TEXT OF GETTING PERSONAL (FIRST SEGMENT)
Tess Vigeland: Alright. It’s time for Getting Personal, where we turn around the mic and with me of course is our economics editor Chris Farrell. Hello again, Chris.
Chris Farrell: Yes, I’m back Tess and boy, I’m eager for these questions.
Vigeland: OK, let’s go to caller number one and Karen is with us from Washington, D.C.
Karen: Hi. How are you?
Vigeland: We’re doing well. What do you do there in D.C.?
Karen: I work for the government doing strategic planning work.
Vigeland: Strategic planning work. What does that mean?
Karen: We do an analysis of the research we fund and then we plan what we need to do in the out years.
Vigeland: OK. Well, tell us what your question is for Chris today.
Karen: I tutor and mentor a young woman who’s a junior in high school and she, a couple weeks ago, decided that she wants to go to college, so I would like to start up some sort of fund or account so that I can help pay for her tuition and I know that there are 529 accounts and I don’t know if that is something I should consider and if there’s absolutely any way I could get a tax break out of this.
Vigeland: Wow, well first of all Karen, good for you. This is quite an effort on your part. You said that she is in what grade?
Karen: She is in the eleventh grade.
Vigeland: In the eleventh grade, so you don’t have a whole lot of time to save for her. Chris, does that have an impact on what you will recommend in terms of being able to put some money aside for this student?
Chris: Yes, absolutely. One is I would just put the money into brand-name money market mutual funds. Get whatever low interest rate that’s being offered right now and your money will be safe, you retain flexibility and it may be that some of the savings isn’t needed, in which case you still have it for your own use. Second point is I can’t think of a tax-advantage savings account for you that is going to save you on your taxes, particularly in light of what you want to use with this money and the short-term time frame.
Vigeland: So Chris, it’s not worth it for her to do a 529?
Farrell: You know, I don’t think so, because let’s say you put some money aside, but then it isn’t really needed or it isn’t needed as much. It’s more of a sense of maintaining maximum flexibility with this savings. It may all go towards the young woman or maybe only a portion goes to the young woman, so that’s why I’m recommending the money market mutual fund. Now my other part is, and this comes from an interview I did oh… seven, eight years ago and it was with the head of financial aid at the University of California, Berkeley. His argument was and my argument would be money’s not the really big issue. The real issue is making sure that she’s done the college prep courses and being her advocate in understanding what kind of college she can go to, what kind of financial aid is available, what sort of grants are out there and to understand the information and to expose her to and show her what are her options.
Karen: Yeah, and we’ve been talking a lot about that lately and fortunately, the tutoring program we work though has quite a resource center for information about financial aid, so that makes the whole world a little less scary for me there.
Vigeland: Well, thank you for helping this young woman out and does that help you answer your question?
Karen: Yes, it does. Quite a bit.
Vigeland: OK, terrific. Well, best of luck to you and to the young woman you’re tutoring.
Karen: OK. Thank you so much.
Vigeland: Bye bye.
Karen: Bye bye.
Vigeland: Alright, let’s reach into the e-mail bag and Casey writes in from Wichita, Kansas, and he has a little in common with Karen. He’s a young professional who’s been saving money fanatically. He feels like he has his personal savings picture under control. He says when he was growing up, his mother sacrificed a good deal of her disposable income helping him to get to where he is now and he would like to find some way to essentially pay her back. He’d like to put a small amount of money away each month into a retirement fund for her, so Chris, what is the best way for him to do this, and again, much like Karen, he’s wondering if there are any tax implications?
Farrell: Well, what I would do — and I think it’s just wonderful what he wants to do — I would open up an account at one of the major mutual fund companies with their tax-managed accounts and the whole idea behind them is they limit your tax bill on a yearly basis, so they understand that when they sell securities it’ll trigger a capital gains event that you end up having to pay for. The other thing, and just as his question is a variation on Karen’s question, variation on my answer. Part of what young people can do for their parents, if it’s worth it, pay for a several-time visit with a certified financial planner to look at your mom’s portfolio and another thing to do is gather information and in the Internet-age, there’s a lot of good information out there, but it’s hard to gather, so does your mom want to stay at home? What are some of the services that will enable her to stay at home and really trying to help continue to lead the life that they want to lead?
Vigeland: Alright, hope that helps you out Casey and thanks so much for writing in.
TEXT OF GETTING PERSONAL (SECOND SEGMENT)
Tess Vigeland: We’re back with Getting Personal, the cure for your financial ills prescribed by our own money doctor Chris Farrell and Chris, our next call comes from Lida and she is in Lincoln, Nebraska. Hi Lida.
Lida: Well hello.
Vigeland: So tell us a little bit about yourself. What do you do there in Nebraska?
Lida: Well, I have reached that magical age where I have to take my minimum required distribution from my retirement savings.
Vigeland: Dare I ask how old that makes you?
Lida: Dare I ask how old you are? Alright, come on, if you’re gonna make me fess up, you’d better do it to.
Vigeland: Well, in fact, it is my birthday this weekend and I am turning [buzz].
Lida: Well, happy birthday for you.
Vigeland: Thank you, thank you.
Lida: The magic age is 70.
Lida: I don’t know how I got there… I only turned around and said “No! It’s impossible!,” but happy birthday to you.
Vigeland: Well, thank you, thank you, and so what is your question for Chris now that you’ve reached this magical age?
Lida: Well, actually, I have two questions. First of all, a woman who’ll tell you her age will tell you anything, so I’m going to tell you this: I have accounts all over the place. I’ve got 401(k)s and supplemental retirement accounts and annuities and ya-de-da-de-da. Now, I have not yet rolled these over into IRAs and I heard your program a few weeks ago that said you recommended that be done, but I have yet to do that. Should I take my required percentage out of each of the accounts or should I take it out of my smaller accounts and eliminate them forever? That’s the how and the when is when should I take it: monthly or quarterly or annually? So, I asked my CPA this and he said “Well, just take it once a year” and I said “But why would I want to do that because now the money is not in the market compounding.” He said “It’s just easier.”
Vigeland: Well Chris, this is a really good question and I think it’s a very common one. It’s really hard to figure out how much money you should be taking out once you’ve retired, but let’s deal with the first question which is the idea of consolidation. Chris, I’m guessing you are going to suggest absolutely move all these small accounts into one simple place.
Chris Farrell: That’s what I would recommend — just ease of bookkeeping and it also just also makes it easier to see where your money is and what your overall portfolio is, but just to throw in one wrinkle, in their wisdom, the people who write these rules treat IRAs and 401(k)s differently, so with your IRAs, when you’re doing your required minimum distribution, you take all your IRA accounts, you throw them all in one pot and then you look at the IRS life expectancy tables and you figure out how much you have to take out, then you can take it out from any IRA account that you want. So you want to get rid of the small ones? No problem. With your 401(k) plan, let’s just say you have three 401(k) plans. You have to withdraw your required minimum distribution from each of those plans. You can’t aggregate them together. From each one with a 401(k), but with the IRA it doesn’t matter which one you take it out of. And then to the second part of your question, most of us have lived in a world where we get a regular paycheck and it’s kind of hard to manage money. I don’t know about you, but if I got all my money in, say, January, I’d be eating really well in January and I’d be on ramen noodles by December and so one advantage of the technology age that we’re in and putting the money with an IRA is they’ll pay you any way you want. You want it monthly? Do you want it quarterly? What makes your life the easiest? For me, I’d probably just go for monthly just because that’s the way I’m used to living.
Lida: Uh huh.
Vigeland: So Lida, what are you planning to do with this money as you withdraw it?
Lida: Pay for my gas bill.
Vigeland: OK, well that’ll eat up most if it I’m sure.
Lida: I’ll probably have to use it all to pay for my gas bill — and food! Bananas just went up to 79 cents a pound.
Vigeland: Oh my goodness.
Lida: I about had apoplexy when I saw that.
Vigeland: Well, I hope you’re having fun as well.
Lida: Oh, I am. I’m going to invest in golf lessons and give Tiger Woods — or now the new guy who just won, Immelman — a run for his money.
Vigeland: Alright. We’ll look forward to seeing you at Augusta.
Lida: And I will look forward to being seen, but green is not my best color. Maybe they could change it to red for Nebraska. Go Big Red!
Vigeland: I think they might do that for you. Thanks so much for the call.
Lida: Thanks so much. Bye bye.
Vigeland: Alright, back to the e-mails and Ben wrote in from Evansville, Indiana, and he was listening to last week’s show and caught part of our financial quiz, specifically this question posed to our own Nancy Farghalli:
Vigeland: Chelsea worked her way through college earning $15,000 per year. After graduation, her first job pays $30,000. The total dollar amount Chelsea will have to pay in Federal Income taxes in her new job will: a) Double, at least, from when she was in college, b) It will go up a little from when she was in college, c) Stay the same as when she was in college, or d) Be lower than when she was in college.
Nancy Farghalli: Can I ask a few questions? So she made $15,000 when she was in college, which meant that she had no taxable income…
Vigeland: Alright, so Ben wants to know — and we’re going to set aside the actual numbers from the question here — but he wants to know if Nancy was correct when she was talking about not being taxed on this figure and the reason he wants to know is because he’s a college student, he makes around $3,000 a year and his employer has not been taking any money out of his paychecks for taxes, so is he going to owe?
Farrell: Alright, now, if you’re making $3,000 a year and went to the IRS Web site, it has a really nice interactive feature where you can figure out whether or not you have to file. If you’re making $3,000 a year, you don’t have to file federal income taxes. However, I would recommend filing. One, this year, that thing you talk about all the time Tess…
Vigeland: The stimulus check!
Farrell: ..the stimulus check! Alright, so you want to file if you want to get your stimulus check and at $3,000 a year, you’ll probably qualify for a minimal amount, but you know, probably get something.
Vigeland: But you say he won’t be paying taxes on $3,000?
Farrell: That’s right. You just file.
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