Personal finance chat with Deborah Levenson

Deborah_Levenson: My name is Debbie Levenson. I'm a certified financial planner and am happy to answer your planning and investment questions. So go ahead and ask!

fundfrenzy__Guest_: Hi Deb, I still have my 401K from my old job. I was holding onto it because it's down a little, and I was going to wait until it bounced back. Now I'm wondering if I should roll it into my new 401K, which is performing better. If I were to do so, would that count as a tax deduction? Do you think it would be better to wait?

Deborah_Levenson: Considering what to do with an old 401K is a common issue and there's no one right answer. If your new employer's 401K has strong investment options, and the plan accepts rollovers, then this is a reasonable option. There will be no tax impact at all from rolling over your 401K into another 401K plan.

Deborah_Levenson: Another option to consider is rolling your old 401K into a new IRA (individual retirement account) at a solid custodian like Fidelity, Vanguard or Schwab. You'll gain a much wider range of investment options and these firms make it extremely easy (and inexpensive) to manage your own IRA.

John__Guest_: Do REITS still have a solid place in a balanced portfolio as a diversifier or are there better options?

Deborah_Levenson: I think REITs (real estate investment trusts) are a good diversifier. If you choose a REIT index fund you will gain exposure to many different types of real estate including residential, office, industrial, etc. In general, I think choosing an appropriate asset allocation and rebalancing over time is key. Real estate is an asset class that deserves consideration in your allocation (along with commodities, international, small cap equities, etc.)

MSchafer__Guest_: Deb, gotta run to a meeting, but here's my question: Is there a better place to put cash than the 20 month CD at 4.50% APY at my credit union (DCU)?

Deborah_Levenson: 4.5% sounds like a very good rate to me. Right now money market funds (like Fidelity Cash Reserves, for example) are paying approx. 2.5%. The question with a CD is always whether you want to lock up your money (in this case for 20 months.) If you go ahead with the CD, make sure you stay on top of the maturity date so it won't automatically roll over into another 20 month CD.

Michelle__Guest_: My kids are 4 and 6 years old and I want to start saving for college. Do you have a preference between UGMAs and 529 Plans?

Deborah_Levenson: Great that you're saving early for college. Before 2007 it was a tougher choice between UGMAs (uniform gift to minor accounts) and 529 plans but the kiddie tax rules were revised last year in a way that made 529s the better choice for most people. Here are a few suggestions on 529s: buy them directly, not through a broker. Check out your own state's plan if there is any tax benefit for using the home state (there is no tax benefit in MA.) The simplest investment option is to choose the age-based plan. If there is a low cost index fund age-based option available, that is a good choice. Michelle, if you wanted to fully fund your children's college educations, you'd need to invest roughly $1,050 per month for your 4 year old and $1,200 per month for your 6 year old (assuming average private college costs of $35,000 per year, college inflation of 5.5% and 7% investment returns. So save early and often!

traveler__Guest_: Any feelings about vacation time shares? Assuming you do plan to take annual vacations, they seem like a great deal. Been looking closely at a time share resale, and would love to do it. Already have established emergency funds and college savings for the kids. Decision is basically what to spend the funds on. Any evils lurking in a time share?

Deborah_Levenson: To be honest, I'm not wild about them. Based on my client' experience they have not provided a strong return on investment when they wanted/needed to sell. You mentioned emergency funds and college savings, how about focusing your retirement? Do you have a 401K or 403B option available through you or your spouse's employer?

cent2myname__Guest_: I invested a sum of money inherited from my aunt. The money was not taxable when I inherited it. It has lost money since invested with this financial services company. If I withdraw the total, will I have to pay taxes on it now because it will be viewed as an investment? Also, if it lost $3,000 and recouped $2,000 ? do I have to pay taxes on the $2,000 or no taxes because the total amount is still less than I originally invested?

Deborah_Levenson: Generally you would only pay taxes if you had recognized a capital gain or received dividend or interest income on your investments. Without knowing how your money was invested, it's tough to answer this. I'd suggest consulting your tax advisor.

CCF__Guest_: I'm about to reach the contribution limit of $15,000 a year for my 401k. But does that limit apply to my contribution alone, or to mine plus my employer matching contribution?

Deborah_Levenson: How terrific that you're almost there and it's only early August. The 2008 limit is $15,500, not $15,000 (unless you are over age 50 in which case it is $20,500.) These limits only apply to your own contributions. Employer contributions (lucky you!) are above and beyond the limits.

CCF__Guest_: Is there a limit to how much I can give my heirs per year before I die? Are the gifts to them taxable income for them? Are my nieces and nephew elligible for these gifts?

Deborah_Levenson: The annual gift tax exclusion for 2008 is $12,000. So you can give that amount to ANYONE at all (nieces, nephews, friends, strangers, me...) If you are married, together you can give twice that amount (or $24,000) to any one individual without triggering any gift tax issues. Happy gifting!

Micky__Guest_: As most of us struggle with trying to balance work life and home life, we also struggle with retirement planning, our kid's education and trying to meet our daily financial needs. At the ripe old age of 36, can you recommend a type of discipline to help us meet these complicated goals?

Deborah_Levenson: You're asking for suggestions on financial discipline? I love it. Here are my top 3 suggestions. First, create a budget and stick to it. If you or your spouse are willing to use quicken personal finance software, this job will be much easier. Always ask yourself, do I need this purchase, or do I just want it? My second suggestion is to maximize all tax-deferred retirement options available to you (i.e. 401Ks, IRAs, etc.) If you are eligible to contribute to a Roth IRA and expect your tax rate to be higher in the future, then that's a great place for saving as well. Third, automate your savings program (often called "paying yourself first.") Similar to how 401K contributions occur automatically, you can set up a transfer from your regular bank checking account into a long-term investment account at a custodian like Schwab or Fidelity. By minimizing the money in your checking account you will probably spend less, and you'll be amazed at how your investment account will grow thanks to the math of compounding. And at the age of 36, Mickey, you definitely have time on your side!

gladiwaited__Guest_: Where would you recommend putting 25K now, short term(money I really don't need to tap into for a while)

Deborah_Levenson: How short is "short-term"? If you think you may need to access this money in less than five years, I'd suggest keeping this very liquid (use a money market fund.) Given how low interest rates are, I wouldn't want to lock in a long-term CD rate because my guess is that we may see higher rates in a year or two. If you're in a money market, the rate you earn will adjust upwards as interest rates rise. Two money market funds that I believe offer competitive rates, and are easy to set up and access, are Vanguard's Prime Money Market or Fidelity's Cash Reserves.

Sally_Revolution__Guest_: I'm considering a new apartment that is more than I'd like to pay, what's a good rule of thumb for managing income and rent?

Deborah_Levenson: While there are lots of factors that can affect this, I generally like to see spending on housing (whether rent or mortgage) consume no more than 30% of a household's gross income.

traveler__Guest_: We each have 401(k)s and the kids are under 2 and I have already started saving for college, $500/mo each. Is it just best to splurge on the pricey vacations when you want them, rather than put money into the timeshare? My thought was I know this way I can afford to stay in the sort of place I prefer. I guess there are IRAs, but I'd rather enjoy some of the money now, too!

Deborah_Levenson: "Best to splurge on the pricey vacations when you want them"? This frugal planner wants to advise you to just say no, but I understand the pull of a great vacation. Build a budget that first addresses required living expenses (like shelter, food and clothing) and then build in retirement savings (realizing that very few people will be able to recreate their working income stream after retirement if they have merely maxed out their 401K each year... it generally takes disciplined taxable savings way beyond that.) Then see what's left over that can be used for discretionary expenses like "splurge" vacations. Whether you choose to spend the available funds on a timeshare versus "pay as you go" vacations may be a function of how sure you are that you'll want to return again and again to the same location. I hope you'll keep socking the retirement savings away so you can have some great vacations after you've retired, too.

Deborah_Levenson: Unfortunately we've run out of time. Thank you for all your great questions! If you have additional questions or feedback, feel free to email me at dlevenson@thebravergroup.com.

Deborah_Levenson: Debbie