Homes at Risk: Is yours one of them?

The Times' Sunday and Monday business sections feature a two-part report on foreclosures and the risks posed by adjustable rate mortgages. You'll be hearing more about adjustables, particularly the controversial option ARMs, which start out with minimum payments that don't even cover all the interest accruing. They made it possible for many people to buy homes they otherwise couldn't afford, but now they're adjusting upward and some borrowers can't afford the payments.

We'd like to hear about your experiences with adjustables and your opinions about our stories. Please post them as comments here.

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Can you settle an argument about cashing in my 401(k) at 55?

Q. I sent my sister your article, which discusses the "55 rule" on withdrawing from a retirement plan. She says no company allows employees to withdraw from their savings before 59 1/2, but I called Fidelity and they agreed with you. I was told if I am 55 when I separate from Verizon, I can do whatever I want with my retirement savings (not my pension), as long as I separate from the company. Please clarify this for us.

A. Of course, Fidelity, Verizon and I are right! If you leave a job when you are 55 or older, you can withdraw your retirement savings without penalty. However, this rule does not apply to an IRA. If you have rolled over your money to an IRA, you have to be 59 1/2 to avoid the withdrawal penalty.

Perhaps your sister is confusing this situation with rules about withdrawals while you are still working. While you are working, typically you can only take money out of your plan as a loan unless the company plan allows hardship withdrawals and your proposed withdrawal qualifies. A loan that doesn't get paid back is considered a withdrawal. Penalties apply if you are younger than 59 1/2.

How do I transfer stock ownership?

Q. My wife and I jointly own many shares of Ford stock. We would like to transfer or donate some of these shares to our grandson with his name as sole owner. If this can be done, what procedure do we have to follow?

A. It certainly can be done. If you held these shares in a brokerage account, you would simply go to your broker for assistance. However, it sounds as though you hold these shares in certficate form. That means you need to contact the transfer agent, which in this case is Computershare Investor Services. Here are their answers to some frequently asked questions about transfers and other subjects. By the way, if you did not know who the transfer agent was, the easiest way to find out is to go to the company Web site. From the home page, there's usually a place to click on "about our company," and from there you can find "investor Information" or some similar heading.

When you give your shares to your grandson, you also will be giving him your tax basis, so he needs to know what you paid for them. If they are worth more than $12,000, you and your wife need to file a gift tax form, splitting the gift. If the total is less than $24,000, it will not have any impact on your future gift and estate tax exemptions. Even if it is more than that, you would not actually owe any gift taxes until your lifetime gifts exceeded $1-million each.

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How can I find out about the energy credits?

Q. Would you be kind enough to send me an address and telephone number for the federal tax credit you mentioned in one of your columns? I am getting 10 new windows I think will qualify for the energy saving credit.

A. Federal tax credits don't have an address or telephone number. You can find information about them at the Energy Star Web site. You also can read about them in the instructions for Form 1040ES and in this IRS notice. For windows you need to save you receipt and the Energy Star labels from the windows.

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Are points or cash better card rewards?

Here's a new twist on reward cards. Chase Bank USA is offering consumers not only the ability to choose cash or points, but the ability to switch from one to the other if they change their minds.  The card pays 3% cash or points on purchases at gas stations, grocery stores and fast food restaurants (limited to $600 per billing cycle) and 1% on other purchases. The points can be redeemed for air travel.

I always choose cash on my reward cards and I don't imagine I'd change my mind. How about you? Cash or points? Is the ability to switch something you'd even care about? More details on the card can be found here.

(Photo credit: Chase Bank)

Leaving your home to your heirs

Q. Within the past year or so you did a column on the little used conveyance of a home or real property using either POD or ITF.  I can’t find the article in my files.  I’ve tried to access the article by going to the St. Pete Times website and I pull up other articles by you but not this one.

A. You are remembering a column that I wrote about "Lady Bird deeds." This type of deed conveys the property to another person, but retains use of the property for life and most important, retains the right to revoke the deed. It is a version of the "payable on death" account and it is better than a traditional life estate. However, I do not recommend it. My recommendation is to leave the deed in your own name. Here's the article.

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What kind of taxes will we have to pay on an inherited annuity?

Q. My wife's 90-year-old mother bought an annuity 12 years ago and has taken no withdrawals. It is now worth $56,000. My wife will inherit this annuity upon her death. What will her tax liability be?

A. Your wife will owe the same taxes she would if this were her annuity instead of her mother's. Assuming this annuity was purchased with after-tax dollars, her gain (the difference between what she paid and what it's now worth) is taxable at her tax rate. If she takes gradual distributions instead of cashing it in, each payment will be partly taxable and partly tax-free.

However, she should not count on inheriting this money until her mother has died. Many people need expensive health care in the months or years leading up to their death and it isn't all covered by Medicare and Medicaid.

What's my tax bracket?

Q. My husband suffered a major stroke last year and it us up to me to handle all our financial affairs.  I need to take out extra money from our IRAs this year to pay for home repairs. We pay estimated taxes four times a year based on our income, which amounts to about $110,000. With the additional $15,000 that we will need this year, what will our tax bracket be? Should I take this money out without withholding tax? Or have tax withheld and take what is left? And how much would that be? 

A. I don't do people's income taxes for them, but I can tell you that you're in the 25 percent tax bracket along with other married couples who have taxable income between $61,300 and $123,700. (Taxable income is after subtracting your deductions and exemptions.) That means you should pay the IRS one fourth of whatever you withdraw. You can either have it withheld or add the amount to your estimated tax payments. Others who want to look up their 2006 tax brackets can find them here starting on page 4.

Since you apparently are new to all this, I recommend that you get help from a professional preparer in doing your return. 

Watch out for early retirement scams and bad deals

The NASD put out an investor alert today, warning about investment pitches related to early retirement. Promoters who focus on early retirement as a marketing gimmick often overpromise and underdeliver. As nice as it might be if it were true, not everyone can retire early and get-rich-quick schemes rarely work. Here are some tips from the NASD:

Be skeptical of "free lunch" training sessions and other seminars that promote early retirement strategies, even if those events take place at the workplace.

Be wary of early retirement pitches that invoke exceptions to IRS Section 72(t) as a "little-known loophole" that allows workers to retire early.

Think hard before trading a company pension—which may offer steady and predictable payments for as long as a person lives—for the uncertainty of investments such as variable annuities and mutual funds whose values fluctuate, creating an unpredictable income stream. If the strategy does involve mutual fund investing, use NASD's Mutual Fund Expense Analyzer to compare and calculate mutual fund fees and expenses.

If the strategy involves variable annuities, be aware that variable annuities are complex investment products, often have sales charges and may impose a variety of fees and expenses. 

Before quitting and cashing in a 401(k), be sure to calculate any other potential tax consequences or ask a tax professional or attorney.

Seek a second opinion before committing to an early retirement strategy. 

Check out whether the person offering early retirement investments is registered with NASD by using NASD Broker Check online or calling its Hotline at (800) 289-9999.  If he or she is registered, be sure to check out any red flags raised by employment or disciplinary history.

You can find the full alert here.

Brother can you spare a dime?

Twenty-two percent of Americans say they have no spare cash after paying their basic living expenses. Are you one of them? ACNielsen, which studies consumer markets in 40 countries, reports that only the Portugese are more likely to say they spend every dime. On average around the globe, 13 percent have no money left over.

The big danger of not having any discretionary cash is that unexpected expenses lead to debt. Not surpisingly, the ACNielsen survey found Americans who do have extra money say their top priority is using it to pay down debt. Savings come in second. Americans are less likely than those in other countries to say they would use their extra cash for vacations, clothing or new technology.

"Perhaps because the idea of living from paycheck to paycheck is so prevalent, consumers who have a little extra cash would rather use it to shore up their finances than spend it right away," said John J. Lewis, president of ACNielsen U.S.

What's your top priority for your extra cash?

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Can I contribute to a Roth IRA?

Q. I have been contributing to a Roth IRA each year for the past 7 years. This year I moved and needed funds, so cashed out one of my IRA CDs. I am 65 and meet all of the requirements of being able to take a disbursement.  My question is, now that I have done that, can I still make annual contributions to my Roth IRA?

A. Yes. You can contribute to an IRA (regular or Roth) any year that you or your spouse have earned income. The contribution limit for 2006 is $4,000, with an extra $1,000 for those 50 and older.You can contribute the full amount to a Roth if your income is less than $95,000 (single) or $150,000 (married). Above that, the size of the allowed contribution is phased out. Here's a source for more details on Roth IRA contributions.

Do we really have to pay taxes on that stock we sold?

Q. My husband withdrew $12,840 from his stock in 2004, which was used for closing costs on our home. His company then sold all their employees’ stocks later that year and he received another $4,343. This money was used to pay off debts. We never really acquired this money long term. Now the IRS has sent us a notice that we must pay the taxes on the money obtained. They have sent us a Schedule D form, but I’m not sure what to account for because the monies are no longer there. Any suggestions?

A. Sadly, you must pay taxes when you sell stock at a profit no matter what you use the money for or how little time you hang onto it. If these shares were part of a retirement plan, you owe tax on the full amount of the sale proceeds. If they were purchased with after-tax dollars, then you owe tax only on the difference between the proceeds and his investment. Reinvested dividends on which you paid income tax count as part of his investment.

The way to figure out how much you owe the IRS is to redo your 2004 income tax return and file an amended return. It probably would be a good idea to get a tax preparer to help you. If you don't have the money to pay the extra tax, you can work out an installment agreement with the IRS.

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What's the rule of thumb on savings?

Q. I am 47 years old.  My annual income is a little over $44,000. I would like to know the rule of thumb for the percentage that should be saved per month. What type of savings would you recommend for retirement savings (at my age) that is safe?

A. The old rule of thumb is that if you start saving in your 20s and you consistently save 10% of your salary toward retirement for 40 years, you should be fine. The new rule of thumb is 15%, including employer contributions to your 401(k). But that's for people who start in their 20s or 30s and save consistently over a working lifetime.

People starting later need something more personalized. You could go to a financial planner for a plan, but a quick and easy way to get started is to run the numbers yourself on a Web site such as this one. It will show you how much you need to save annually to reach your retirement income goal. You also can change the numbers around to see how much difference it makes if you earn more or less on your investments. If it is not possible to save that much, you can either reduce your retirement income expectations or work more years.

I recommend saving for retirement using low-cost stock funds (I like stock index funds myself) and either bond funds or interest earning investments such as CDs or government bonds. No investment is completely safe. Those where the principal is guaranteed (such as CDs) have other risks, namely loss of purchasing power to inflation and reinvestment risk if rates go down.

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What's the easy way out of debt?

Q. How can I pay off debt without filing for bankruptcy and without taking a large amount of money away from the little I make now?

A. There is no easy way out of big debt. You probably would benefit from a consultation with a credit counselor and possibly from signing up for a debt repayment program. The agency may be able to get interest rates reduced on some of your debt, which means more of your payments would go toward principal. A counselor also can give you some advice on setting up a budget and finding money for debt repayment. If there is nothing you can cut out of your budget, think about taking a second job to make the numbers work.

Here is a story I wrote about alternatives to bankruptcy that you might find helpful. But if there is no way that you could pay off your debt within five years, bankruptcy might be the right choice. Good luck.

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Our nest egg is cracked

Apparently a lot of our nest eggs bear more than a little resemblance to Humpty Dumpty. Brokerage A.G. Edwards says we Floridians are well below average when it comes to saving and investing. The state ranked 33rd out of 50, while the Tampa Bay area ranked a dismal 379th out of 500 in this year's Nest Egg Index. More small communities were added to the list this year, which had the effect of pushing the Tampa Bay area lower. Savings rates, home ownership, employment and retirement plan penetration are among the factors considered in the rankings.

Here are the areas that topped the Nest Egg list:

States: New Jersey, Connecticut, Minnesota, Maryland and Massachusetts.

Communities: Los Alamos, N.M.; Bridgeport-Stamford, Conn.; San Jose, Calif.; Torrington, Conn; and Minneapolis-St. Paul, Minn.

We listed Florida metro areas rankings in the Times. You can see complete state-by-state results and the results for all 500 communities here. Calculate your personal savings score here.

(Photo credit: A.G. Edwards)

Lots of questions about early retirement

Q. My company, with a defined benefit pension plan, allows retirement at age 55.  My 401k-plan administrator allows for “no penalty” withdrawals upon retirement.

1-If I rollover my 401k investment into a different fund manager or another IRA, can “no penalty until 59 ½ ” withdrawals continue?

2-In projecting retirement budgets, are IRS tax schedules considered valid resources for anticipating tax rates?

3-After declaring retirement at 55, if you do not elect to return to work, are Social Security taxes taken from pension and investment income?

A. 1. The no penalty at age 55 rule applies to withdrawals from your employer plan when you separate from service at age 55 or older. It does not apply to IRAs. If you leave Job A at age 52, you could transfer your Job A 401(k) to your Job B 401(k). Then if you retire from Job B at 55 or older, you could get the penalty-free withdrawals.

2. If you think tax rates will be higher or lower in the future, you should adjust the numbers in the IRS tables accordingly. I think they'll be higher.

3. Social Security taxes are only assessed against earned income, which would include consulting fees or income from a small business you operate in retirement, but would not include pension or investment income.

Tell us what you think: How much does retirement cost?

Estimating your expenses in retirement is one of the toughest challenges anybody planning for retirement faces. You can read how others have handled it in this story . But here's your chance to tell us what you think.

If you're already retired: Are your expenses higher or lower than when you were working? What have been the biggest cost surprises for you? What planning tips do you have to offer? 

If you're planning for retirement: What are you estimating your expenses will be? How confident are you that you're on the right track?

Post your comments here (by clicking on "comments" under the date.)

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