Marketplace

Shredding papers

Question: I have the option of putting my shredded documents in plastic bags out with the recycling. Is that safe? Or is it better to throw it in the garbage? Michelle, Vermillion, SD

Answer: Well, I'm glad you shred your documents. It's a good habit to get into in an era when identity theft is all too common. For peace of mind, the first thing I would do is make sure that your shredder is a "cross-cut" shredder rather than a "strip-cut" shredder. The former cuts up the paper into smaller pieces and, according to the experts, makes it that much harder for anyone to put the paper back together. I would then recycle the paper. Depending on your level of concern, you could also consider a shredding service. It isn't expensive, and these companies then send the shredded paper to a mill to be recycled.

10/01/09 by Chris Farrell

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Investing for retirement

Question: After many years of false starts, my wife and I will soon be able to finally start saving for retirement. I'm 38 years old, and after watching so many 401ks turn into 201ks, I'm more than a little worried about saving with this method. I've listened to the show for years, so I know about TIPS, I Bonds, etc, but I'm hoping you may provide some more advice about ways to save for retirement that don't involve taking on all of the risk of a 401k. Thank you very much. Andy, Spring Hill, TN

Answer: Congratulations on getting started. . Most of us are reluctant plungers in the market these days. We're supposed to figure out how to invest our money for when we retire in 10, 20 or 30 years. Yet in today's world, the biggest mistake you can make is not saving for the long haul. The financial penalty for not participating in a long-term savings plan is far bigger than the risk of picking a poorly performing mutual fund.

That said, a 401(k), an IRA, and similar retirement savings plans are simply tax sheltered parking place for savings. You can put the money into more conservative investments, like Treasury securities and certificates of deposit, as well as riskier investments, such as stocks and junk bonds. So, the risk to your savings is minimal if you invest in Treasury Inflation Protected Securities, short-term CDs, and the like. The gain won't be much either. That's a reasonable trade-off for most people to make, especially anyone who doesn't want to see their 401(k) become a 201(K)--and is willing to give up the possibility that it becomes a 601(k).

When it comes to retirement savings the basic money question you should ask yourself is not "How much money will I make on my investments?" The real question is "How much can I afford to lose?" You then lock in a standard of living for your old age with a conservative investment strategy. You don't want to be 70 years old with a portfolio that has lost half its value.

I have two books to recommend. The main points of both books can be quickly absorbed, so this isn't like assigning homework. But you've raised a huge important topic and both of these books cut to the core issues in easily digestible chunks. Worry Free Investing by Zvi Bodie and Michael Clowes advocates a very conservative approach to retirement savings (largely based on TIPS). The Random Walk Guide to Investing by Burton Malkiel is also conservative (he strongly advocates for diversification) but he makes a stronger case for putting a portion of the portfolio into equities. Good luck.

10/02/09 by Chris Farrell

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Closed credit card account

Question: I just received a notice from HSBC, one of two of my credit card companies, that they were going to increase my interest rate - again! (Six months ago they increased it from 9.9% to 14.9%) This increase is unrelated to any delinquency on my part nor a particularly low credit score (approx. 760+). The notice indicated that HSBC was raising my interest rate because I am part of a "class of accounts" whose interest rates are being raised as of December of 2009. They are offering me the opportunity to "opt out" of the increase. This means they will cancel my account. I know Marketplace has advised other listeners that closed credit card accounts negatively impact credit ratings - so my question is: should I keep the account open and not use the card or should I "opt out" on the presumption that it will not negatively impact my credit score? Chris, Los Angeles, CA

Answer: You have a lot of company. Yes, closing the account will have a slight negative effect on your credit score. The impact of a closed account comes from the change in your ratio of total credit balances to total credit limits. A closed credit card account lowers your overall credit limit and raises the ratio.

But so what? The nick won't really matter unless you're in the market to buy a home, a car, or some other big ticket item. If that's the case, I would swallow the increase for now. But if you aren't going to be borrowing money anytime soon I would recommend closing the account and paying off the balance at the lower rate. Why reward this company with your business considering how it is treating you? After all, the real goal is to get rid of credit card debt. And the effect on your credit score--if any--does fade with time.

One other point: Do you really need more than one credit card anyway? I can't think of a good reason why anyone wants more than one. An important exception to that rule is having one for personal use and the other for business expenses. It makes record keeping easier.

10/05/09 by Chris Farrell

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Go on trip

Question: My wife (30 yrs old) and I (31) have been saving for multiple years to take a 6 month world trip and I am hoping you'd give me your opinion if it is too financially risky to take this trip. I can take a leave of absence from my work with the expectation that I'll still be employed when I return. My company is an FFRDC [Federally Funded research and Development Center] so it is relatively secure. My wife will have to quit her job and search upon return. However my job is 2/3 of our income and we could live off my job alone if needed. We rent so we should be able to cut most expenses while we're away. We have zero consumer debt, though we have $45,000 in federal student debt at 2% APR. We estimate the trip will cost $30,000 and have $40,000 so that we have a good buffer. This is not our only savings as we have been saving for retirement for multiple years and already have about $100,000 toward retirement in our tax advantaged plans. We also have several months (~4 mo) expenses saved up in the bank for a rainy day. However I am still a little worried. With the poor economy and losing 6 months of pay is this just foolish conspicuous consumption that will put my wife and I in financial peril or is this a small, calculated risk which, given we are young, can course correct even if the unexpected happens? Obviously I'd love to make this trip, but I like feeling financially secure as well. First Name: Nichols, Redondo Beach, CA

Answer: Okay, I'm jealous--really jealous. It sounds like a wonderful adventure. I guess I'm supposed to act like a sober-minded guardian reminding people not to take unnecessary risks when the economy is down. But I can't do it. I don't believe it. As the 15th century French poet Charles D'Orleans wisely wrote, "It's very well to be thrifty, but don't amass a hoard of regrets."

You can't get rid of the risk that when you return you face a rough time. It's in the nature of your adventure. But you've carefully thought through the risks and rewards of taking the trip, and you've done a lot to minimize the risk of hitting a tough patch when you return. You've prepared your employer for your leave. You've saved a lot, leaving yourself a decent margin-of-safety to fund your wife's job hunt when you get back to California. The global downturn also means that in many places you'll be able to take advantage of cut-rate prices. Bon voyage.

10/06/09 by Chris Farrell

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Relief on student loans

Question: My son was recently told by another graduate that there is a program that limits the amount of monthly payments for student loans. Are you aware of this and is there a place to call? Mary, St. Clairsville, OH

Answer: Sounds like your son needs some financial relief. There is genuine financial flexibility built into federal student loans. (The same can't be said for private student loans. They are really high-cost installment loans. The term "student loan" is a misnomer.) However, all the various ways of lowering his monthly student loan bill come with a price: He'll increase the overall cost of the loan over time. Still, he'll get a break now and, since there is no pre-payment penalty with student loans, he can always accelerate his payments if his money circumstances improve.

The main options for lowering the payment are the 1) Graduated Repayment Plan (payments start out low and increase over time); 2) the Extended Repayment Plan (stretch out the payments); 3) an Income-Based Repayment Plan (your monthly payment rises and falls with your income); 4) the Income Contingent repayment plan (the payment can't exceed 20% of discretionary income); and 5) the Income Sensitive plan (monthly payments are a percent of gross monthly income).

Whew--that's a really quick tour. Obviously, he'll need to look at these options in more detail. He can learn about these loan options at Finaid at finaid.org. The U.S. Department of Education at ed.gov also offers good loan information.

I don't know if this applies to your son, but federal and state governments will forgive loans or make loan payments in certain circumstances. The military is one example. So is teaching in inner city schools. A new program has the U.S. government paying the remaining interest and principal on federally backed student loans for employees that have worked for the government for 10 years. You must be in good standing with your student loans, too. The benefit extends to a lengthy list of other "public service" jobs, including law enforcement, public defender, nursing, and child care. It's a way to attract young talent to the public sector and public service jobs. If Hollywood remakes the 1967 classic The Graduate, the advice to Benjamin might be "public service" instead of "plastics."

10/07/09 by Chris Farrell

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A whole life policy

Question: My wife and I are in our early 50s. We have been told that we should have a whole life policy in our investment portfolio as a conservative investment vehicle (we currently carry $150,000 term life policies on each of us). Our combined gross annual income is approx. $155,000, and we are saving for retirement in 401Ks at approx. 15% of our annual income. We also invest in Roth IRAs and have two homes that are nearly paid off. So, about the whole life for us, what do you think? Thanks very much! - Tim, Indianapolis, IN

Answer: I'm skeptical. Do you need more life insurance than you are currently carrying? If yes, why not simply hike the amount of term life insurance you have currently. Or do you face a future that calls for a whole life policy?

A whole life policy combines a death benefit with a tax-sheltered savings account. In essence, you pay a premium for the coverage, the insurance company deducts insurance and expense charges, and then it credits the rest of money into a tax-sheltered interest-bearing checking account. It can quickly gets a lot more complicated than that, by the way, but that's still the essential idea.

I like judging whole life from the perspective of does it meet your life insurance needs better than term insurance?

To be clear, whole life fills a need. But I'm skeptical that its a conservative investment alternative for many people. If you need a stronger hedge against bad times in your overall portfolio why not put the money into all kinds of conservative savings choices, from CDs to Treasury notes to I-bonds. The cost of owning investments like these are minimal. (And if you buy I-bonds, bills, notes and bonds directly from the Treasury there are no commission costs to buy.) You don't have to worry about default risk. Interest rates won't always be at such razor thin levels, either. You can be tax smart with these alternatives, too.

Clearly, you're good savers with plenty of assets and almost no debt. I think I would just continue what you're doing.

If you do go the whole life route, take your time, shop around, and ask lots of questions.

10/08/09 by Chris Farrell

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Too much in retirement savings?

Question: This may be an odd question in this economy. I've always tried to max out my pre-tax retirement savings. However, I'm wondering if this philosophy still holds true when your employer's contribution is significant (i.e. it's over 10%)? This is a *contribution*, not a *match*.

This puts me at pretty much 25% pre-tax retirement savings. I'm 35. Am I better off taking some of my money and putting it into something post tax for more diversification? Or should I still contribute the maximum because of the pre-tax benefits?

Basically, is there such a thing as putting too much into pre-tax retirement? Renee, Minneapolis, MN

Answer: You're right--you are in a different situation than most people. It's a nice place to be, too. But yes, I do think it's possible to put too much into a particular tax-sheltered retirement savings plan. The reason is that you can't get access to the money without paying a steep 10% penalty as well as ordinary income taxes if you withdraw the money before 59 ½.

I have two suggestions for you to consider. Both assume that reducing the amount going into your pre-tax retirement plan doesn't affect the company's contribution, which is incredibly valuable. First, if you come under the income restrictions I would set up a Roth IRA. The contributions are funded with after-tax dollars, but the gains are tax-free on withdrawal in retirement. An additional benefit is that you can always withdraw the contributions without penalty or tax if you need the money.

The other is to set up a long-term savings plan that minimizes your annual tax hit. But you can always access the money. For instance, you could set up an automatic savings program--a set some of money is invested every month. Some of your savings could be regularly invested in a broad-based stock index fund, such as the Wilshire 5000, the Russell 3,000, or the Standard & Poor's 500. Uncle Sam annual levy is minimal since there isn't a lot of trading activity with an index fund and when you sell stocks much of the gain will come under the lower capital gains tax rate. You could also load up on tax-deferred inflation-protected I-bonds for the fixed income portion of your portfolio (or Treasury bills, certificates of deposit, and other safe investments). It provides an anchor to your savings.

A regular monthly investment into a mix of secure and riskier savings in taxable accounts accumulates with time. It may be tapped to fund a career change, a medical emergency, a home, or retirement. This approach is a simple strategy that gives you a lot of flexibility.

10/09/09 by Chris Farrell

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$7,500 homebuyer credit

Question: I bought a house in 2008 and received the $7500 first-time home buyer credit (the first one not the $8000 giveaway). I lost my job and sold my house at a lost in spring of 2009. Do I still have to payback that $7500 credit? If so how soon? If I kept my house I would have to repay it over a 15 year period. Sean, Camden, AR

Answer: The $7,500 homebuyer "credit" was truly misnamed. It wasn't a credit. It was a 15-year interest-free loan from the government for first-time homebuyers. You got the "credit" upfront and then you paid it back in equal installments over 15 years. (The $8,000 first-time homebuyer for 2009 that expires on November 30 is a pure tax credit. You simply pocket the money. You don't owe anything so long as the home is your principal residence for at least 36 months after purchasing it.)

The balance of the $7,500 loan is paid off in full if you sell your home at a profit before the 15 year term is up. The amount paid back to the government, however, can't exceed the amount of the gain. When a home is sold at a loss--as in your case--the balance of the loan is forgiven.

By the way, I find it intriguing that even the IRS on its website suggests checking with a tax professional if you sell a home bought with the $7,500 "credit/loan" with no gain or a loss. The agency knows it's a confusing piece of legislation. So, who am I to argue with the IRS? Check with a tax pro first.

10/12/09 by Chris Farrell

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Required minimum distribution

Question: What exactly is involved in "distributing" your IRA'a by / at age 70 ½? Beverly, Flagstaff, AZ

Answer: In the calendar year following the year you turn 70½ you must start withdrawing a minimum sum of money from your tax-sheltered regular IRA. (You don't have to with a Roth-IRA; it doesn't require minimum distributions.) The jargon term is "RMD" for required minimum distribution. Of course, you can take out more money than the RMD if you want to or need to.

The basic formula is composed of two parts: The adjusted market value of your IRA as of December 31 of the prior year divided by your life expectancy taken from the Uniform Lifetime Table published by the IRS. But most major financial institutions that are in the IRA business offer calculators to figure out your RMD. If your IRA provider doesn't offer one you can turn to calculators at websites such as dinkytown.net.

The exact amount of your RMD does change from year to year.

10/13/09 by Chris Farrell

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Life insurance

Question: My husband and I are considering getting life insurance. We are 30 years old and we don't have kids but would like to have them in a few years. Our combined income is 150,000 and our only debts are our mortgage (350,000) and student loans (15,000-me, 40,000-husband). I've read in personal finance books that we should only consider term life insurance. Is that the case, and how do you figure out how much life insurance is right for you? Erin, Rockville, MD

Answer: There's really only one reason to buy life insurance: To financially protect our loved ones from our untimely death. Most of us realize we need life insurance when we have children. But I think it makes sense even for married folks without children to consider buying life insurance. It's a way of making sure that if one of you dies the other doesn't have to worry about money for a period of time. That's how I would start figuring out how much life insurance you need: How long do you want expenses to be covered to give the survivor some freedom? One benchmark is giving the survivor a year to deal with their grief without worrying about earning an income, paying down debts, or draining the savings account.

What kind of life insurance should you buy? I would go with "term" life insurance. Term is a pure death benefit. Premiums are cheap if you're in good health, although the cost of the policy does increase as you age. It's a simple product, easy to understand, and it allows for competitive comparison-shopping for the best mix of price and coverage. You'll want a low cost, plain vanilla policy from a blue chip, financially strong insurance company.

10/15/09 by Chris Farrell

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Old financial papers

Question: After cleaning out a closet, I now have old bank statements and other financial information, even old checks that I didn't use because of a change of address. It fills a trash bag, but is it safe to put it out in the trash? If not, what do I do with it? My little shredder would overheat if I tried to shred all of it. Claudia, Baltimore, MD

Answer: I definitely would not put any old financial information like that in the garbage. Odds are that your Social Security number is in the papers, as well as other valuable financial data that a dumpster-diving thief could use to steal your identity.

So, although it's a pain and it means an extra trip I would take the paper to a professional paper shredding site. It's safer, and the paper will get recycled to boot. (I know it's a pain because I was just staring at an old computer and television that need to be recycled. I've been meaning to do it for some time, now. This weekend I'll get it done.) Some neighborhoods hold paper shredding "events" where a truck with a shredder stops by. It's another option if it is happening in your area.

by Chris Farrell

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Credit check

Question: I am inquiring as to if the State of Missouri has enacted legislation to enable consumers to "freeze" their credit report access from landlords and employers. The state of Missouri, where I reside, currently has one of the highest unemployment rates in the nation (near 10%) and an employer that I interviewed with who otherwise would have hired me based their decision NOT to hire me on my credit report, which is a disaster. Last Sunday's Parade magazine mentioned that the Federal government is considering legislation that would block employer access to credit reports. Please advise and thank you. Sincerely, Colleen, St Louis, MO

Answer: The official unemployment rate is close to 10%. The broadest measure of unemployment, which includes folks that want to be working full-time but are employed part-time, is at 17%. Its numbers like these that have the federal government and a number of states worried with almost half of employers making use of credit checks to screen potential employees.

That said, not much has been done on the legislative front. Washington instituted limits on employers tapping into credit histories for job candidates in 2007. Hawaii became the second state with such a law this year. A number of other state legislatures have considered comparable proposals, among them is Missouri with a 9.5% unemployment rate. The bill is here. The bill hasn't passed into law.

All these bills recognize that a credit check is essential in some industries and jobs, such as financial services and bank tellers. There isn't and shouldn't be any dispute about that.

But it sure seems like an abuse of power in the current economic environment. Look, when the economy is weak employers have the upper hand. They can impose all kinds of job qualification requirements for potential openings. Sometimes, it seems as if applicants need a PhD to be a janitor and an MBA for a clerical position. Yet when the economy is booming and the unemployment rate is low these onerous requirements disappear. That's what happened in the late '90s.

The journalist Dana Dratch has a nice backgrounder on the issue.

Your credit score isn't supplied to employers (at least your FICO score, which is the main one).And the fact that a potential employer may run a crdeit check is yet one more reason to monitor and correct any errors in your reports.

10/19/09 by Chris Farrell

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Participating in 401(k)

Question: My fiancée has about $40K in student federal loans outstanding and because of that, has yet to contribute to her company's 401k program. I think her company matches dollar for dollar up to $2000 and .50 cents up to $4000. What's the best "financial equation" to use to figure out how much to contribute to the 401k and how much to set up for monthly deductions for her student loan payments? DJ, San Francisco, CA

Answer: The simplest answer is that she should invest enough to take full advantage of the employer match. Warren Buffet, David Swensen, and any other investing superstar of recent decades can't come close to the kind of investment performance recorded by the match. Plus, most of the growth in a 401(k) plan doesn't come from investment earnings but from the match. (And that's why it's doubly devastating when employers reduce or eliminate the match.)

There are additional issues she could consider. For example, she could look at the interest rate she's paying on her student loans. She can put in more money than the match if she thinks she'll do better than that interest rate over time. She should also increase her contributions as her income grows.

Still, for now, the simplest equation is to "invest to the match."

10/20/09 by Chris Farrell

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Rollover IRA

Question: I was recently laid off and told that because my 401k balance was below 5k I would need to move the money. I do not want to cash out and would like to avoid paying any taxes on the funds. I currently have 3 other 401k accounts with previous employers. What are some of my options for these investments? Natalie, West Chester, OH

Answer: You'll want to do what's called a "rollover IRA." There are no tax consequences or penalties so long as the money is transferred from your former employer directly into the rollover IRA account. Check with human resources before you do anything to make sure you understand any requirement the company may have about a rollover. The same goes with the company you've chosen to place your rollover IRA. And if you put the money into a comparable investment you shouldn't take much of a hit on the transfer, either.

Now, as to your other 401(k) accounts at 3 previous employers, why are you keeping the money there? If it's because you really like the plan options offered by these employers, fine. But my bias is for you to take control of the money through a rollover IRA. "It's great anytime you can take control of your money and take it out of your company plan," says Ed Slott, head of his eponymous company and a leading IRA expert.

You're no longer working for these companies. It's your money and if it's under your control you'll watch it carefully. Plus, you get to chose the investment company and investment options, not your former employer.

10/21/09 by Chris Farrell

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Roth conversion

Question: My wife has a combined income that is over the limit for a traditional IRA tax deduction or for contributing to Roth directly. We both also have employer sponsored retirement plans. Since there is no income limit for conversion from a traditional IRA to a Roth in 2010, I want to establish a traditional IRA now so that I can convert it to Roth next year. My question is, because I will be contributing to my traditional IRA after tax (or without any tax deduction), how I will be taxed when I convert my traditional IRA to a Roth coming 2010? Thanks. Andrew, Norman, OK

Answer: What you're planning on doing can be a smart move. Let me just give a bit of the background behind your question.

The Roth-IRA is a terrific retirement savings vehicle, probably the best available. The main reason is that all accumulated investment gains are free from Uncle Sam's clutches when withdrawn during retirement. The other attraction of the Roth is that it offers unusual flexibility for managing finances. For instance, there is no required minimum distribution at age 70 ½ with a Roth as there is with a 401(k) or a traditional IRA.

In the past, you could convert money stashed in a traditional IRA into a Roth, but you could only do it if your adjusted gross income was under $100,000. That earnings cap on conversion disappears next year. That's why the Roth conversion equivalent of a gold rush is about to be unleashed in 2010. Conversion calculators have sprung up all over the web. (The contribution limits to a Roth and the income phase-outs all remain essentially the same in 2010 and on. What have changed are the rules with conversion.) There are a lot of twists and turns to the Roth conversion question in 2010 and after. But it's an issue well worth researching.

Now, to your question. Many financial planners I've talked to are advising folks that earn too much to contribute to a Roth and a traditional IRA to open up what is called a non-deductible IRA. This is what you're planning to do. The non-deductible IRA is funded with after-tax dollars. The gain is tax-sheltered over the years and the earnings are taxed at your ordinary income tax rate on withdrawal during retirement.

But you're not going to wait that long. You'll convert the non-deductible IRA into a Roth in 2010. The only tax you will owe on conversion is on whatever gain you've earned in the meantime--in other words, not much. You won't owe anything on the contribution since you've already paid the tax tab on that money. And, of course, with this maneuver you won't pay any taxes on the investment earnings when you withdraw the money in your retirement years.

As I said, it can be a savvy move.

10/22/09 by Chris Farrell

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Buy a home

Question: My wife and I are considering buying a home in San Francisco, but also know that we will be moving to LA sometime in the 3+ years. Homes in SF are extremely expensive, and we would be able to put down a 15%~20% down payment, but I don't want to lose this money if the market gets worse. We are both currently employed luckily and are expecting which is what is prompting this decision. What tools are out there to help us make a smart decision on whether this is a financially smart idea? Also if we do buy a home, when we move what are the consequences of renting out the home?

Thanks in advance and love the show. David, San Francisco, CA

Answer: I would be very wary of buying with your time frame of 3-plus years. Whenever I run the numbers it's clear the longer you intend to stay in a home the better the financial advantages of ownership. It's safe to say that if you plan on staying in a place for three years or less renting is always preferable. I don't think ownership makes sense unless you're confident that your time horizon is at least 5 years, and preferably longer.

It does appear that the housing market is stabilizing. That doesn't mean it won't stagnate for a long period of time in many markets. It's what I expect. In coming years, the ebb and flow of home values will largely be dependent on local job and income growth. In the words of a Business Week story on the housing market, it will be "back to blissful boredom." It will be a welcome respite.

Still, it's always a good idea to run the numbers. Online calculators will do the math for you. There are a number of good ones, but I tend to gravitate toward the websites dinkytown.net and hsh.com. By playing with different assumptions these calculators will help you figure how long it might take before you break even on the investment or, to put it somewhat differently, how much risk you're taking with the down payment money.

When you rent out a home you are no longer a homeowner but a small business person. It's a business. Nolo.com is a good source on what it takes to be a landlord.

10/23/09 by Chris Farrell

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Investment taxes

Question: Hi Chris, I have listening to Market place Money for the past several years and love to hear your views on the economy and your Q&A. Last year I bought some Municipal Bonds (MICHIGAN ST BLDG AUTH REV BDS CUSIP 594614W54) when the financial world was coming to an end (:((). I just did this as an experiment. (The post tax yield equivalent on these bonds were attractive at that time) If I were to sell these bonds after a year of holding them - what are the tax implications? Thank you and look forward to hearing your views in these historic times. Guru, Farmington Hills, MI

Answer: With the scenario you've laid out you would come under the capital gain and capital loss rules. You say you've owned the bonds for more than a year. Let's assume for illustration purposes that you paid $10,000 and you can sell the bonds for $10,400. You would have a capital gain of $400 with a maximum rate of 15%. (A long-term capital gain requires that the security be held for more than 12 months; the maximum rate on short-term capital gains is 35%.)

However, if you sold the bonds and could only get $9,800 for them you would have a capital loss of $200 that can be used to offset, first, a long-term capital gain and, second, if there is any loss left over any short-term capital gains.

Of course, there are a few other wrinkles, such as adjusting for selling costs and whether the bonds were sold at a discount. But that's the basic idea.

Thanks for listening.

10/26/09 by Chris Farrell

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Responsible for debt

Question: In 1999 I opened a credit card with my nanny to help her establish credit. I have never used the card so all of the charges on it are hers. Last year in July I was informed by the bank that she was late on a payment. I canceled the card. Since then she had been paying regularly until this past May. She is over 90 days late and it is now in collection. I had her fill out a form to assume financial responsibility for the card. The bank will not allow that because she has been late. Technically it is my responsibility. The total due on the card is around $10,000. What can I do so this doesn't ruin my credit? Vivian, San Mateo, CA

Answer: I know you don't need me to say this at the moment, but for other listeners and readers your experience is why it doesn't pay to co-sign or open a joint account with non-family members--no matter how trustworthy. Life intervenes, and many of us fall behind on our payments for a number of reasons. (Even with family members I urge caution; there are other ways to help them out financially without taking on a legal obligation.)

Fact is, the bank and collection agency has every incentive to enforce your legal responsibility for the payments. You can't get off the financial hook. Still, the good news is that you've closed the account. The potential damage is limited to the $10,000 remaining on it. Now that it's in collection the simplest way to minimize any damage to your credit is to pay it off and then work out a payment plan with your nanny. Of course, this course of action depends on your relationship with your nanny.

Does anyone else have a suggestion?

10/27/09 by Chris Farrell

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Military thrift plan

Question: Hi, I recently left active duty military service and am trying to decide what to do with my Thrift Savings Plan. I've got about $40k saved in it right now.

When I look at the options for withdrawing, it seems like I'll be paying either 10 or 20 percent penalty fee.

I was thinking about starting a ROTH IRA. Should I take the penalty and roll it over into a ROTH IRA? Or am I better off just letting the money sit in the TSP until I retire? Thanks, Spencer, Humble, TX

Answer: You have a number of good options to think through. And you shouldn't pay a penalty or taxes with them. The one exception on taxes is the Roth option. I'll explain in a moment.

First of all, the Thrift Savings Plan is a really good, low-fee plan. It's hard to beat. You might want to simply leave your retirement savings in the plan.

If you still want to move your savings out of the Thrift Savings Plan you can roll it over into another tax sheltered plan. For instance, if your current employer's savings plan allows it you could transfer the money into your new 401(k). Alternatively, you could roll it over into an IRA. In both cases you don't take the money out. You'll make an institution to institution transfer of the money, preserving its tax-sheltered status. No penalties will be imposed, either.

You could put the money into a Roth-IRA. Since the Thrift Savings Plan was funded with pre-tax dollars and a Roth is funded with after-tax dollars you'll owe taxes on the money your transfer into the Roth. However, when you pull the money out during retirement the gain is free of Uncle Sam's levy. By the way, in most cases it does not make sense to Roth if you have to use your retirement savings money to pay the tax levy. It reduces the amount that can grow, free of tax, in the Roth.

I'm not sure which branch of the military you served in. But the Navy offers a clear brief explanation of your choices.

10/28/09 by Chris Farrell

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Stock options

Question: My husband is a mid level executive and he receives stock options yearly as part of his compensation. Since the stock prices have been continually declining at his company, we now have five year's worth of options we are unable to exercise. Aside from the stock price increasing, is there any way we will be able to recoup this money? Mary, Milwaukee, WI

Answer: Your husband's situation isn't uncommon among publicly-traded companies. Many executives now hold stock options that are worthless because the "exercise" price is greater than the market value of the underlying stock. In other words, you'd lose money if you exercised the options. The Wall Street metaphor for this experience is that the options are "underwater". Descriptive, isn't it?

There's nothing your husband or you can do. It's really up to management and the board. They can decide to leave the current option awards program unchanged. In that case, everyone will have to wait and see if the stock price improves before the option grant expires. The employee optionholders remain in the same financial boat as shareholders. However, some companies have decided to take a different tact. They are rewarding employees by substituting their old underwater options for newer ones with a lower exercise price, retiring the options and issuing restricted stock, or by exchanging cash for the options.

10/29/09 by Chris Farrell

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Inflation indexed bonds

Question: Is there a way I can buy "I" series treasury bonds with pre-tax money? I would like to hedge a little bit against inflation with these bonds, but don't like buying them with after tax dollars. Does this make sense? I am open to suggestions. Jeff, Sparta, TN

Answer: Let me clarify the choices. In an IRA or comparable retirement savings plan you can't buy Treasury Inflation Protected Securities directly from the U.S. government. However, you can purchase them through a broker with pretax dollars in an IRA, 401(k), and the like. (And commission costs are low.) You can also buy mutual funds that invest in TIPS with pretax money.

The I-bond is a savings bond that also offers investors an inflation hedge. It is purchased with after-tax dollars. But the money compounds tax free until you cash them. You don't want to buy I-bonds with pretax dollars since it's already a tax-sheltered form of savings.

Both TIPS and I-bonds are good long-term investments for savers.

10/30/09 by Chris Farrell

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