Stand up for nonprofit news & help us reach our $100,000 goal! GIVE NOW

Mailbag for Friday, May 25, 2007

Marketplace Staff May 25, 2007
HTML EMBED:
COPY

Mailbag for Friday, May 25, 2007

Marketplace Staff May 25, 2007
HTML EMBED:
COPY

TESS VIGELAND: Hi, I’m Tess Vigeland, and it’s that time in the show where we listen to you. Here with me, as always, is our economics editor, Chris Farrell. Hey, Chris, how are you doing?

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

VIGELAND:
I’m terrific. But before we get to the questions, let’s ask everyone to take down our Web site address. It’s Marketplace.org. Click on the contact button there. Or you can give us a call. It’s 877-275-6667. That’s 877-ASKMONY. And we spell that M-O-N-Y. All right. Let’s hit the phones. We’ve got Steve calling from San Francisco, California. Hey, Steve.

STEVE:
Hello, and thank you for taking my call.

VIGELAND:
Oh, it’s our pleasure. Now, tell us a little bit about yourself. What do you do there in the beautiful city of San Francisco?

STEVE:
It is beautiful. Thank you. I am an attorney and a writer. And I have a small press.

VIGELAND:
Ah.

STEVE:
I have done pretty well here. I saved some money in my 401 (K) during the Dot-com boom. And my question has to do with what we call socially responsible investing.

VIGELAND:
Very popular topic for our listeners, Chris, isn’t it?

FARRELL:
Yeah.

STEVE:
Well, I hope so. After a few people at work told me it was impossible, I learned that my employer’s 401 (K) plan does allow us to choose the mutual funds that are not on the list that comes by default, because the package deal included stock in Altria Group, which, I guess, is supposed to sound altruistic, but it’s actually Philip Morris reborn. I don’t wanna make money off exporting munitions or poisoning rivers or advertising cigarettes to 12-year-olds. I do wanna support companies that treat their employees well and companies that promote things that I believe in, like wind power and hybrid automotive energy.

VIGELAND:
But you say you have a mutual fund that says it does invest in socially responsible companies. Right?

STEVE:
I found a couple that said they did. But when I read the perspectives and I read the fine print and I see the companies that they have money invested in, it’s not that easy to find out what companies they have, actually. But the only ones they actually tell us are the top 10.

VIGELAND:
Hmm.

STEVE:
You know, I do believe in capitalism as a concept. But then, I see a lot of companies that I don’t wanna be profiting from and I don’t wanna be supporting. Is there a resource out there to help people with this kind of thing?

VIGELAND:
That’s interesting, Chris, that, that this mutual fund only lists the, the top 10 companies that they’re investing in. Is there way to kind of dig deeper in the dirt within your mutual fund to find that stuff out?

FARRELL:
There are several things that you can do. First of all, SocialInvest.org is sort of the main portal into the socially responsible investing world.

STEVE:
Okay.

FARRELL:
And they have a lot of information on the mutual funds themselves, but also, in terms of community investing and some avenues for community investing, because more and more people are putting some of their checking account money, or savings account money, into small community banks that lend to intercity entrepreneurs and intercity homeowners. The other thing that I’m a big advocate of, and I guess you’re aware of this, is I don’t like index funds. And there are a couple of socially responsible index funds. Probably the best-known is the Domini index. It’s 400 companies, very low fees. It does very, very well, relative to the S&P 500, which is what we would normally compare it to.

FARRELL:
But again, what you’ve really hit on is a big issue in socially responsible investing. How deep do you want to drill down? If you go to MorningStar.com or the SocialInvest.org and you do the information there, you’re typically gonna get the top 10 holdings. And the reason why they don’t publish as much is they can change. There’s a lot of turnover. And frankly, I think that the information should be more available in today’s Internet world. But it takes a little more digging.

VIGELAND:
All right, Steve. You ready to dig?

STEVE:
Yes.

VIGELAND:
All right.

FARRELL:
But I do wanna say that people should not despair. I mean, you can’t achieve perfection, but you can get pretty close to what you think is the way you’d like your money to work. There are all kinds of tradeoffs. Perhaps, you know, you would prefer have this different type of labor relations, but what it turns out is, you know, you’re not gonna have the labor relations you want, but they really treat women well. But I think one of the things that people should not take away is that socially responsible investing is a fool’s errand.

STEVE:
Mm-hmm.

FARRELL:
It is a not a fool’s errand. We always bring values to whenever our money…

STEVE:
Right.

FARRELL:
…and this is no different.

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

STEVE:
It certainly does. And I appreciate your being on this issue.

VIGELAND:
Absolutely. Thanks so much for the call.

STEVE:
Thank you. Buh-bye.

VIGELAND:
All right. Chris, how about we hit the e-mail bag? You’re ready for our first letter?

FARRELL:
Absolutely.

VIGELAND:
All right. Well, Joan is writing in from Dearborn, Michigan. And she wants to know a clear and simple explanation of something called Crummey powers?

VIGELAND:
C-R-U-M-M-E-Y. What is this?

FARRELL:
If you’re asking about Crummey powers, contact an estate-planning attorney. Let me break it down. You’re a married couple. You have one child. By law, each parent can give that child $12,000 excluded from taxes, right, a year. Now, the one rule we need to remember is that the child then must be able to go ahead and do what hey want with the money. Now, let’s say that you had a trust. Child might not get that money for another 20 years. Crummey powers is a way of giving the money into a trust and still being able to take advantage of the annual exclusion gift. That’s really the trick that’s going on here.

VIGELAND:
Doesn’t sound too crummy to me. It sounds like a pretty good deal.

FARRELL:
It is a good deal. I mean, there’s also a lot of other good deals with that because it probably means you’re getting a really good inheritance.

VIGELAND:
Well, I hope that helps you, Joan. Thanks so much for the letter. If you think you’re the only person who doesn’t understand some of the terms bandied about, well, you definitely aren’t. I’m right there with you. And Chris is here 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-M-O-N-Y. All right. Let’s hit the phones again. We’ve got Yolanda on the line from Denver, Colorado. Hi, Yolanda.

YOLANDA:
Hello.

VIGELAND:
How long have been there in Denver?

YOLANDA
Almost 18 years.

VIGELAND:
And what do you do there.

YOLANDA:
I’m a cashier . . . at Colorado State University.

VIGELAND:
Well, what’s your question for Chris today?

YOLANDA:
Well, I’m planning, planning on selling my home.

VIGELAND:
Hmm.

YOLANDA:
It sounds like there’s a possibility of a short sale. I’m not sure of all the ramifications, as far as a short sale. I haven’t really been able to get many answers from either my mortgage company or my real estate agent or, and she asked if I had spoken to an attorney. Flatly, I just don’t, can’t afford an attorney.

VIGELAND:
Okay.

YOLANDA:
So I thought, well, I’ll call you all to see if you can help me out with some of the questions I might have.

FARRELL:
Sure.

VIGELAND:
Well, Chris, this is a term that we’re hearing more and more often these days, as people can’t sell their homes for the price that they owe on them. Can you give us a quick definition of a short sale?

FARRELL:
This is for people who are on the edge. You have a choice at bankruptcy, foreclosure or short sale. And with the short sale, what you convince the bank to do is to write off the portion of the mortgage that’s higher than the value of your home. The reason why they ask you whether or not you have an attorney is that at a moment in your financial life when you can least afford it, in essence, you need a squad of professionals to help you out.

VIGELAND:
Right. And Chris, as I understand it, I actually know someone who’s done a short sale recently. And not only does that put you in a unique situation with the bank, but Uncle Sam then considers that short sale a…

FARRELL:
A gain.

VIGELAND:
…a gain for you. So then, don’t you owe taxes on that, as well?

FARRELL:
Yeah. Let’s say it’s a $200,000, you sell it for $150,000, you owe the bank still $50,000, that could be treated as a gain. It’s a slightly strange situation because typically, when you try to buy a home, you know, you’re proving how credit worthy you are. With a short sale, you actually have to do the opposite. Essentially, you have to prove that you’re broke. Because in order for a short sale to go through, you know, the bank has to be convinced and everybody else be convinced that, you know, you don’t have other finances that you could tap. Because let’s say, you sold the home with a $5,000 loss and you have $5,000 in savings, the bank is not gonna cut you a break at that point in time.

FARRELL:
So, as we can already see, there’s a lot of issues that come into a short sale. And that’s why the person that recommended to you, Yolanda, to talk to a real estate attorney, that’s really what they were saying is that this is a complicated transaction and you really do need to reach out.

VIGELAND:
Yolanda, what’s your reason for moving? Do you, do you have to get out of the house for some reason?

YOLANDA:
Well, actually, I do have a second, and it is quite a bit behind. And they did negotiate a prepayment plan, but they gave me until the end of June to make a balloon payment, which I don’t, I don’t have.

VIGELAND:
Wow.

YOLANDA:
I don’t know why they set that.

VIGELAND:
So, Chris, given that situation, what’s her best next move?

FARRELL:
I would really go to an attorney because…

VIGELAND:
But what if she can’t afford one?

FARRELL:
It isn’t gonna be tough, the question that gonna be raised is short sale, bankruptcy or foreclosure, or some other alternative. But it’s always best to hire a professional to do, to do renegotiations. And in this environment that we’re in, banks have an enormous incentive to work with people.

VIGELAND:
Well, Yolanda, I know it’s small comfort, but – you’ve got lots of company…

YOLANDA:
Yeah.

VIGELAND:
…when you’re dealing with these issues. So, hope that helps and best of luck to you.

YOLANDA:
Okay. Well, thank you.

VIGELAND:
Take care. Well, as you know, owning a home is a dream for a lot of people, but this can be very confusing. There are sticky predicaments that you can get yourself into. And hopefully, we can help you sort it all out. Give us a call, we’re at 877-275-6669. That’s 877-ASK-M-O-N-Y. Or visit our Web site, we’re at Marketplace.org. Click on the contact button. This is Marketplace Money from American Public Media. All right. One more reach into the e-mail bag. We’ve got Charles writing in from right here in Los Angeles, California. He is in his late 30s, single, and currently earns, good for him, around $160,000 a year. He has about $120,000 saved for retirement, again, good for him. He maxes out his 401 (K). It doesn’t sound like this guy has any problems.

FARRELL: . . .

VIGELAND:
But because of his income, he cannot use a Roth IRA. As we know, there are income limits. He’s done a little research and he thinks that in 2010, the rules that govern the Roth, especially these, these income limits, he’s heard that it could be beneficial to change his retirement savings over, right now, to take advantage of it. So take us through this question about this Roth IRA. Are things actually gonna change in 2010? And what should he do?

FARRELL:
Actually, this is something that’s out there. In 2010, the law would change. Now, we got to do a couple of rules. You can’t contribute to the Roth if your income exceeds $114,000. There’s an income limit. There’s also you can convert a traditional IRA into a Roth IRA with one important caveat. Your modified adjusted gross income has to be under $100,000. In 2010, you can convert your traditional IRA into a Roth IRA in the $100,000, there’s no income limit there. It disappears. Furthermore, at – for that one period of time if you do, you can also spread the tax by 2011 and 2012. Don’t ask me why they did that. But anyway, they did it. So people are excited.

VIGELAND:
So you can take a traditional IRA, which is something that you can get a tax deduction for, the taxes are not taken out until you withdraw. You can take that traditional IRA, convert it into a Roth IRA, and pay the taxes then over two years?

FARRELL:
Yeah. But then from then on, then it goes back to the one year. The problem that I have, is this law still gonna be in place in 2010? This is one of those at the margin that strikes me as no one’s really going to mount the tax fight battlements to support. So, you know, it’s kind of complicated. It’s kind of a small world that can deal with it. And I’ve noticed more and more people are recommending, you know, maybe what you might wanna do is just buy a good stock. That might just be a smarter strategy overall.

VIGELAND:
All right. Well, there you go, Charles. Hope that helps you out. And unfortunately, those are all the questions we can take on this week’s show. But please do leave your questions for a future program on our voicemail, call 1-877-275-6669. That’s 877-ASK-M-O-N-Y. Or visit our contact page on our Web site, it’s Marketplace.org. Thanks, Chris.

FARRELL:
Thanks a lot. And Tess?

VIGELAND:
Yes, sir.

FARRELL:
What would we do without the tax writing geniuses at Congress?

VIGELAND:
We’d all probably be better off.

FARRELL:
Exactly.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.