Marketplace

Lehman Brothers Bank?

Question: Several years ago my broker at Morgan Stanley bought me a CD at 5% which would not come due until 2016. Unfortunately this CD was with Lehman Bros. . Now I'm worried about the $10,000 I have invested. It is still paying interest but don't know if it will continue. Should I sell or what? My broker refuses to answer my questions about this- I'm changing brokerage firms! Phyllis, Lacey, WA

Answer: One thing that I love about the questions we get is that I always learn something new. I had no idea there is a Lehman Brothers Bank FSB. There is, and it's headquartered in Wilmington, Delaware. It's essentially an online bank that also offers community banking services in Delaware. Here's the really critical piece of information: The bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC).

According to a Reuters story last month, the U.S. bankruptcy judge overseeing Lehman let the company hike the capital level of the bank. It needed to boost it capital levels to prevent the Office of Thrift Supervision from taking enforcement action and placing the bank under government receivership.

What does this mean for you? Your $10,000 invested in the certificate of deposit is safe since you are well under the $250,000 FDIC limit. (Although on January 1, 2010, the FDIC insurance limit returns to $100,000 for most deposit categories.) That should give you some reassurance. And that's my most important message.

The story gets more complicated after that. There is a risk that at some point the bank gets taken over by regulators. If that happens another bank would take over your account. The new owner may or may not honor the existing terms of the CD. Traditionally, banks did stick with the CD terms because they wanted to keep you as a happy customer. More recently, a number of banks, nervous about their deteriorating balance sheets, have decided to change the CD terms.

My guess is that you have what's called a "brokered" CD, i.e. one that was sold to you by your broker. Brokered CDs come with some unusual twists and turns. If you want to get out early in a brokered CD, you'll probably have to sell it in the market like any other fixed income security. The risk is that you'll sell your CD for less than you paid.

I would definitely get a new broker, and work with that person. In the meantime, your principal is safe.

03/02/09 by Chris Farrell

Permalink

Downsize?

Question: I'm 50 yrs old and have been thinking about downsizing and relocating for a few years now. I am self-employed and can take my work with me, so my income is not tied to a particular location.

My plan is to sell my current home, of which I own about 70%, and take that cash to buy a different house that would better suit my needs as I age, etc. Hopefully I could buy this house without a mortgage, though I would consider taking a small 10 yr mortgage if necessary.

I realize that it may be impossible to sell my house in the current market, but if I DID sell my house near the market rate, and put the money into another house in a similarly deflated market, would this be a foolish endeavor? Or is it ok since I'm just moving my equity from one house to another? Thanks. Anne, Olivebridge, NY

Answer: As Jane Austen wrote in Emma: "Ah! There is nothing like staying at home for real comfort." Problem is, many people's homes--their most valuable asset and the foundation of their retirement plans--provide scant comfort these days. At some point, of course, real estate prices will stabilize and economic growth will pick up again. The question, as always, is when--and by how much.

That said, I think your idea of downsizing and taking into consideration aging is spot on. For one thing, you'll have a nice equity cushion going into retirement, and one of the worst ideas coming out of the boom years was that it was okay for retirees to carry a hefty mortgage. That was bad advice in most cases.

Large homes cost a lot more to maintain and are subject to higher property taxes. The savings from lower energy costs and other expenses associated with running a smaller home compound over time. Plus, as we age, few of us want to perform maintenance. Smaller yards and single-level homes become more attractive, as do condominiums and townhomes with maintenance staffs.

So, no, I don't think what your contemplating is a foolish endeavor at all. I hope more people are building downsizing into their retirement savings plan.

03/04/09 by Chris Farrell

Permalink

Tax credit and tax rebate

Question: We've heard about the $13 a paycheck 'tax credit'. What exactly is a 'tax credit' as opposed to the 'tax rebate'? Will we have to pay the credit back to the IRS come April? Should we adjust our withholding so we pay enough tax and avoid paying penalties? Lisa, Pinckney, MI

Answer: I thought I knew the difference between a tax credit and a tax rebate, but I wasn't quite sure. So I put your question to the financial advisor and professional polymath Scott Gislason at North Star Resource Group in Minneapolis. He's a lawyer, a CPA (certified public accountant), a CLU (chartered life underwriter) and ChFC (chartered financial consultant).

Here what he says: "There's an often overlooked difference between "tax credits" and "tax rebates". Generally speaking, tax credits only offset tax balances due - meaning if you have low income and owe nothing in tax, you get no benefit from a credit. Whereas, tax rebates are paid to a taxpayer regardless whether a tax is payable. There is an exception to this rule - the earned income tax credit which operates like a rebate."

Another exception: The new $8,000 credit for first time homebuyers. It's a "refundable tax credit." That means you can get a refund of the full $8,000 even if your total tax bill is less than that.

So, that's the difference between a credit and a rebate. He adds: "Neither credits nor rebates should generate additional taxable income necessitating a change in withholdings or estimates."

By the way, the change in withholding for the "Making Work Pay" credit is being done by your employer. You don't need to do anything.

by Chris Farrell

Permalink

Graduate school debt

Question: I'll be starting veterinary school in the fall, which means that over the next four years I'll take on something like $150,000 in debt. This will be mostly in the form of subsidized and unsubsidized Stafford loans, with rates in the neighborhood of 5 to 6%. My question is, is this an awful time to take on this kind of debt, or is it the perfect time? I haven't heard a single thing in all the coverage of the current crisis about how this might affect current student borrowers. Sarah, Portland, ME

Answer: At the moment, the federal government's focus when it comes to higher education seems to be twofold. First, make sure that there is enough loan money available for students, especially undergraduates and, second, to direct more financial support for college to low income families though a combination of more generous grants and tax benefits.

The downturn in the economy is unusually scary. But I don't think it's a terrible time to borrow and invest in your education or a perfect time.

Instead, I would go back to the fundamentals. What you're facing is the classic graduate school question: Do my future job prospects, measured in terms of career satisfaction, income and job security, justify taking on all this debt? Medical school students, law students, MBAs, MFAs, PhDs, future veterinarians like you and anyone else thinking about earning an advanced degree needs to weigh the income-in-the-future versus the debt-burden-to pay-down trade-off. Is there a good chance that you will earn a sufficient return on investment to pay down the debt within a reasonable period of time? What's the downside, and is the risk worth it to you? Those are the questions to research.

That said, it's smart to get more education and improve skills during an economic downturn. Hopefully, the economy will pick up before you get your professional credentials and get a job as a vet.

03/05/09 by Chris Farrell

Permalink

Extra money

Question: My wife and I have transitioned to using cash to pay for daily expenses versus a credit card. As a result of this transition, we have are able to save more money. Now the question for us is where to put the extra savings? We are both in our early thirties, own a home with a mortgage, and have a car loan, a student loan, and a home improvement loan. We have 401K investments, which I have been contributing to since I was 22, but we do not have 6 months of expenses in liquid funds. Should we using our increased savings to increase our 401K contributions, we are not at the contribution limit today, increase emergency savings, or pay down debt? I appreciate any suggestions you can provide. Regards, Tim, Victor, NY.

Answer: Congratulations on getting your finances under control. It's nice to take a question, too, where all three of the money alternatives are good. You can't go wrong if you decide to hike contributions to your retirement savings plan, add to emergency savings, or pay down debt.

Still, I would recommend dividing the extra money into two small streams, one channeled toward extra debt payments and one siphoned off into savings. I'd accelerate debt payments on the car loan and the home improvement loan. I'd put the remaining extra money into an FDIC insured savings account or FDIC insured short-term certificate of deposit (or comparable products at a federally insured credit union). You won't make much money on the savings (okay, that's an understatement these days) but the money will be there if you need it.

One other thought to raise, this one concerning retirement savings. Just make sure you're taking full advantage of the company match if there is one. That's too good to pass up.

03/06/09 by Chris Farrell

Permalink

Bankruptcy and Cobra

Question: We hear lots about the Stimulus Plan helping folks pay for their health insurance when they go on COBRA, but what about people who lose their jobs when their company ceases to exist. There are presumably lots of folks in that bind. They are not eligible for COBRA but are newly unemployed. Is there any health insurance help for them in the stimulus plan? Rob, Seattle,WA

Answer: In essence, the rule called Cobra-- Consolidated Omnibus Budget Reconciliation Act of 1985--requires most employers with group health plans to offer employees the opportunity to continue their health care coverage for up to 18 months. With the passage of the fiscal-stimulus package the federal government will now pick up 65% of the cost of Cobra for up to nine months.

However, you're absolutely right: If a company liquidates and discontinues its health plans, COBRA coverage for its former employees isn't an option.

The Department of Labor has a brief write-up on bankruptcy and Cobra. Here's the key paragraph:

"If, however, your employer discontinues all its health plans, COBRA continuation coverage will not be available. You will have to seek other coverage. Other coverage may be available by converting your employer's group health coverage to an individual policy. As mentioned above, you may also have rights to special enrollment in a spouse's employer's plan, or by being an "eligible individual" who is guaranteed access to individual insurance. The opportunity to buy an individual insurance policy is the same whether the individual is laid off, is fired, or quits his or her job. "

By the way, the Department of Labor has posted on its web site information on Cobra and the new subsidy on premium payments. However, the fiscal stimulus package is a huge bill so hopefully I've missed something. Is anyone aware of the new law changing the rules when it comes to liquidation and Cobra?

03/09/09 by Chris Farrell

Permalink

Credit unions

Question: My sister and I are having differences of opinion in investing our Father's money. He is in Assisted Living, age 93. Right now, the money is in U.S. Treasuries and earning very little interest. My sister wants to take most of the money ($150,000) and put it into CDs with SchoolsFirst Federal Credit Union which would earn 2.5%. I want his money to be safe and wonder about the financial footing of this credit union. Supposedly it is sound. Any suggestions? An avid listener of Marketplace Money on Saturday mornings. Linda, Tulsa, OK

Answer: I'm not sure I want to come between you and your sister, but we do get a lot of questions about the safety of credit unions. It's impossible for outsiders like you and me to judge the financial soundness of any bank or credit union. In the jargon of Wall Street, financial institutions are "black boxes." We can't figure out what's going on inside (and it turns out even the insiders couldn't figure it out).

What we can do is make sure the financial institution is backed by the FDIC or its credit union equivalent, the NCUSIF. That stands for the National Credit Union Share Insurance Fund. It's an arm of the National Credit Union Administration or NCUA.

Enough with the acronyms. I checked online, and SchoolsFirst is a federally insured credit union. The rules are the same as the bank FDIC limits: Deposits are insured up to $250,000. So, the money your father has would be fully covered.

You can rest easy if you put the money into a federally insured credit union. What if the credit union failed? (To be clear, I'm not saying it will or is even at risk of failing.) Your money is safe. The worst that could happen to it is that you can't get access to the money for a few hours or perhaps days (and I'm spinning out the worst case scenario here). The other risk is that the terms of the CD could be changed if the credit union was seized by the regulators and sold to another institution. The principal is completely safe, of course, but sometimes the interest rate on the CD is cut.

In a sense you can't go wrong so long as you stay short and stay safe. While I was writing this I wondered if a good solution was to decide on a mix, keeping some in short-term Treasuries, and adding some short-term CDs and savings account.

03/10/09 by Chris Farrell

Permalink

Co-sign for brother

Question: I'm planning to cosign a home loan for my brother. What's the best way to insulate myself from unforeseen liabilities? Are there any pitfalls in joint ownership? I'm going to ask them to buy a life/disability insurance in my name. Though I'm not sure if the benefits of paying the insurance outweigh the cost of getting mortgage in their name. I'm cosigning to get them a better mortgage terms. He and his spouse earn a decent salary and want to buy a town house in LA suburb. They have recently moved to US, have less 15 month of credit history and 600+ score. House value: 350K. Income > 90K. Down payment - 10%. Naren, Boston, MA

Answer: Lenders love it when a loan is co-signed. It increases their security. More borrowers than ever are seeking better loan terms by turning to family members or close friends to co-sign loans. All I can tell you is that if your brother and sister-in-law can't meet the loan payments you are on the hook. There is no way out of it. There is no way to insulate yourself from that obligation. That's the risk you're taking.

It's wonderful that you want to help them out financially. The problem is we live at a time in our history when job security is vanishing, the depth and length of the recession is uncertain and the risk of unemployment unusually high.

I have two recommendations. The first is to question whether it makes more sense for them to continue renting for now, build up their credit and learn more about their new city. They have plenty of time. Home prices are not rising anytime soon. The other suggestion is not to co-sign but to help them out financially. For instance, you can gift to them up to $24,000 a year--$12,000 each--with no tax consequences. But you're not taking on the legal obligation of the loan.

03/11/09 by Chris Farrell

Permalink

401(k) safety

Question: The company that manages our 401k plans for my employer has had its rating downgraded by S&P recently due to concern about making its debt payments. Just before the turmoil in the markets, I changed my investment strategy out of stock funds and moved it all into a product touted as a no risk fund, basically a low, fixed rate deposit product with them. My question is two-fold: First, is there any government insurance for my 401k funds that is similar to the FDIC insurance for normal savings vehicles? Second, if there isn't, and I remain employed where I am, is there any way to transfer my funds from the 401k account to a traditional IRA account covered by the FDIC without incurring a tax penalty? My employer is doing fine and still providing matching funds, so I would consider moving the funds only if the rating continues to deteriorate. My account has approximately $130k on deposit and I am 53 years old. Thanks! Denise, Orange, CA

Answer: To your first question, there is no FDIC insurance coverage or its federal equivalent when it comes to the money in your 401(k) plan. Your money is at risk to what happens in the market. That said, there are multiple layers of protections surrounding your 401(k) to make sure that the account is safe. For instance, pension law requires that retirement plan money is kept separate from your employer's business assets and the money must also be held in trust. So, if your employer went belly up creditors can't get at the money and it is safe.

To your second question, in general you can't take the money out of your employer's plan and roll it over into an IRA until you stop working there. Then you can--and should--do what's called a rollover IRA. But since regulations give plan sponsors a great deal of flexibility when it comes to plan desgn you should check with your human resources folks just to make sure.

03/12/09 by Chris Farrell

Permalink

A bad credit card experience

Question: I just had an extremely frustrating conversation with my credit card company (Bank of America). I wanted to get your thoughts. Larke, Washington, DC

Answer: Larke sent us a long email, a self-described "rant." It details an all too common experience with government bailout-gorged credit card issuers. His case involves Bank of America. It raised the credit cards interest rate and cut the line of credit.

A couple of personal finance points: First, Larke is doing the right thing: Paying off the card in full. The beauty of capitalism is that you don't have to do business with companies that mistreat their customers. Second, everyone with a credit card should be prepared for a similar experience. It may not happen to you, but just as mailboxes stuffed with unwanted credit card solicitations was the bane of our financial existence only a few years ago, now hiking rates and slashing lines of credit is normal business practice. Be prepared. Third, don't volunteer to your credit card issuer that you've been laid off. In their business model, you've gone from a good customer to a high risk customer. Period.

Now, over to Larke's story. It needs no further comment:

I called BOA to try and get my interest rate down on my credit card. I have made this type of call in the past when I've been comparing offers from other credit card brands/banking institutions. In this situation, I was trying to use my current unemployment situation as leverage to get my interest rate lowered (i.e., I wasn't just shopping for a lower interest rate, I really thought that there wouldn't be an issue to lower my rate by a reasonable, appropriate amount; I was still riding the mortgage rate reduction train, I suppose).

Not only did the senior credit analyst not lower my interest rate, she cut my line of credit because I was just laid off. Instead of having a cushion of $10K, I now have a cushion of $500. Twenty minutes ago, if I never made the call, my limit would have remained the exact same as it was last night. I also just heard that BOA is experiencing gains. Great. So, BOA got to be irresponsible, get a slap on the wrist and now, can't possible lower someone's credit card rate by 2% (I do understand that rates are based on prime/t-bill calculations so I know that certain rates are just unrealistic, but I don't believe my request was unrealistic).

So, I got humiliated through a job lay-off and now , in trying to be responsible, my credit card company is reducing my credit (I have excellent credit history, always made my payments, own a house, etc.).

They offered me some kind of debt reduction program (a 5 year payoff program) - but I'm pretty positive that will end up costing me more in the long run. So, I'm just going to pay the card off, asap.

Thank you so much for reading my rant - I thought the bank's were supposed to be flexible. I'm very frustrated!

03/13/09 by Chris Farrell

Permalink

Social Security $250 stimulus check

Question: There was a brief mention of this on I believe it was the 2/13/09 show (on KPCC in Los Angeles). I have cut and will paste the portion of that show in which I am interested:

Dimsdale: Unless you're on Social Security, in which case you get a $250 check.

Vigeland: OK, so that's a separate part of the stimulus package. You want to give us a few more details about that?

Dimsdale: You also get a $250 check if you're a veteran with a pension and disabled people have a $250 check.

When are these checks going to be sent? This is the ONLY place I've heard about this. I can find nothing about it on the White House web site (lousy search app on that massive site). Randi, Long Beach, CA

Answer: You can get information on the $250 check from Social Security Administration at www.ssa.gov/payment

According to the SSA:

"President Obama recently signed the American Recovery and Reinvestment Act of 2009. This act provides for the one-time payment of $250 to individuals who get Supplemental Security Income (SSI) or Social Security benefits.

We expect everyone who is entitled to a payment to receive it by late May 2009. No action is required on your part.

We are currently working on the details regarding how we will issue nearly 55 million one-time payments to our beneficiaries."

The Administration will post any updates on the SSA website. You don't need to do anything to get the money. The payment will be made to you automatically. You'll get the money the same way you get Social Security--either through direct deposit or a check in the mail. As for veterans that don't get Social Security or Supplemental Security Income will get their $250 payment automatically from the Department of Veterans Affairs.

03/16/09 by Chris Farrell

Permalink

A loss on selling home

Question: Hello, I sold my house last year and lost 30K. Can I claim any capital loss on my tax returns? Rozario, Nashua, NH

Answer: No, when you sell a home at a loss you can't turn to Uncle Sam to lesson the financial hit. A home enjoys enormous benefits when you have a profit at sale. A single filer gets to exclude $250,000 from capital gains tax and a joint filer a $500,000 gain. (There are some restrictions surrounding this capital gains exclusion.) But on the downside the loss is all yours.

03/17/09 by Chris Farrell

Permalink

What to do with a tax refund?

Question: We are getting a hefty tax return this year (and yes, I had our tax accountant double check it three times!)-- due to capital gains losses, losses on rental properties we have and loss of income for my husband. It's a hefty 5 figure refund. I just don't know what to do with it. Invest it? But where? Slit that mattress of ours? Money market? Savings? Any suggestions? Nancy, Berwyn, PA

Answer: Please, not in the mattress! It's distressing enough that home safe sales are up during this financial crisis.

Seriously, if I were in your position I'd put the money right into an online savings account (FDIC insured), or some kind of comparable savings account backed by the full faith and credit of the federal government. This way you preserve the value of your unexpected "windfall" while you and your husband figure out the best use of the money. In light of all the economic uncertainty--and the losses you've suffered this past year--you may decide to keep it in a safe place in case you need it. On the other hand, you might want to pay down debt (always a good idea), invest in more education and skills for the job market, upgrade some aspect of your rental properties, or simply spend it in a way that adds to your life experiences.

But while you two talk it over, I would put it in a very safe place like a bank savings account or certificate of deposit--nothing fancy.

03/18/09 by Chris Farrell

Permalink

A safe place for money

Question: My Dad, 68, is dying of cancer and recently entered Hospice. He has a life insurance policy in the amount of $500,000. This is money my mom, 68, would be living on along with Social Security. Her house and car are paid for and she has very little debt. Her Insurance Agent, who sold her the policy, is suggesting she place the money in a 10-year annuity. That she doesn't want to do.

She would like to place it somewhere she can live off the interest and hopefully not draw down the principal. If need be, she could access some for special items...if she were to buy a new car in the future, etc. She also mentioned she would prefer to handle this herself, not going through a broker.

A few questions... Should she manage this herself or work with a broker? Where can she put the funds that will allow her to live off the interest? Any other issues we should consider or need to know when an insurance company pays out for life insurance? Thank you for your advice. Cheers, Shelly, Shelly, Cotton, MN

Answer: I'm sorry to hear about your father. There are no easy answers to your questions. That's why my main piece of advice is to be extremely conservative with the money in the near future. I would put some of it into an FDIC insured savings account, and the rest into short-term certificates of deposit, say, 6 months to 1 year. I would simply focus on making sure that all the money comes under the $250,000 FDIC limit. With this strategy your Mom can't lose any of the principal, although she won't make much in interest payments. The FDIC has on its website--www.fdic.gov--an easy explanation of how to accomplish this goal of principal preservation.

Then the two of you together need to figure out the best way to invest the money. You don't need a broker for this, although I'd talk to lots of people to dig for thoughts, information, and ideas. For instance, one common low-risk low-return strategy is to create a fixed income "ladder." She could invest the money in 3-month CDs, 6-month CDs, 1-year CDs, and 2-year CDs. The basic idea is if interest rates rise she can reinvest the short-term money at the higher interest rate and if interest rates fall she is still earning a decent yield on the longer term CDs. She could accomplish the same strategy by buying Treasury securities directly from the U.S. government at www.treasurydirect.gov. That's just one idea. Another common strategy is to take a slice of the proceeds and put it into an immediate annuity with a blue chip life insurance company. The immediate annuity would guarantee her an income for life.

Of course, much depends on what your Mom wants to do in the coming years. What does she want to spend her money on? Other issues to talk about include how will she handle the money as she gets older? What will be your role?

Investing the money very conservatively for now gives the two of you time to think through what's the best course of action.

03/19/09 by Chris Farrell

Permalink

AIG policyholder

Question: I'm the beneficiary on a traditional life insurance policy (i.e. the basic AIG business) on the lives of my parents who are still alive. What protections are there on the beneficiary in various scenarios that might happen to AIG including bankruptcy, selling the traditional life business, etc. Thanks so much, and thanks for your weekly recommendations. Susan, Baltimore, MD

Answer: With all the anger directed at AIG, it seems that the millions of life insurance policyholders have been forgotten. Like you, many are nervous, wondering if their money is safe, and the hysteria in Washington isn't helping. The simple, direct answer is yes: Your money should be safe.

Life insurance policyholders have several layers of protection. None are foolproof, of course. But AIG life insurance operations have a good reputation. First, the AIG turmoil involves the parent holding company, and not its giant life insurance and retirement money management subsidiaries. Second, the life insurance operations are well funded, and by law the assets of the insurance company are segregated from the parent company. Insurance company assets are supposed to be invested conservatively. If the insurance companies did get into trouble state regulators would take them over, and the law requires them to be run by regulators in the interests of policyholders. Creditors and any other claimant take a backseat. Last, there are state insurance guaranty funds that offer another layer of protection.

There is one new buffer, perhaps the strongest yet: You, I, and all other taxpayers now own most of AIG through the federal government. Even in an era when the financially unthinkable happens, I can't imagine the federal government allowing the AIG insurance companies to short-change its policyholders.

03/20/09 by Chris Farrell

Permalink

TIPS

Question: Chris has recommended TIP (Treasury Inflation Protected somethings!) in the past. With the amount of money flowing into the economy from the various rescue plans I am concerned inflation is going to be a big factor in a few years, does he still recommend them? Thanks, Simon, Raleigh NC

Answer: Do I still like Treasury Inflation Protected Securities or TIPS? You betcha. The impact from high and rising inflation--the scenario you're worried about--is what TIPS are designed to protect you against. TIPS are default-free government-issued inflation-indexed bonds that come in 5, 10 and 20 year maturities. (The maturity date of a bond is when you get back the principal amount you invested and interest payments stop.) TIPS offer a fixed interest rate above inflation, as measured by the consumer price index. An additional advantage of TIPS is that they also offer a hedge against deflation--a decline in the overall price level of goods and services--by offering a "deflation floor" that protects principal value. TIPS are an investment for all seasons. They won't make you rich. But $1 saved today will be worth $1 in 5, 10 or 20 years--plus some interest.

TIPS have two drawbacks. The first is that Uncle Sam requires owners of TIPS in a taxable account to pay income taxes on any inflation-adjusted gains before you get any of your inflation-adjusted money at maturity. The easy way to invest in TIPS and avoid the tax problem is to own them in a tax-deferred retirement savings account, such as a 401(k) or IRA. The other issue is that you can't buy TIPS directly from the U.S. Treasury for your retirement savings account. You have to pay a broker to do it for you. The federal government seems to be more worried about lining Wall Street's pockets than making it easy and cheap for savers to own TIPS in their retirement accounts. Shame on Treasury.

03/23/09 by Chris Farrell

Permalink

Hybrid tax credits

Question: My car is on its last legs. Its engine is slowly dying. I know I am going to need to buy a new (which to me usually means used) car this year. I am confused about all the offers currently around. I understand there's a tax deduction for new car purchases, which basically makes the purchase "tax free." I'm considering purchasing a new car to take advantage of the tax benefits, but also realize that a used car might still make more financial sense. Are hybrid tax benefits still around? The sub $20,000 Honda Insight is looking quite appealing... Alex, San Diego, CA

Answer: The credit is only for new cars. The hybrid tax benefits still exist. They're available for four kinds of vehicles: fuel cell, advanced lean burn technology, hybrid, and alternative fuel. That's the good news.

The bad news--aarrrgggghhhhh--is that rules are stunningly complex. I know I shouldn't be surprised at this point, but it's ridiculous. No, it's stupid. For instance, the credit varies significantly by car. According to tables published by Cars.com, the tax credit attached to the 2009 BMW 335d is $900 while the credit on a 2009 Ford Escape Hybrid is $3,000 (for the two-wheel drive version). The credit also runs out. There is a limit of 60,000 cars per automaker, and then the credits are phased out. As I understand it you already can't get a claim the full credit (or even get a credit) on Toyota and Honda alternative cars. For the life of me I can't figure out how all these tax credit twists-and-turns, phase-ins and phase-outs are good public policy.

You're right about the ability to deduct state and local taxes on a new car purchase. (Again, not for used cars.) Of course, there are wrinkles to this tax perk. You can deduct local sales and state taxes on a new car purchase if you file jointly and make less than $250,000 or if you earn less than $125,000 for a single filer. The car, motorcycle, RV or light truck must cost less than $49,500.

You can read a good explanation of the rules at Cars.com The hybrid tax credit section is here.

03/24/09 by Chris Farrell

Permalink

Borrow to boost credit score?

Question: Hi Chris: Thanks to you and Tess for your informative show. It's appointment radio for me on weekends. :)

Here's my question: I've worked to get my finances in order and bring my credit score up over the past several years. Currently I have only one credit card with a very low limit, which I can and do pay off in full each month. I have no student loans or other debts and no mortgage. I've been contemplating trying to buy a house for the first time this year and have been watching my credit score through Equifax. This month when I pulled the report, the summary told me that one of the factors that could work against me was that I had had no new credit or loans in several years.

I had intended to put off buying a car for another year or so, but could afford it now, though it would mean saving a little less each month. I want to get the best interest rate possible when I finally get a mortgage, so I've been paranoid about adding any new debt. Has being prudent held me back? Could taking out a small loan (less than 10k,) for something like a car, and making on-time payments actually help my score in advance of trying to get a mortgage? And if it lowers my score initially, how much of a penalty would it be? And at what point in the loan is it actually helpful? 3 months in? 6? a year? Thanks, Kerri, Washington, DC

Answer: When it comes to question like this my starting place is good savings and debt management practices. The peculiar dynamics of the credit scoring business comes second (or third or even farther down the list). My basic belief is good savings and debt habits will pay off in all economic and financial seasons, and those sound principles will pay off in a good credit score. Not everyone agrees with me, and their personal finance advice is more tailored toward manipulating credit score higher. I don't agree. What's good for the profits of the credit reporting and credit scoring industries is not necessarily good for your personal fiscal health.

We're in a recession. It's unclear how deep the recession will go and how long it will last. You've already gone through the tough slog of getting your personal finances in order. You pay off your credit card bill in full every month. Bravo. I would not take out on unnecessary debt and create a more fragile balance sheet in an attempt to boost your credit score. My fear is that the strategy could backfire on you badly.

What's more, my educated guess is that you'll be fine when it comes to buying a home. Remember, there is a range to credit scores and if you keep paying off your bills on time you'll be pretty high up. Take this example drawn from the FICO website. The key assumptions: The mortgage loan is for $150,000 and the borrower is making a 20% down payment on the home

FICO Score Mortgage Rate

720-850 4.760 %
700-719 4.885 %
675-699 5.423 %
620-674 6.573 %
560-619 N/A
500-559 N/A

The reason for the "NA" or Not Available for the two lowest score levels is that borrowers with such a low score and damaged credit can't qualify for better loan terms.

It would be much better for you to spend the time researching the home you might buy, and the neighborhood you want to live in. Remember, you have a lot of negotiating power in this market. You should visit with a bank loan officer or credit union lender to see what rate you qualify for currently.

Let us know how it goes for you.

03/25/09 by Chris Farrell

Permalink

Retirement vs. student loans

Question: Hi Chris, my question relates to two subjects: a student-loan for graduate studies and funding my retirement. I am 27 years-old and am planning to enroll in a graduate program (MBA) in the fall of 2010. The total cost of this education is in the vicinity of $100,000. By the fall of 2010, my savings should amount to at least $25,000. So, I will have to obtain financing for the majority of my education costs.

Since I will require a loan for such a large percentage of my educational costs, should I immediately cease contributing to my retirement accounts and, instead, add that money to my savings? Currently, I am contributing 5% of my pre-tax income to my 401k through my employer. Moreover, I am making regular contributions to a Roth IRA so as to achieve a total contribution of $5,000 by the end of the year. Please let me know what I should do. I worry about taking on such a large student loan. But also, I worry about the long-term consequences of not regularly contributing enough to my retirement.

Here's some information about me that you may find useful when crafting your reply. I am currently employed and am quite confident that my income ($70,000/year) will remain steady for the remainder of 2009. My savings currently amounts to $25,000 and my credit score is 770. I do not have any debt. Thanks Chris. I love the show and it's really helped me in so many ways. Cheers. Mark, Los Angeles, CA

Answer: Thanks for your note. You're making a big investment in your job and career by getting an MBA. You've done the research, and the rate of return on that investment measured in terms of job options, total compensation and career satisfaction will more than pay for the money you borrow. In a sense, your standard of living in retirement will largely be influenced by how much your investment in an MBA pays off over time.

Price matters, and the less you go into debt to get your MBA the more financial and job flexibility you'll enjoy at graduation. That's why I think your instinct to reduce contributions into retirement savings and, instead, put the money into a bank or credit union savings account, certificate of deposit, or some sort of very safe parking place for money is sound.

Here's another thought: Stop contributions into the 401(k), but continue to fund the Roth-IRA up to the $5,000 limit (and that's how much you are setting aside in total anyway). A Roth is a unique retirement savings vehicle. It's a retirement plan and a parking place for emergency savings. The reason is that by law you can withdraw contributions without any tax bite or early withdrawal penalty. You can't tap the earnings without taking a big hit, however. You leave the earnings alone.

You keep your financial options open by funding the Roth. If you decide the smart strategy is to borrow less you can withdraw your contributions from the Roth and just leave the earnings in the account. If it turns out you're borrowing less than you anticipate, well, you leave the Roth alone and let the money compound over time.

Since a Roth is funded with after-tax dollars will give up some income tax advantages with this tactic.

03/26/09 by Chris Farrell

Permalink

Home buying tax credit

Question: Is there an income cap for single first-time homebuyers to be eligible for the $8,000 tax credit? Is there a sliding scale of eligibility amount? Sandra, New York, NY

Answer: This is the U.S. tax code. Why make it simple? Yes, there is an income cap and a sliding scale. The home buying credit is for 10% of the purchase price of the home or $8,000--whichever figure is lower. For a single filer, the credit starts getting phased out with a modified adjusted gross income of more than $75,000, and it's eliminated once your income is $95,000 or more. For a married couple, the phase starts with a modified adjusted gross income of more than $150,000 and the credit ends if your income is above $170,000 (married).

Remember, the $8,000 credit applies to homes bought between January 1, 2009 and November 30, 2009. You must keep the home for three years, and you cannot have owned a home for the past 3 years to qualify.

Clearly, considering the volume of questions we're getting the home buying credit has grabbed the attention of potential home owners. I'll be curious to see how much the interest in the credit translates into actual purchases this year.

03/27/09 by Chris Farrell

Permalink

Withholding taxes

Question: Is it better to owe the federal/state government tax, or receive a refund? How much money should one aim to owe/receive when deciding how many exemptions to take on a W-4 form? In anticipation of buying a house last year, my husband and I took more exemptions, and now owe quite a bit more than we have in previous years. We found our home late in 2008, and closed at the end of January. Now we are trying to plan for 2009 taxes. Thank you for your help, Jeannine, San Diego, CA

Answer: Congratulations on getting a jump on your tax filings for next year. Many people haven't even filled out this year's return. (And you know who you are.)

Ideally, you won't owe anything and you won't get anything back either. It's always nice to get a refund rather taking out the check book in April. Still, if the refund you are used to is over a few hundred dollars I would adjust your withholding. The reason is that the government doesn't pay you any interest while holding on to your money. In essence, you're making an interest free loan to Uncle Sam. On the other hand you can also make an adjustment if you will owe more than you're comfortable with come April. Remember, your withholding has been reduced slightly because of the Making Work Pay Credit that was part of the Obama Administration's fiscal stimulus package.

The IRS has a withholding calculator here.

It reflects the new withholding tables. The IRS recommends that any employee use the calculator if they work two jobs, are a two-income couple (that's you), and if you can be claimed as a dependent to make sure that the amount being withheld is what you want--and so that you don't owe more than you expect next year.

03/30/09 by Chris Farrell

Permalink

Investing in toxic assets

Question: Is it possible for a small investor to invest in the toxic assets that the federal government is buying and loaning money against? I think they have the potential for high returns and I would like the opportunity to invest a small part of my savings in them, but I don't know where, or if, they will be available. Most of what I have read about them suggests they are available to high income investors only. Thank you, Mary, Seattle, WA

Answer: It sure looks like individual investors will get the chance to invest in toxic assets. It will be an extremely high risk bet, especially after taking into account the cost of entry, fees, and the uncertain value of the underlying assets.

A trip to Las Vegas might be more fun.

Of course, the big players in this market will be hedge funds, giant institutional investors, and high-flyers from the multi-millionaire and billionaire club. Still, a number of major fund companies, such as Pimco and BlackRock, are interested in creating funds open to individuals. The funds wouldn't welcome the Joe the Plumber investor, however. So far, it appears that the basic blueprint is a closed end mutual fund with a hefty minimum investment in the $25,000 to $30,000 range. A closed-end fund sells stock to investors, and then the fund takes that money and invests it. In this case, the investment would go toward toxic assets. The shares of a closed end fund often trade on an exchange, such as the New York Stock Exchange or the American Stock Exchange.

Stay tuned.

03/31/09 by Chris Farrell

Permalink