|
"Ask The Experts" is a feature of Investing For Your Future that allows readers to obtain unbiased, research-based information pertaining to a specific investment topic (e.g., index mutual funds, Treasury securities). A panel of financial experts representing land grant universities and several federal government agencies stands ready to assist you. The information provided is generic in nature. Our experts will not mention or recommend specific products (e.g., XYZ growth fund), but they will provide information to help you narrow your investment options and make financial decisions. To search more frequently asked questions and ask your question select the "Ask an Experts" link above. Answers to Readers' Questions Q: Do you know what the symbol TEKBX stands for? It was in my stock portfolio and is now without value. Also CRPP, was the name was changed, or did the stock go belly up? A: There are professional services that can provide this kind of information, but for your case all it takes is an easy little Google. When you google each symbol, you will see the press releases and other material explaining the status of these investments, as well as the contact information for investors. You're lucky, all the information you need is available on line. You will find that TEKBX was class B shares in the Morgan Stanley Technology Fund which subsequently merged into the Morgan Stanley Information Fund in 2003. CRPP was Crown Pacific Partners LP, a limited partnership that bankrupted and transferred to Cascade Timberlands LLC. Q: If I use a portion of an IRA towards the purchase of a house that would be my legal residence, would I be penalized for withdrawal? A:Here's the scoop on the IRA withdrawal for a home, taken directly from the 2003 (most recent) IRS Publication 590, pages 49 and 51: In general, there is no 10% penalty for an early (before age 59 1/2) IRA withdrawal if you use the distribution to buy, build, or rebuild a first home. However, there are certain requirements that must be met in order for this exception to apply. To qualify for treatment as a first-time home buyer distribution, the distribution must meet all the following requirements.
Qualified acquisition costs include:
Generally, you are a first-time home buyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition (see the Pub 590 for this definition) of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement. If you want to see the publication, you can order it from the IRS or view it in PDF format by going to www.irs.gov and searching for the Pub 590.
Q: Where can a person purchase savings bonds? A: Savings bonds can be purchased through most commercial banks (for banks selling savings bonds in your state, consult www.publicdebt.treas.gov/sav/savhblst.htm, savings and loan associations, and some credit unions; through a payroll deduction plan at work; through a Federal Reserve bank nearest you (www.federalreserve.gov/otherfrb.htm), or online through TreasuryDirect (www.treasurydirect.gov).
Q: I recently inherited some money and I'm looking to buy a home. I have enough money to pay cash for a home, but some people are telling me that I should get a mortgage so that I can save on taxes. I've looked at what I can save in taxes vs. what I can make on investing it and I don't see any advantage. Is there something that I'm missing here? A: Taxes are certainly a factor to consider, as homeowners who qualify to itemize can deduct their mortgage interest, property taxes, etc. A better way to answer your question though, is from the standpoint of opportunity cost. In other words, if you do one thing (buy a home with cash), you can't do another (invest the money). You need to compare the average return on the assets you would put the money into if you didn't use it on the house (e.g., stock index funds, CDs) with the after-tax cost of getting a mortgage. The numbers should guide you in your decision. You could also do a little of both...use some of the money for a big down payment and a smaller mortgage and invest the rest.
Q: I am a father to two girls, ages 2 years and 1 month. We are a single income family. I would like to purchase saving bonds to have when the girls are of college age. I know there are some education benefits to buying bonds, since there is a way to have the interest taxed deferred. The question is which type of bond--EE or I--and whose name should the bonds be issued to? Our family gross income is now $50,000, but by the time the girls are ready for college, we expect both mother and dad to be teaching. A: Many parents purchase bonds to help pay for their children's education. In addition to Government issued bonds, some parents purchase zero coupon bonds. The U.S. Treasury has an Education Bond Program that allow interest to be completely or partially excluded from Federal income taxes when the bond owner pays qualified higher education expenses at an eligible institution in the same calendar year the bonds are redeemed. You are correct, both the EE and I bond series qualify for this plan. If you plan to use the bonds for this educational purpose, you and/or your spouse must be the registered owner of the bonds. Your children may be listed as beneficiaries of the bond(s), but may not be listed as co-owners. There are income limits for interest exclusion from income taxes for the educational plan. These limits are applied in the year you use the bonds for educational purposes, not the year you buy the bonds. Since your girls are very young, you would need to check what these limits are when you reach the year you will redeem them. Financial institutions report interest earnings on IRS form 1099-INT. Savings bonds are exempt from state and local income taxes. You can purchase both EE and I bonds though most local banks, or over the Internet directly from the U.S. Treasury. If you want to explore the later option go to www.treasurydirect.gov. Some employers offer a Payroll Savings Plans that can be directed to the purchase of bonds. Series EE bonds are issued at 50% of face value (e.g. A $100 EE Bond costs $50) and the interest added over the life of the bond brings it to face value. EE bonds are guaranteed to reach face value in 17 years. Series I Bonds are issued at face value (e.g. A $100 I Bond cost $100). Interest is paid when the bond is redeemed. The interest on EE bonds is calculated as 90% of 6-month averages for 5-year Treasury securities yields. I Bond interest is calculated on a fixed rate plus an inflation rate based on the Consumer Price Index-Urban Consumers. Interest rates for both series of bonds is announced May 1 and November 1 each year. Both bonds apply interest monthly and compound semiannually. Because the interest is added to the face value of the I Bond, you might consider lesser value I-bonds on your initial purchase. Both bonds earn interest up to 30 years. Since you are a young family with one income the EE bonds may have more interest for you. EE bonds can be exchanged for Series HH savings bonds. I bonds cannot be exchanged for any other series of savings bonds. Both series can be cashed any time after twelve months for bonds issued February 2003 or later. There is an interest penalty for bonds redeemed during the first 5 years. Zero Coupon bonds work in the same was as Series EE bonds. They are purchased at less than face value and the interest earned over the life of the bond brings it to full face value by maturity. Zero coupon bonds can be purchased through a stock broker. Instead of being backed by the US Treasury, they are issued by corporations. Many parents purchase bonds for educational purposes in a "ladder." This means that they purchase bonds in dimensions that will come due as they are needed. For a college education, you might want bonds that you can redeem at the beginning of each semester. Thus you might purchase 8 different bonds for each girl. You can purchase these bonds every 6 months to simulate the time 17 or so years later that you will redeem them. I encourage you to consider both US Savings bonds and zero coupon bonds before making your decision. If you are a willing to take a slightly higher risk in your bond investment, you might look at municipal or corporate bonds. The municipal and corporate bonds probably will take a larger share of money than the other bonds at initial purchase.
Q: Is it correct to say that "B" shares of mutual funds are an expensive way to invest based upon their expense ratio? A: "B" shares typically have a back-end load that declines 1% a year until it disappears after the fifth or sixth year. However, management and marketing fees are usually higher on this version of a load fund than "A" shares that charge a front-end load. Try to avoid B shares if you don't know how long you will hold a mutual fund. Expense ratios for different share classes should be reviewed carefully in a fund's prospectus to make comparisons among them.
Q: My parents bought a lot of real estate over the years. Since my father's death, we have my mothers house, my house and one rental property left. I'm trying to help my mother figure out the best way to sell one of the properties--probably the rental. My mother is 60 years old. She bought the rental property for around $40,000. The small town we live in is BOOMING. Older homes are getting snatched up for over $120,000! Here's the advice we have gotten from her tax man, if she sells the rental, she will owe over $20,000 in capital gains taxes! Could you please shed some light on the Tax Law for us? Thought you could sell one property if you were over a certain age with no Penalty? A: A house must be a primary residence in order to receive the capital gains exclusion of $250k for singles and $500k for couples. Rental properties do not qualify as a primary residence. I think this is what your tax advisor was trying to tell you. Capital gains tax is calculated as the selling price minus the original purchase price and the cost of improvements multiplied by a person's marginal tax bracket. A list of marginal tax brackets can be found in the "Tax Information" section of our Web site: www.rcre.rutgers.edu/money2000.
Q: My wife and I are retired (58 years old) and are currently seeking advice as to how to invest for fixed income as my cash is currently in Short term bond and GNMA funds and a money market fund. I just recently invested in the Corporate and GNMA fund. I am a conservative investor and am seeking advice as to where I should be allocating this portion of my portfolio. With the prospect of interest rate increases in the future, how can I invest to take advantage of this? I have sufficient funds to buy individual bonds and think laddering treasuries appeals to me but don't know if this is the best choice. A: When interest rates go up, as they most surely will eventually, the price of bonds goes down. If you have to sell before maturity, you'd take a loss. If you hold on until maturity, however, you'll get your full principal back. The share prices (NAV) of bond funds are similarly affected by interest rate risk, except that they never mature so you never escape the chance of loss if interest rates rise. As for your options, laddered Treasuries, or investment grade corporate bonds if you want a slightly higher return, would provide a nice stream of income. Buy them for six months in a row and you'll have an interest payment every month. Choose a variety of maturities to give yourself liquidity and a chance to take advantage of changing interest rates. Unit 5 of our Investing For Your Future course describes other options in detail. See www.investing.rutgers.edu.
Q: My mother and father are very close to retirement and have just paid off their home mortgage. They have no investments, no savings, and still have a few credit card bills. I just got them to get IRA's on each of them that have $1,000 in each so far. My father has decided since he does not have any money and does not want to be taxed so much because of not having a mortgage and having the IRA's he is going to borrow $1,000 on a credit card at 9% and put it into the IRA. He said this is so he does not get taxed the 15% this year. It sounds like a bad idea to me and I just don't understand the logic. Do you know what would be a good idea for him to do? Just a note they only make about $ 30,000 combined each year. And they have nothing in savings and my dad does not plan to invest or start any savings. Also the IRA is only earning about 3.50% right now. A: Although you did not indicate your parents' ages, I am guessing they are in their late '50s or early '60s because you indicated they are "very close to retirement." Based on my understanding of what you have said, I'm making the following observations. However, you would be advised to contact your tax advisor for assistance that is specific to their situation. My comments may be too general to provide you with everything you need to consider. You did not indicate if either of your parents contributes to a pension plan at work. Because their income is around $30,000 per year, they are likely to qualify for a tax-deductible traditional IRA. They are limited to a $2000 per person contribution for 2001 but in 2002, they will be able to contribute $3500 each because they are over the age of 50. With a traditional IRA, they will be required to start taking distributions from their IRAs at age 70.5. They can still open 2001 IRAs until April 16, 2002. And they have until April 2003 to open their 2002 IRAs. Of course, given their ages, the earlier they open their IRAs, the more time they have for their money to grow. If your father is concerned about losing the mortgage interest deduction because they have paid off their mortgage, he may respond favorably to the tax-deductible IRA option I have outlined above. But be sure to check with your tax preparer about their elligibility for such a tax deduction. Another alternative to the traditional IRA is the Roth IRA. However, this is not tax-deductible. With a Roth, none of the distributions (withdrawals) are taxable...with a traditional IRA, they will have to pay taxes on earnings. Now that the mortgage is paid off, is it possible for your parents to use the money that was being used to pay the mortgage to contribute to their IRAs?? This would cost them less in the long run than borrowing money on a credit card at 9% since the interest on the credit card is not tax-deductible. At 9% APR, borrowing $1000 for a full year would cost about $90. If the IRA is only growing at 2-4% per year, it will only be making $20 to $40 dollars. This is a net loss. Neither the cost of borrowing nor the net loss are tax-deductible. However, a traditional IRA contribution may be tax-deductible. You sound as if you are handling a difficult situation with a great degree of sensitivity. It is not always easy to help parents make prudent financial decisions. Have they considered what they can expect to receive in retirement income? And will it be adequate to cover their living expenses? Increasingly, many retired Americans must work part-time in order to make ends meet. Your parents may find themselves in this situation. However, as long as they have "earned income," they can continue to contribute to an IRA. You may want to check out the web site, www.asec.org for further information about retirement planning and ballpark calculations on the amount of money needed in retirement. Also, check out the IRS Publication 590, Individual Retirement Accounts: www.irs.gov/forms_pubs/pubs/p590toc.htm.
Q: Please give me some info on IRA's. My father passed away this year and left me his IRA. What do I need to do to get the money out of his name and in mine? What kind of tax is involved? I live in South Carolina and am 45 if that makes a difference. A: You should be able to find this information out from the IRA custodian. Contact the investment company or financial institution where the IRA is held and let them know of your father's death. They may ask you to furnish a death certificate. New guidelines that took effect this year make this distribution process simpler. Generally, if you are the designated beneficiary of the IRA, the custodian will transfer the account to your name. Required minimum distributions will then be based on your lifetime. That means that you will not have to begin taking distributions until you are 70-1/2, or you could opt to begin distributions when you are 59-1/2 without a penalty. Income taxes are due on the distributions in the year they are taken, based on the nature of the contributions--if they were deductible or not, or if it is a Roth IRA. By taking the distributions over your lifetime, you avoid the large tax liability of the old five-year distribution rule. You are also able to stretch out the tax-deferred growth of the IRA. If you are not the designated beneficiary (named on the IRA documents) or if you are one of multiple beneficiaries, it is a bit more complicated. The IRA custodian should be able to help you with that. The total value of the IRA on the date of death would be included in your father's estate for estate tax purposes. If his taxable estate was less than $675,000 there probably is no estate tax due. If it is over that amount, the tax would be paid by the estate. The only tax you need to pay would be the income tax on the distributions when you receive them. I am not familiar with the tax laws in South Carolina, so I do not know if there would be any state tax involved.
Q: I was looking at your web site showing the 2001 tax tables and I'm confused. It looks like we'll make $62,000 between us this year, will we have to subtract 27.5% for federal taxes? It looks to me that we will have paid throughout the year about $10,500 in taxes. We only have one child so I know there are deductions there. I'm kind of confused, can you shed some light for me? A: If you earn $62,000 and file a joint return, you are in the 27.5% tax bracket in 2001 and would pay tax of $6,577.50 + 27.5% of the amount of your income over $45,200. The tax bracket was lowered from 28% with the new tax law and will be 27% next year. Keep in mind that the income in the chart is TAXABLE income after all deductions and exemptions have been subtracted. With a child in your household, be sure to subtract the child tax credit.
Q: My 80-year-old mother has a fair amount of money in CD's. She has lived on the interest only for years never touching the principle. Now with the CD's rate so low she is becoming worried that she will have to touch the principle. What other options are out there for the short term investor that is not a huge risk. A: How about Treasury bills (3 or 6 month) or, Treasury notes (2, 5 or 10 year) or money market mutual funds, or better still, inflation-adjusted savings bonds called I bonds. The current rate in effect for I bonds is 4.40%. EE savings bonds pay 4.07%. The only downside of savings bonds is that they pay no current interest. You get all your return at the end when you cash out. Another option is short-term bond funds (corporate or government).
Q: My husband and I are in our mid thirties with two children, ages 8 and 11. We have 12 years left on our 15 year mortgage (I pay a small amount above the minimum payment each month). I'm an at-home mother. My husband took a new job this past June and we found out he won't be able to participate in the 401k program until next June. We had been participating in the old company's 401k. We don't want to waste the next twelve months. I have $50 taken out of our checking every month and put in a Roth IRA for myself. I just put $1000 in the rollover IRA we set up when he left his old job. We did speak at length to an advisor with Schwab when we set up the account and he's got us diversified. Should I continue sending the money to the new account, add more to the Roth IRA (in my name only), or do something new? With all the uncertainty in our economy we were thinking of buying series I savings bonds, something that seemed more stable. What are your thoughts. On a separate note.... The advisor with Schwab told us we should be saving $20,000 per year. It's got us rattled. We'd been proud to be saving $11,000 per year between his 401k and my IRA. Our mortgage is $1550 (including a small prepay of $16). We have one used car (husband gets use of vehicle 24/7). We do have a home equity line loan of $20,000 that I am not especially proud of. It's the remainder of the car loan and a used boat we bought in late June. (In the 15 years we've been married the man has never treated himself. His new job came with a $35,000 bump in salary and he felt he'd earned it. I couldn't agree more!) We pay between $1000 and $1300 per month on this loan and would like to pay in off in 26 months. Is that smart or should we just pay maybe $600 monthly and invest the rest? I mean, we do get to write it off the taxes. But debt is debt, right? Better to not have it at all? We have no credit card debt. I do keep track of our expenses. I have a Christmas club. Last year we took the kids to Disney World for a week and I had figured out exactly how much the trip would cost and we paid cash. But I feel like we're still not doing it right and I don't want to find out I wasn't in my fifties! Any advice on our financial health would be appreciated. A: Lots of questions...here are a few thoughts: Save now as if you were in a 401(k). Put the money in a liquid money market mutual fund or short-term CDs. Then when your husband is eligible to contribute, double up your "normal" contribution and draw from the savings to supplement your reduced pay as needed. Continue your automatic investing program for the Roth IRA. This is great. You can fund $4,000 ($2,000 apiece) total for 2001 and $6,000 ($3,000 apiece in 2002). Make plans to save for the extra $1,000 contribution. I would invest for retirement in growth mutual funds such as a total stock market index fund that tracks the broad U.S. stock market. I bonds are great for the cash portion of your portfolio and currently pay 5.92% through 10/31/01. As for whether you should pay off more on your home equity loan or invest, it depends what the numbers are. If you invest very conservatively, paying off debt is the better option because it provides a higher after-tax return. 4. As for the $20,000 a year savings figure, don't panic. You might try the Ballpark Estimate worksheet at www.asec.org for another calculation or check Rutgers Cooperative Extension's fact sheet FS431, How Much Do I Need To Save For Retirement? (www.rcre.rutgers.edu/pubs/pdfs/fs431.pdf).
Q: I will be rolling over my 401(k) account into a traditional IRA(s). I am about 13 years from retirement, and would like to give myself the best chance to optimize my retirement savings. I already own a number of mutual funds and am well diversified. However, my main concern is trying to decide whether index funds or actively managed funds would present the greater opportunity for growth of capital. I know that you cannot make specific recommendations; I would just appreciate your opinion regarding the pros and cons of each. A: One big advantage of index funds is their low costs--a feature you will see heavily advertised in funds such as the Vanguard Index funds (just an example, I can't recommend a particular fund or fund family as you mentioned). Another advantage of index funds is that you can get them for the total stock market, just the S&P etc. You are diversified across all stocks that are representative of that index. Actively managed funds can be great depending on who the manager is. There are some "star" managers who have a long track record of success. Sometimes they are managers of load funds rather than no load funds. If you pick an actively managed fund then you need to keep track of it and see if the manager leaves, such as Michael Price did with the Mutual Shares fund. The really important thing is fund performance and expenses. Some funds can have great performance but high costs that eat up some of your potential profits. A fund's prospectus will give you this information. Q: I've got quite a lot of my retirement money tied up in tech stocks. I would like to reduce my losses and get rid of some of them. I'm afraid of the tax consequences which I don't know anything about. If I sell some of these do I pay taxes on the receipts even though I sell for less than I paid for them? A: You need to calculate your tax basis in your tech stocks, which is what you paid for the shares originally, plus any subsequent share purchases or dividend distributions, if any. The difference between your tax basis and the selling price is your capital gain or loss. You only pay taxes on capital gains. You can use capital losses on your tech stocks to offset other investment gains.
Q: I am a teacher and have been told by a financial planner that a TSA is my best bet. Presently, I have a Roth IRA that offers a 10% match for any money I put in. I am 61. I put in more than the $2000 and he is telling me it's not a good deal. I don't understand the difference between all these annuities: TDA, TSA, IRA, etc. He is telling me that the annuities my board of ed offers are just insurance companies and his deal is better. He gets a 1% commission based on assets. What is my best bet? I have no savings, and am buying a condo which will raise my boarding cost to $1800 instead of the $1300 rent I am paying now. He said I am better off investing that money instead of raising my living expenses. A: Yes, a TSA, also known as a 403(b) plan, is a wonderful savings opportunity for teachers like you. It allows you to contribute a portion of your salary to the plan (up to $10,500 in 2001, going up to $15,000 gradually), not pay tax on the amount of the contribution, and earn money on the investment earnings that is tax-deferred until withdrawal. Your deposit is also automatically deducted from your paycheck. An IRA, ot the other hand, is something you purchase away from work. I doubt that you have employer matching, as you wrote, unless it is a SEP-IRA or SIMPLE-IRA offered by a business. It sounds like your financial planner is suggesting the purchase of an annuity outside of your IRA, with after-tax dollars. While it is true that many school boards offer poor (and high-cost) investment choices, you would lose the benefits of a 403(b) plan by purchasing annuities outside of your school plan. My advice: fund the 403(b) plan for as much as you can afford, plus an additional $2,000 ($4,000 if married) for a Roth IRA. Then, if you still have money to invest tax-deferred, consider an annuity, but only from a low-cost provider such as Vanguard or TIAA-CREF. High-cost annuities with expensive broker commissions should be avoided.
Q: I have been self-employed for the past 15 years. Just recently, I decided to take a break from working and just invest the $400,000. I have. To avoid paying more than 15% in taxes, I wanted to make the $27,200 the IRS allows and still save for retirement--the 59.5-year imposed rule. I am 40 years old now. I have a Roth that I can only put $2,000 a year in, but the gain has only been about 1% a year. If I start a corporation as an investment club-type business based in Nevada, I won't have a lot of tax to pay. Can I buy stocks as a corporation and pay myself and put away for retirement? The corporation would be for whatever gains I could come up with through investing, stocks, bonds, and market funds. If I can make 10%, that's $40,000. But I don't want to be pushed into the 30% tax bracket. Could I as a corporation be allowed to reinvest and also put some into a retirement for myself? I plan to go back into business when the economy is in better shape, probably in two years. I have no debt, no dependents, no liabilities, and very low cost of living. I can get by very easily on $27,000 per year. But don't know how to protect myself from big brother tax if I make more than the $27k. I am not trying to do anything illegal or asking for that. I just want to know how the Clinton's do it. A: To paraphrase, it sounds like your goal is to invest funds without increasing your taxable income from the investment returns. There are several ways that you can do this that could fit with your current situation. You can purchase a deferred annuity. You can select a fixed annuity, which pays a set guaranteed rate of return, periodically adjusted. Or you can purchase a variable annuity, which allows you to select among various funds for your investment. In both types of deferred annuities, the return on the investment is not included in your taxable income, but rather is tax deferred until you begin to draw out the income. The major drawback is that you will pay a tax penalty, as well as the income tax, if you cash in the investment before age 59.5. You can contribute as much money as you want to these kinds of plans. You can purchase municipal bonds or invest in municipal bond funds. The interest on these investments is tax exempt on the federal level. Again, you can purchase as much as you want. US savings bonds enable you to defer federal taxes until you redeem them. You can purchase up to $15,000 per year in these bonds. I would not encourage you to pursue the idea of setting up a corporation as a private investment club. You would be going to the expense of incorporating, and taking on the risk that the IRS may question the legitimacy of the corporation. The investments I mentioned could help you accomplish your goals with less cost and in a more straight forward manner.
Q: I have a thirty-year, adjustable-rate mortgage on my condominium, which increased to 9.00% in November of 2000. This is my primary residence. I only owe $35,000 on the mortgage. I also pay private mortgage insurance ($17.00 monthly) on top of the mortgage. I have excellent credit. The property is worth approximately $95,000. I have inquired at a number of lending institutes about refinancing. All the banks quote great rates in the paper and on the Web. My problem is the low mortgage amount. None of the lending institutes will give me the advertised price for such a small amount. On top of this, they are all asking approximately $1500.00 for closing costs. A $1500.00 cost to borrow $35,000.00 seems outrageous. If I remain at this residence for ten more years I will have the balance of the mortgage paid off. There is however a good chance that I will relocate in two years. Ideally I would like to refinance with little or no closing costs. I would be willing to pay over the going mortgage rate in order to do this. I at least would like to eliminate the PMI. Do you have any suggestions? A: Yes, I have a suggestion for you. Several years ago, I replaced an 8 3/4% mortgage with a 7 1/4% home equity loan at a New Jersey bank. It cost me only $35 for the entire process and paid for itself (in savings on the monthly payment amount) in about a week. That was it...$35 in closing costs...not $1,500. If I were you, I'd look for a similar deal. The interest on your loan will still be tax deductible. Make the loan term equal to whatever number of years remains on your current loan or less. Also, you have way too much equity in your home ($95,000 - $35,000 = $60,000) to be paying PMI. Ask you lender to stop charging this ASAP. Only homes with less than 20% equity require PMI. One more suggestion: invest the savings from your new loan for a future financial goal (e.g., retirement). Good luck.
Q: I could use some help with financial advising. I am a 22 years old married college student and both my husband and I will be entering graduate school in the fall. We have a savings of $6,000 and a money market account worth $10,000. We have a $3,500 debt for student loans that has an interest rate of around 7%. Should be pay off the loan? What would be a small, wise investment to make for two young people just starting out without a lot of money? I would like to start thinking about the future and am not sure where to begin with money management. It is also difficult since we are mostly living off of borrowed money (student loans). I have been told to wait until after graduate school when we both have income but I know nothing about financial planning and don't want to start too late. A: Congratulations to you and your husband on saving $16,000 on what is obviously a tight student budget. This is very admirable. You are probably earning a bit less than the 7% you are currently paying on the student loan. Since you owe only $3,500, yes, I would pay it off. This would still leave you with $12,500 in savings. If you want to pay off less, because of upcoming expenses in graduate school, that is fine too. This is a very low rate loan and you don't need to be in a great rush to pay it off (unlike 19% credit cards). As for future investments, I'd recommend a stock index fund with an automatic investment plan. This allows you to debit your bank account each month to purchase shares. Some funds will accept as little as $25. A good reference book about this is a new book called The Thrifty Investor by Craig Israelson. Other low-cost investments are EE or I savings bonds and Treasury bills. Good luck.
Q: I am 60 years old, single, working as a teacher for the Dept. of Defense Dependents Schools, in Okinawa, Japan. I have been teaching for them since 1978, and am covered under CSRS. As of today my investments portfolio is valued at around $150,000, and is an aggressive plan investment strategy. On the Web site RiskGrades.com, my stock and mutual fund portfolio is rated at a risk grade of 192, and my IRA is rated at 243. I have investments in the following: AOL, CSCO, ERICY, ORCL, WCOM, AAGFX, CSTGX, EMTGX, TEKBX, SLMCX, SLMBX, VGRBX, VBSGX, and in the IRA: MSFT, GSCBX and TEKBX. I am planning on retiring in June of 2003, after 25 years of service. I am assuming my retirement will be around half of what I am presently making, so between $25-27,000 a year. I think that my investments are way too risky for me at this time in my life, but don't know what to change. A: You have made great progress toward meeting important retirement goals. I'm impressed. By my count you have about 10 different mutual funds. That's plenty. The main issue is creating a portfolio of funds and/or stocks which are truly diverse. There are several major assets groups which need to be represented in a well diversified portfolio: (1) large U.S. stocks/funds, (2) small/mid U.S. stocks/funds, and (3) non-U.S. stocks/funds. For retirement you might want to consider an allocation on the order of 50% large U.S. stocks/funds, 20% U.S. small stocks/funds, and 30% non-U.S. stocks/funds. Maintaining "risk" even in a retirement portfolio is important because you could easily live 25-30 years in retirement--which is clearly long enough to warrant having some aggressive stocks and/or funds. Perhaps you could look through your funds and determine your degree of exposure to the three fundamental assets groups.
Q: I am in the military and have been forced to sell my house. I will realize a net profit of approx. $27,000. I will be moving to a base that I will only be at for two years so buying another house is not a good option. I would like any information and guidance you could provide on capital gains tax. I have heard I would be exempt for two years and possibly longer while I am in the military. I would like to invest this in mutual funds or common stock. I have very little experience in investing, this is really the only savings I have. A: I am not aware of any specific capital gains rules for military folks. There may be. Do you have a command financial specialist that you can check this out with? As for the general capital gains rules in effect, there is no tax on capital gains for gains of $250,000 or less for singles and $500,000 for couples. You must live in the house for at least two of the five years prior to its sale in order to qualify. Otherwise, the exclusion is prorated according to your holding period. You can take this tax break every two years. As for where you should invest your $27,000, what is your time frame for needing this money? If it is less than 5 years, I'd avoid stocks or growth funds and go with less volatile choices such as Treasury notes, CDs, or a short term bond fund.
Q: Are capital gain distributions from a mutual fund always considered ordinary income? If some of the stock that the fund sold was held for more than a year (since that is taxed at 20%), would the fund make this distinction so that I could save on paying the ordinary income tax and pay the 20% tax instead? A: Your mutual fund will advise you whether distributions are considered dividends or short-term or long-term capital gains. These distributions will be listed as such on your statement and on the 1099 form that you will receive to do your taxes. As you correctly point out, the type of gain depends upon the fund's holding period. Index funds, which change securities infrequently, generally through off fewer taxable capital gains than actively managed funds.
Q: Over the past two years, I have focused on paying off my debt. (School loans and credit cards.) I've gotten rid of my high-interest credit cards and I pay more than the minimum each month. I'm looking for ways to quickly pay off my debt. I am in my mid-twenties, and my goal is to have my money 'work for me,' and start investing for an early retirement/property investments. Friends have suggested that I use my savings towards paying off my debt. Is this wise? Losing this sense of security seems awfully risky. Shouldn't I keep my savings for a 'rainy day?' A: One way to reduce debt quickly so you can begin investing is to use our PowerPay program. See www.rcre.rutgers.edu/money2000 for details. The cost of an analysis is only $2.50. What PowerPay will do is allocate the amount that was paid monthly to a creditor that is paid off to another remaining creditor, in order of highest interest rate first. It could save hundreds, even thousands, of dollars. As for tapping your emergency savings, I'd advise against it, especially since you seem so concerned. If it is adequate (at least 3 months expenses), you might put all new money toward debt reduction or, if not, for every $100 you have to save or repay debt, put 75% toward debt reduction and 25% toward savings. After all, paying off an 18% credit card is equal to earning 18% risk free and tax-free. The sooner you wipe out your debt, the sooner you can have interest work FOR you instead of AGAINST you.
Q: What is the difference between a mutual fund and having a money manager (e.g., through Morgan Stanley Dean Witter)? A: To an extent you are comparing apples and oranges. A mutual fund is an investment; a money manager helps one select investments (for a fee). A good source for learning about mutual funds is: "A Guide to Understanding Mutual Funds" by the Investment Company Institute (www.ici.org). Educators can order multiple free copies by sending a request on official letterhead to: Investment Company Institute Another great resource for learning about mutual funds: www.vanguard.com. Go to the "university" section for a series of lessons on mutual funds. Back to your question: A mutual fund is a way to invest in a diversified portfolio of investments, even if you have only a small amount of money, because thousands of investors are pooling their funds and giving the money to a manager to invest. There are many kinds of mutual funds: stock, bond, money market (and many variations). A mutual fund is like a cookie jar--what kind of cookies will you put in the jar? So you need to ask--what kind of investments are in this mutual fund? Are they suited to my goals? Individual investors can purchase a mutual fund directly from the company via phone, internet or mail. The other option it to purchase through a salesperson (money manager) but in that case you will always pay some type of commission or "load," whereas if you do your own research and select a no-load fund you can avoid the sales charge. If you use a money manager or broker they will only recommend funds on which they will earn a commission. A great way for a beginner to select a mutual fund is to chose an index fund that basically tracks an established investment index. Standard and Poor's 500 index funds are very popular and have done very well but a fund that tracks the Wilshire 5000 will offer much broader diversification- essentially the entire U.S. stock market.
|
- did you know?
- Farming is the second most dangerous occupation in the United States. Cooperative Extension is addressing community and environmental health concerns related to agriculture, including food safety, health care access and delivery, and air and water quality through the new field of agromedicine. Read more...
Articles from our resource area experts.
Have a question? Try asking one of our Experts
IFYF FAQs
Last Updated: February 24, 2007
| Related resource areas:
Have a specific question? Try asking one of our Experts
Unlike most other resources on the web, we have experts from Universities around the country ready to answer your questions.
Comments
Subscribe to this page's comments
Post a comment about this topic