海角大神

What鈥檚 inside?聽Here are the questions answered in today鈥檚 reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.

1.聽Is more retirement savings necessary?
2.聽Netflix streaming series
3.聽Imminent financial disaster
4. Student loans vs. house purchase
5.聽Paper books or e-books?
6.聽Mixing and matching investment firms
7.聽Quit claim deed and taxes
8.聽Starting a professional support group
9.聽Roth tax imbalance
10.聽Lethargy after the sale

I spend significant time each day (at least a couple of hours) engaged in personal projects. I鈥檒l work on learning about something new, reading a really challenging book, or building something.

Yet, I find that my list of 鈥減rojects to be done鈥� grows longer rather than shorter. I have so many things I鈥檇 like to try or like to spend my time doing that I never find time to do them all and instead discover more I鈥檇 like to do than I have time to do them in.

When I was a teenager, I would often be bored. I don鈥檛 think I鈥檝e been bored in years.

Q1: Is more retirement savings necessary?
I am 25 making a little over 40k a year. I was very lucky my parents were able to pay for my college education, have no reason to get a car, and am not looking to pick up a mortgage right now. I have a very healthy emergency fund and everything is looking pretty rosy. My employer contributes 5% to a traditional IRA regardless if I put anything in. I am currently putting in an additional 12%, but worry that I should be putting money into a separate Roth IRA, while I am being taxed at a lower rate than what I anticipate later in my life. Any advice?
- Charlie

I agree with you, Charlie. You should be putting at least some of your money into a Roth IRA to supplement the traditional one.

However, I don鈥檛 think a person should just go all Roth or all Traditional/401(k)/403(b). The reason for that is that we simply don鈥檛 know what tax rates are going to be like in the future. If I were in your shoes, I鈥檇 hedge my bets and have money in both.

One final note: I would make absolutely sure you鈥檙e not bumping up against any contribution caps. My quick math based on what you said above indicates that you might be very close to your IRA contribution cap.

Q2: Netflix streaming series
You talk a lot about how the most television you and your wife watch are series on Netflix streaming and how that鈥檚 enough to make you strongly consider dumping cable. Can you give me some examples of what you鈥檙e talking about?
- Alan

OK, here鈥檚 forty series well worth watching on Netflix streaming. Remember, these are聽series, making up many hours worth of viewing聽each. I tried hard to mix up genres here so there would be something for everyone.

30 Rock.聽Archer.聽Arrested Development.聽Battlestar Galactica.聽Bones.聽Breaking Bad.聽Cosmos.聽Doctor Who.Downton Abbey.聽Eureka.聽Family Guy.聽Firefly.聽Friday Night Lights.聽Ken Burns: Baseball.聽Ken Burns: The Civil War.聽Ken Burns: The War.聽King of the Hill.聽Life on Mars.聽Lost.聽Mad Men.聽Man vs. Wild.聽Mythbusters.聽The Office (U.K.).聽The Office (U.S.).聽Parks and Recreation.聽Portlandia.聽Rescue Me.聽Sherlock.聽Sliders.聽Sons of Anarchy.South Park.聽Stargate SG-1.聽Star Trek.聽Star Trek: Deep Space Nine.聽Star Trek: Enterprise.聽Star Trek: The Next Generation.聽Star Trek: Voyager.聽Torchwood.聽The Walking Dead.聽The X-Files.

If you have a good internet connection, you already have access to news and weather. Add this mountain of good programs (and more) for $9 a month on top of that and the reason for having a cable box聽and聽internet access begins to seem questionable.

Q3: Imminent financial disaster?
I am due in a few days with our first, a little girl. I am the major bread winner in our household I make about 48,000 and my husband makes about about 22,000. There are days where i have no clue how we can spend all that money鈥� Now we are not huge spenders and we avoid credit cards unless we can get 0% for a year, like we did with our range and washer/dryer.

Our major bills are the mortgage $706, my leased Prius $280 and my husband truck $330, and our grocery bill鈥� but I鈥檝e been working hard on our grocery spending because at times I think we were spending 1000 a month on groceries, and takeout鈥�

Two days after we bid on our now home we found out that we were pregnant鈥� and all of our savings went into our down payment. We haven鈥檛 been able to save what we need to cover my salary when I鈥檓 out on maternity leave鈥�. we live in ny so I will get 170 a week for 3 of the 4 weeks I鈥檓 out on disability. we have been able to save 1800 so I鈥檓 so worried about not being able to pay all are monthly bills. I plan on working right until i go into labor, Ive been feeling pretty good at this late stage, so we鈥檝e been lucky.

I feel like we鈥檙e in such a rut. I can鈥檛 imagine what one month of no pay is going to be like. It seems like every time I project our costs I鈥檓 still spending more than expected so we won鈥檛 have as much savings as I expect to have鈥�

Please your advise is greatly needed
- Marcia

You just explained why an emergency fund is vital. Sometimes life just knocks you for a loop.

If I were you, I鈥檇 rely on that $1,800 for an emergency fund to get you through that month. In the run-up to the baby鈥檚 arrival, don鈥檛 buy a bunch of stuff. Keep your purchases to the minimum. Don鈥檛 buy random things like wipe warmers that you basically don鈥檛 need. Buy clothes for the baby at a secondhand shop. Don鈥檛 be ashamed to have a baby shower or two and tell the person that鈥檚 hosting it that you really need functional stuff like diapers.

You鈥檒l make it through. You just have to be on the ball with smart choices between then and now and you also have to not be down on yourself.

Q4: Loan debt and house purchase
I am a graduate student with $25k in subsidized Stafford loans. I am still in school; thus, the loans are not accruing interest and I don鈥檛 have to pay them back yet. I recently got a full-time job and have been able to save up the full $25k to re-pay the loans. However, my husband and I are hoping to buy our first home by April 2013. I am due to finish school in another couple of months, so taking the six-month grace period into account, the loans will start accruing interest in November.

The money I have saved for the loan repayment would be a big help in our house savings fund, because it could make the difference between us having to rent for only one more year (April 2012 thrugh April 2013) versus having to sign on for another full year after that in order to save up a minimum of 20% down payment (we are in a relatively high cost-of-living area).

1) Since my loans are not accruing interest and are not due yet, can I put my savings (or part of my savings) into our housing fund? This would necessitate accruing some interest on the loans since we won鈥檛 be ready to buy until spring of 2013 and the loans will start gaining interest in November 2012. The interest rate on the loans (after the grace period) is about 6%.

2) Which option is better for our mortgage application? In the banks鈥� eyes, is it better to (a) have less money in savings, but no debt or (b) have more money in savings but with student loan debt?

Other details: My husband and I have no debt other than my student loans and we both have excellent credit scores (over 750); we also have our emergency savings account funded (only for about three months鈥� worth of expenses though鈥�we鈥檙e still working on it) and are contributing 15% of our salaries in retirement.
- Amanda

A person鈥檚 first job out of college often doesn鈥檛 wind up being their permanent job. In fact, if I were in your shoes, I would anticipate some career changes in the next five years as you find what really clicks with you.

Because of that, I wouldn鈥檛 buy a house just yet. It鈥檚 great that you saved for it, but I would hold off. The last thing you want to do is buy a house early next year just to have your department cut and you find yourself being the lowest person in seniority, or to discover that you actually don鈥檛 like your job situation. Then you鈥檙e stuck in your current location with a house and don鈥檛 have the flexibility to move.

Hold off on the house for a year or two, rent, and save up some more money. I鈥檇 pay off that whole loan when the interest starts just to get it out of the way. You鈥檒l find that doing these things gives you the life and career flexibility you鈥檙e going to want in the next few years.

Q5: Paper books or e-books
My lovely wife Amy gave me a Kindle for Christmas along with a bunch of credit to Amazon to buy some books. I really like the reading experience on the Kindle and I鈥檝e read several books on there already.

You鈥檝e owned a Kindle for longer than I have and so I have a few questions for you. Do you buy many books on your Kindle? Do you buy more than paper books? How do you decide which to buy? Has having a Kindle made you spend more on books?
- Devin

Most of the books I buy on the Kindle are from the聽Kindle Daily Deal聽or from the聽discounted Kindle book list. I also have it loaded up with classics and other items from the聽Kindle free book collection. Most of the relatively expensive books I buy for the Kindle are from gift cards that people sometimes give to me as gifts.

I still use the library for most of my new releases 鈥� and often for older books, too. The library is just an enormous bargain.

I don鈥檛 buy many paper books for reading at this point, though I do buy them for reference. For instance, if I see a great cookbook, I鈥檒l add it to my collection. It just functions really well in the kitchen.

Q6: Mixing and matching investment firms
Wondering your thoughts in investing in a simple firm 鈥� stocks, mutual funds, roth ira, savings account, 529, etc. all in one firm 鈥� such as Schwab, Vanguard, TRowe, HSBC 鈥� or mix and match depending on the firm 鈥� TRowe for roth IRA, HSBC for online savings, USAA for insurance, Schwab for brokerage.
- Linda

I think it comes down to what you鈥檙e comfortable with. There is no right answer, and there are pros and cons with each option.

The pros for having consolidated accounts are that you have all of your info in one place under one login, so you don鈥檛 need lots of passwords. It鈥檚 much easier to manage everything. It鈥檚 also usually much easier to transfer between the account types.

The pros for having accounts spread across multiple firms include the fact that you can find the 鈥渂est鈥� firm for each of your specific needs instead of hoping that one firm offers the best value in all areas.

I don鈥檛 think there is a聽right聽answer here.

Q7: Quit claim deed and taxes
My father in law bought a duplex outright that my husband and I live in and manage. What we are trying to figure out is what kind of tax implications are there if he quit claims deeds the duplex to us? (In English please :)) Do we get dinged for the amount the duplex is worth as income? Also what are you required to claim as income as far as the rents?
- Susan

A quitclaim deed is a simple way for someone to transfer their interest in a property to someone else. No money changes hands.

Instead, the property is considered to be a聽gift聽from the original owner to the new owner. This triggers the gift tax. That basically means the value of the house will be taxed to the new owner at the same rate as normal income tax. Now, there is an annual gift tax exclusion of $13,000. So, if the duplex is worth $100,000 and he gifts it to your husband, you would be hit with a bill for a gift tax on $87,000 鈥� probably around $20,000 in taxes. As a married couple, you can pool your exemptions and reduce the bill by $2,000 to $3,000 more. Your best bet will be to take out an equity loan on the mortgage to pay for the bill if you don鈥檛 have the cash on hand to pay it.

Rent paid to you on a property you own is reported as normal income. You may want to consider forming a corporation to own the property instead of you, however. I would contact a property lawyer about these matters.

Q8: Starting a professional support group
A long time ago, you wrote about how you have sought out people who are doing the same thing you鈥檙e doing, just so you have something of a support group.

I have a side business that involves woodworking and I鈥檇 love to get a small group of woodworkers going in my area, but I have a couple of concerns. First, how do you make sure no one is stealing customers from you? Second, how do you even get the ball rolling on such a thing?
- Eddie

On some level, you have to trust that the people in the group aren鈥檛 going to actively poach customers from each other. If you don鈥檛 trust each other on that level, it鈥檚 going to be hard to trust each other enough to share techniques and challenges with each other. I think you either have to accept this risk and just live with it or not bother with the group.

If you want to get the ball rolling, the best bet you have is to simply post about it in any local businesses that woodworkers might use as well as online. Start a Facebook group and invite people you think might be interested. Set up a meeting in your shop and tell everyone to bring a woodworking question they might have (a great way for this type of group to get to know each other).

Eventually, you could work on group projects together for charity or other such things, as a way to build skills and reputation while helping out the community. There are a lot of possibilities with this type of group.

Q9: Roth tax imbalance
How do you balance out the problem of being able to put $17,500 a year in a 401K 鈥� which will be taxable in the future 鈥� and only $5,000 in a ROTH IRA 鈥� which will be tax exempt? It concerns me that my husband and I have easily 5x the balance in our 401Ks than we do in our ROTH accounts.

Are there any options we are missing here, to hedge the future taxation problem, other than converting a big chunk of our 401K into a ROTH and paying taxes now? That seems like a bad gamble, as we are a fairly high tax bracket now, and we don鈥檛 know if tax rates will go up or not. Personally, I think they will, but its a risk I鈥檓 not comfortable betting several hundred thousand dollars on.

罢丑辞耻驳丑迟蝉?听
- Eric

You are diversified at least a little bit. You do have money in pre-tax and post-tax investments, though it鈥檚 not perfectly equal.

You鈥檙e actually not betting several hundred thousand dollars on this 鈥� that鈥檚 a bit of an exaggeration. In retirement, you鈥檒l be withdrawing an amount each year to live on, some from the Roth and most from the 401(k). The WORST case scenario is that you put all of your eggs in the wrong basket from a taxation perspective and had to pay 10% (or so) more in taxes each year. Assuming you鈥檙e withdrawing, say, $100,000 a year, you鈥檙e talking about perhaps $3,000 per year in extra taxes due to your mistake. Unless you鈥檙e withdrawing millions of dollars per year, that type of mistake is not going to cost you hundreds of thousands of dollars. In a worst case, it might cost you tens of thousands, and you鈥檙e not in the worst case. You鈥檙e at least somewhat diversified.

Not only that, this is all guesswork. We do not know what the future holds when it comes to taxes. For all we know, the 401(k) might end up being the better bet with regards to taxes.

If I were in your shoes, I wouldn鈥檛 worry about it too much. The key thing is that you鈥檙e saving plenty for retirement, and if your main problem is that you鈥檙e hitting the contribution caps, then that鈥檚 really a great problem to have.

Q10: Lethargy after the sale
When I sold my business in 2006, I felt good about it at first. After that, though, I sunk into a bit of a funk. It was almost like a mild depression and I felt like a big aim in my life had suddenly vanished. I felt empty. Have you felt like that since selling The Simple Dollar?

What got me out of it was finding things to do. I eventually realized that I was just wired to keep busy doing something.
- Colin

I鈥檝e gone through the same thing. It was exhilirating right after I sold The Simple Dollar, but I went through a rather deep funk for a while right after the sale.

Part of it might have been my seasonal affective disorder 鈥� the winter blues always get me down. Still, I know that at least some of it was mixed feelings about having sold something that I put countless hours into over the past several years.

Much like you, I dug myself out of it by working on lots of projects. I am happier when I鈥檓 busy.

Got any questions?聽Email them to me or leave them in the comments and I鈥檒l attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.