Finance Space

Cheryl Costa, an investment adviser with Family Financial Architects in Natick, took readers’ questions about debt management, mortgages, and education planning. Here’s a transcript.
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Cheryl_Costa: Hi Everyone! Welcome to today’s chat. I see a queue of several questions already so let’s get started!

bottomout__Guest_: we are 60,000 in debt and currently renting a house and are desperate to buy a house please help us with ways to work down our debt

Cheryl_Costa: Getting rid of the full $60K will be difficult but not impossible. Is most of the debt credit-card related?? If yes, diligently seek out 0% offers if you can get them. Consolidating onto a low interest card would be another alternative. I often suggest tackling the highest rate card first and getting that paid off, then proceed through all the cards according to the rate you are paying. Generally speaking, the best thing you can do is make a strict budget and try to stick with it as best you can. In order to offer more specific advice, I’d need to know the source of the debt.

maze100__Guest_: From a purely historical investment performance standpoint, which state?s 529 plan is your recommended choice for Massachusetts residents?

Cheryl_Costa: I have my own children’s 529 accounts in two places — Fidelity’s UFund and the College Savings Plan of Nebraska. SInce there are no tax advantages to using an in-state plan for the residents of Massachusetts, you should consider in-state and out of state plans. I like Fidelity because they have some low cost options and they have a great credit card associated with their program — the 529 College Rewards Card. Currently, 1.5% of everything you charge is credited to your 529 account. It is possible to get thousands of dollars added to your account over the years simply by using this card. Grandparents and other relatives can also get cards tied to your child’s account so the credit card contributions can really add up. I also like the Nebraska plan because they have a wide variety of funds available and you can pick your own allocation. The costs in the Nebraska plan are also quite low and performance has been solid. Check out: www.fidelity.com/ufund and www.planforcollegenow.com for more details.

klm__Guest_: is it smart to pay off a mortgage with rates so low?

Cheryl_Costa: I am assuming you currently have a good rate on your mortgage and you are wondering if you should consider paying it off. My advice is generally no, but it really depends on your personal circumstances. If your rate is anywhere in the 5’s or lower, I wouldn’t be in too much of a hurry to pay it off. The rates that many of us have on our mortgages are near historic lows.

highyield__Guest_: how can these money market funds garner 5.5 % Is there a catch??
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Cheryl_Costa: Where are you seeing a 5.5% rate? The best rates I am seeing are closer to 3% for “vanilla” money market account and there are also one year CDs in the 3.6% range. Oftentimes, slightly higher rates are available if you are depositing $50,000 or more.

Jimmm__Guest_: Cheryl, what do you think of the idea of having a Roth IRA in addition to a 401(k) to hedge against unfavorable tax raes after retirement?

Cheryl_Costa: Love it. I think it is a great idea to have money in a few different “buckets”. Be sure to check out whether your employer might also offer a Roth 401(k).

ChuckD__Guest_: I am 43 and about to purchase my first house. I am trying to choose the right mortgage loan. I believe conventional wisdom is to get a 30yr fixed – but I’m considering 15 year fixed instead. What do you think?

Cheryl_Costa: COngratulations on your imminent home purchase! I would lean towards the 30 year mortgage because it provides the most flexibility. Here’s my thought process — take out the 30 year mortgage but pay it back as if you had a 15 year mortgage as long as you can afford to do so. If you should ever encounter a financial hardship or a job loss, you could drop back to the lower payments. The drawback to this plan, of course, is that you pay a slightly higher interest rate but these days the difference between a 15 year rate and a 30 is oftentimes just a quarter point. I guess I just like the flexibility that comes with the 30 year product.

maze100__Guest_: Can I open 529 accounts for my son in my name in 2 separate states? Or do I have to open one state in my name and the second state in my wife’s name?

Cheryl_Costa: You can definitely open 529 accounts for your son in two separate plans — no need to try to juggle account ownership between you and your wife.

highyield__Guest_: orange direct and hsbc have money market funds with 5.5 % for deposits over 10,000. Is there a catch to these products? I need somewhere to park my 3 month cushion of money if my company implodes and i find myself out of work

Cheryl_Costa: I would be willing to bet that you are looking at something that is from a while back. The highest rate on ING DIRECT’s webpage today is 3.35%

Prospective_student__Guest_: my current employer does not offer any type of retirement savings plan…would you recommend that i do something now (even though this job is certainly not a long-term one, and i am 23 years old) to start saving, or wait until i am with an employer that has a 401k, for example?

Cheryl_Costa: Start saving now if you can. You can and should contribute to an IRA (and a Roth IRA if you can). At your age, you can contribute up to $5,000. Starting early is always a great thing to do — you won’t regret it!
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d__Guest_: I have an adjustable mortgage rate of 4.75, which will adjust in November of next year. Should I be shopping around for a fix rate now?

Cheryl_Costa: It certainly doesn’t hurt and you should plan to check frequently. Recently, there has been a “blip” upwards in rates. Today,you would be lucky to find anything for 15 or 30 years under 6% — but just a few weeks ago, there were lenders with rates below 6%. Good luck!

Jimmm__Guest_: Where should I shop for disability insurance? I feel that the plan my employer offers may be too expensive for the coverage provided.

Cheryl_Costa: Generally, the disbility insurance provided through your employer is usually pretty good and offered at a reasonable price because they can negotiate a group rate and spread the risk across many people. There are certainly private disability agents out there and you could definitely contact them and ask them to compare your policy with what they can offer.

pennypincher__Guest_: We also have credit card debt (about $50K) but we own a home and have the mortgage and a home equity line. Should we stop contributing or contribute less to my husband’s 401k and my 403b and use that money to pay down our debt. We are 47 and 52 with only $125K in retirement savings. We plan to work until we are 65 to 70.

Cheryl_Costa: Great question but a tough one to answer. A lot depends on your personal circumstances. I usually hate to see anyone stop contributing to a 401(k) because it is very hard to get back into “savings” mode. In your case, even if you were contributing the max permitted to your husband’s 401(k), you would need to turn off his contributions for several years in order to pay down the debt. I’d only consider this option as an absolute last resort.

jj__Guest_: i have 8 yr left to my mortage balnce 59K 6.25% should i try to refinance for a lower rate

Cheryl_Costa: With your relatively low loan balance, I think it is unlikely that you could get a lower rate, plus there would generally be fees associated with the refinance. It never hurts to look though, so keep checking the papers for good rates.

Prospective_student__Guest_: what are the advantages of having a Roth IRA versus having a traditional IRA? can the money in either not be touched until i reach a certain age? each of them also have some kind of positive or negative implication for tax season, right?

Cheryl_Costa: The big tax difference is that contributions to traditional IRAs can reduce your taxable income but contributions to a Roth IRA will not. Roths have several advantages over traditional IRAs: you are never required to take minimum distributions from a Roth and when you do take qualified distribtions, those distributions are tax free. I am a big fan of ROth IRAs and I generally encourage everyone who is eligible to contribute to them. The problem is that there are income restrictions so not everyone can qualify for a Roth.

maze100__Guest_: I’m researching long term care insurance for my mom, age 70 as well as for myself, age 45. As you know, this type of insurance ins’t cheap. What direction do you generally steer your clients with respect to whether or not they should get it?

Cheryl_Costa: I start broaching the topic with my clients when they are in their 50s — before there are likely to be insurability issues. Younger people can also benefit from this insurance but they generally can’t afford the premiums when they are in the 40s and trying to pay a mortgage, save for college and save for retirement. I think this coverage is very important to have especially since a year of care in a nursing home can easily approach $150,000.

chatguest1: Thanks everyone. As usual, the hour went by too quickly and I was not able to get to everyone’s questions. However, I have good news!! Later this month, I will be launching a personal finance blog here at boston.com. I am very excited about this opportunity because the blog format will allow me to answer all your questions and answer them in more detail than is possible on this chat. I’m looking forward to the official kick-off and I hope you will continue sending me your great questions. Thank You!!

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Tags: Personal Finance