SHOULD I USE MY PROFIT-SHARING MONEY TO PAY OFF MY DEBTS?
(MONEY Magazine) – Q I am a 36-year-old pharmacist and have just landed a new job. My previous employer informs me that I will receive a profit-sharing check for $16,000. Right now, I am about $14,000 in debt. Instead of reinvesting my profit- sharing money in a retirement account, wouldn't it be wiser to pay off my debts? Jason Edelman Tampa A ''Don't let him do that!'' shrieks Alan Goldfarb, president of Financial Strategies, a Dallas planning firm -- like I'm your mom or something. He is right, of course. Spending your profit sharing rather than rolling it over into an Individual Retirement Account or some other tax-sheltered plan would not be wise. First, consider the tax consequences. If you cash in your profit sharing before you reach age 59 1/2 (or 55, depending on the plan), you owe the IRS a 10% penalty. Moreover, your $16,000 is taxed as ordinary income -- and you don't get to deduct the penalty from the taxable amount. So if you are in the 28% tax bracket, you will have only $9,920 left to throw at those debts -- meaning you will still be $4,080 in the hole. More important, Goldfarb points out, you will fall behind in building assets for retirement. He figures that if you roll the money over into, say, an IRA, where it could earn 10% a year on average until you reach age 65, your account would grow to $254,000. But if you spend the money now to pay debts, it might take you six years to build up another $16,000 in tax-deferred savings, and you will have six fewer years of compounding. Result? At 10% a year, you would wind up with only about $143,000 -- or $111,000 less -- at age 65. So my advice is: repay your debts from your salary even if that means eating pasta al niente followed by air pie for the next few years.
Q My husband is in an unusual fix -- he overpaid his Social Security tax. When he left his last job, he had reached the $53,400 income limit, so presumably he was paid up. Now his new employer is deducting Social Security all over again. How do we get this money back? Kay Bell Greenbelt, Md. A At last, a not-too-taxing question! I direct your attention to line 58 of your Internal Revenue Service Form 1040. That's where you should enter your husband's overpayment of his Social Security and, possibly, his Medicare tax as well. How much will that be? For 1991, the Social Security tax rate is 6.2% on all income up to $53,400 (a maximum of $3,310.80) plus a 1.45% Medicare tax on all income up to $125,000 (maximum: $1,812.50). Even if your husband has passed those limits, though, Social Security must continue to be deducted -- in part because Employer Two is not permitted to ask how much your husband earned from Employer One. But the last laugh is on the employers. Though your husband will receive a refund for overpaying his share, neither Employer One nor Two receives any return of contributions. Why? IRS spokesman Wilson Fadely says simply, ''Because it's the law.'' But my theory is that Uncle Sam couldn't figure out how much One or Two should get, so he decided to keep it all for himself.
Q We recently discovered that my family has a number of Japanese woodblock prints from the early 1800s, including one titled Night Snow at Kambara by Ando Hiroshige, the famous printmaker who died in 1858. Are these works valuable and, if so, where could we get them appraised? Edward M. Coville Ward Cove, Alaska A Even though my memories of a Japanese art course I took in college 120 years ago have nearly faded, I still recall Hiroshige's beautiful landscapes. He was one of the most popular of the 19th-century Japanese printmakers. And the prices for his best work reflect that fact: anywhere from $10,000 up to $80,000 for a first-edition print in superb condition. Even a slightly faded Night Snow at Kambara recently fetched $8,000 at Sotheby's auction house in New York City. But before you break out the champagne, you should know that Hiroshige was also one of that period's most prolific printmakers -- and therein may lie a problem. Of every 100 Hiroshige prints, art dealers say, 80 are undistinguished, 10 are good, nine superior and one breathtaking. (That's still remarkable when you consider that he produced 5,000 designs in his lifetime.) After his death, his publisher reused his woodblocks again and again to strike new prints. As a result, says Robert G. Osborne at the Osborne Gallery in Pasadena, most Hiroshige prints go for only $50 to $300 each -- better than nothing, certainly, but hardly enough to finance your next jaunt to Tokyo. You can get a free estimate of the value of your family's collection by mailing clear color photographs to Sotheby's Japan Department at 1334 York Ave., New York, N.Y. 10021 (212-606-7000). That's a whole lot less expensive than getting on an airplane and flying to Seattle -- the closest U.S. city where somebody who lives in a far corner of Alaska, as you do, will find experts who can do a formal appraisal. But if you do plan to be in Seattle anyway, you might try showing your prints to Erin Warren at Honeychurch Antiques, who was recommended by the Seattle Art Museum. She charges $25 for a verbal appraisal and $50 for a written one.
Q I am a 69-year-old widow who is having trouble making ends meet. Social Security pays me $503 a month. My only other sources of income are $50,000 invested in a one-year bank certificate of deposit paying about 8%, $5,200 in a Ginnie Mae fund yielding 7.66%, and $3,300 in a bank savings account earning 4.9%. Those bring in a total of about $385 a month, which, combined with Social Security, barely covers my bills. Besides the three accounts, my sole asset is my $170,000 house, which is all paid up. The CD will mature soon, and I don't know how to reinvest it to get 8% again. How can I boost my income or at least provide a cushion against unforeseen expenses? Name withheld by request Oakland A If interest rates stay low for the next few months, as expected, you will not be able to find one-year CDs paying more than about 6% -- which would make an unwelcome $90 cut in your monthly income. To boost your earnings a bit, you might try moving your CD money into a mutual fund invested primarily in short- term U.S. Government bonds (see the story on page 96). Looking more broadly at your entire financial picture, you may also want to consider something more radical -- such as taking out a reverse mortgage on your house. In a reverse mortgage, or home-equity conversion mortgage (HECM), as it's more formally known, the bank lends you money using the equity in your house as collateral. Unlike a conventional loan, though, you don't have to make payments on an HECM; principal, interest and fees simply accrue against the home's value and are paid when you move out or sell it. Moreover, even if the accumulated costs end up totaling more than the house is worth at that time, neither you nor your heirs can ever be held liable for the difference; the government will pay it out of mortgage insurance that is built into the loan. / Some reverse mortgages are set up so that the bank pays you a fixed sum each month. In your case, though, I'd recommend an HECM line of credit -- an option that's available to you through the U.S. Department of Housing and Urban Development at more than 100 banks nationwide (you can find those near you by calling your local HUD field office). ARCS Mortgage in nearby Vallejo, Calif., for example, offers variable-rate HECMs pegged to the one-year Treasury bill rate plus 1.6 percentage points, recently 6.75%. Your out-of-pocket expense to obtain the loan can be as little as $375, since you are allowed to borrow the rest of the $5,571 closing costs (the figure is steep because of the hefty 2% mortgage insurance premium you must pay). Granted, even if you never touched the line of credit again and lived in the house for, say, 20 years before selling it, the tab for those closing costs alone would grow to a debt of approximately $53,528. But that money would simply be subtracted from the $372,500 that you or your heirs would reap from selling the house in that distant year (assuming an expected 4% average annual increase in value), leaving a comfortable $318,972 profit. And in the meantime, if you happened to need an extra $250 to fix the furnace one month, you could draw the money from your credit line without giving up essentials like food and water. Better yet, any money you draw down will not be taxable and will not affect your eligibility for Social Security or Medicare.
To get complete information on reverse mortgages (which have some wrinkles too complicated to explain here), study Retirement Income on the House by Ken Scholen (available for $24.95 plus $4.50 for shipping; 800-247-6553). And keep up your courageous spirit!