris is in regards to foreign property. My wife’s family has a property that my in-laws use occasionally when they go back over there to India, and they’ve wanted to pass it on to her. And we wanted to see what the tax consequences were. And I have two particular questions. The first one is, essentially, tax consequence, whether positive or negative, of foreign property ownership, if we were to pay the property tax and all that stuff. And the second part of my question is, the tax consequence if were to convert that into a rental property for a part of the year.
VIGELAND:
Wow, lots of questions. Chris, I think we’ve dealt with this on properties, say, in the Caribbean but I don’t think we’ve had a question for as far as India. Do the same rules apply?
FARRELL:
Well, what has happened with India is they’ve liberalized a lot, and so there’s a lot of money that’s pouring in from the Indian Diaspora. It does turn out, and this is the good news, is that the US and India have a tax treaty. And so, once you have a tax treaty, and rental income actually comes under the tax treaty, then that really does cut down on, you know, double corporate taxation, a lot of those issues. So, quite a few people in the Indian community are doing exactly what you want to do, so you could actually just hit some informal conversations.
FARRELL:
But this is an area of international tax law and, therefore, you’re going to need to work with someone who is experienced in international tax law because, I don’t know if you’ve ever looked at one of these tax treaties, yeah, you need a little bit of tax background to understand exactly what’s going on here.
VIGELAND:
So is there any way to tell him whether there’s any tax advantage to having a rental property in India?
FARRELL:
Oh, there is tax advantage, the 30 percent tax advantage within India itself to having the rental property. So, there is absolutely tax advantages within India itself toward having a rental property. So I think it’s a great idea.
VIGELAND:
Well, there you go, Sam.
SAM:
Great.
VIGELAND:
Rent away.
SAM:
Great. Thank you very much.
VIGELAND:
Thanks for the call, Sam. Need a place to stay for vacation? Well, we can’t help you with that. But we can help you save enough money to take a vacation. Give us a call and we’ll try to help. It’s 877-275-6669. That’s 1-877-ASK-MONY. Or just visit our Web site. We’re at Marketplace.org. Click on the contact button. This is Marketplace Money from American Public Media. All right. How about one more reach into the e-mail bag? And Bill has written in from Rochester, Minnesota. And his 3-month-old daughter passed away not too long ago due to Sudden Infant Death Syndrome.
VIGELAND:
Of course, our condolences go out to Bill. He had purchased a life insurance policy both for his daughter and for his 3-year-old son, hoping that that would help with future insurability. Now, unfortunately, he stands to collect on his daughter’s policy. In some ways, of course, he doesn’t even want the money but he knows…
FARRELL:
Sure.
VIGELAND:
…that he should use it for his son. So here is Bill’s question. How can he create a retirement plan for his son, something that he can’t use on a whim as he ages, can’t touch, perhaps, until he’s much older and near retirement? Bill doesn’t want to use it for a college plan, so this is really using the insurance money for a retirement plan for his son. What’s the best setup here?
FARRELL:
Well, there’s a couple of things. One, I just would like to say, Bill, that the best investment that anyone can make is in a college education. So I would, at least, urge a second thought about putting the money toward a college plan, just because over a lifetime, that is the biggest return on an investment. If you really don’t want to do that, then what I would do is put the money aside in treasury bills, you know, blue chip, money market, mutual fund. And as your son gets older and starts earning some income, then you could start funding a Roth IRA.
FARRELL:
That’s probably the other way that I would approach. And with a Roth IRA, when you withdraw that money in retirement, it’s tax-free. And so, if you can imagine, I don’t know when your son’s going to start earning some money, but your son will still be very young, so, if it’s compounding over a 50, 60-year period of time, that’s a long time. That’s a lot of compounding, and there’s a lot of wealth there. That’s the, an alternative. If I was trying to think about setting the money up in a retirement, that’s what I would do.
VIGELAND:
But your initial kind of gut reaction is to go ahead and start setting up a college fund, like, what, a 529?
FARRELL:
A 529 plan is probably the best idea. That’s what I would do, and I really feel terrible. But you could get more complicated depending on the money you would trust. But let’s just keep life simple, 529 plan, perhaps a Roth.
VIGELAND:
All right. Well, again, our condolences and best of luck to you and your family, Bill. And unfortunately, those are all the questions we can take on this week’s show. But please do leave your question for a future program on our voicemail. It’s 877-275-6669. That’s 877-ASK-MONY. Or visit the contact page on our Web site, Marketplace.org. Chris, as always, thanks so much for the great advice.
FARRELL:
Thanks a lot.
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