Reader mailbag: Should I contribute to a Roth 401(k)?

Lots of questions this week dealing with the workplace. Let’s dig in.

My work is now offering a Roth 401(k) option in addition to the normal 401(k). We’re down to one income right now so I reduced my contribution to 6% which still gets me the full company match. Raises come out next month so I was thinking of adding a percent or two to my contribution. Would it be worth it to start a new Roth 401(k) with only 2% contribution, leaving my initial 401(k) as is? I’m at around six figures now, barely, but don’t want to assume I’ll be in a lower tax bracket in retirement… I do have a Roth IRA with ING, but I rarely contribute to that since it requires a lot of extraneous paperwork related to my job. I hope to continue increasing my contribution rates, but I’m not sure if I should go with the new option.
- Christina

The Roth 401(k)’s advantage is that it’s funded with after-tax dollars, which means that you’ll pay the taxes on the money now instead of later. If you have a high income and anticipate it dropping significantly in retirement, then there is no real benefit to the Roth 401(k) in comparison to a normal 401(k) – in fact, the latter is probably better, assuming investment choices are the same.

If I were you, I’d probably just contribute more to my normal 401(k) at this point, unless you have reason to believe yuor income in retirement will be comparable to what you make now.

Also, I’m not sure why an external Roth IRA requires paperwork for your job. The usual method of funding those is to simply withdraw money from your personal checking account, which shouldn’t involve your employer at all. If your employer makes this difficult, don’t involve your employer in it at all.

My husband has a Citi credit card for about 20 years. This was his first and only credit card until they started increasing the rate about 5 years ago. They would also charge for random things like credit protection services that were never authorized. He would call and get the charge removed, but all the actions just felt very smarmy. We decided that we wouldn’t close the card due to the long history, but he just wouldn’t use it anymore. He opened a credit card with his credit union five years ago and usually pays it off each month. Yesterday we received a letter from Citi saying that they would begin charging a $60 annual fee, but he could avoid the fee if he charged $2,400 annually on the card.

We have had a mortgage for 7 years and had a couple car loans through the years that we’ve always paid on time. His credit score is in the mid 700’s.

My question is would his credit be greatly affected if we closed the card?
- Tina

Given that you have a credit card with a five year history, an outstanding mortgage, and a solid credit score right now, I’d assume you must have a history of making payments on time and likely don’t have a big outstanding balance on either card.

If those things are true, I wouldn’t worry a bit about canceling the old card. You might receive a small negative bump right after the cancellation, but that bump would be small and temporary, vanishing over the next year or so.

The truly frustrating thing about credit scores is that we don’t know exactly how they’re calculated – all we can do is make best guesses based on observations and the guidelines the credit agencies provide.

My husband and I have the opportunity to sell our long time business that is actually still doing ok here in MI. We want to relocate and have picked out a place to go, Raleigh, NC. I interviewed for a job down there two weeks ago. This is with a major company that actually does what I do (only in a different way and with a little different philosophy). At the end of the interview, they sent me for a urine test and said they would also do a background check.

It’s been two weeks. I called a week ago to see how things were going and was told that because I lived out of state that “it would probably take longer” to do the background check. We have lived here for 30+ years, the business has been going for 26 years.

The job I applied for has been taken down from Monster.com.

What do you think?

1. I have the job in my pocket but they are just slow responding to me, busy or haven’t gotten back the information.
2. They found someone they like better. (I find this hard to believe with the experience and schooling that I have, the two checks I have had to take are perfect, no drugs, no arrests or dramas in my life at all.)
3. They were “just looking” for the future (although they told me that they did have an opening).
4. ?

It has been 20+ years since I interviewed for anything and I realize things are done differently now. When I called, he was a little guarded with me but then maybe he was busy or distracted or really didn’t know what to say. Wouldn’t you think that they would have called or written a letter or something if it wasnt’ going to work?

I don’t mean to take up your time but I don’t know who else to ask. You don’t have to write back a long note, just do you think I should call them again, write them,ignore them? I really want the job but if I appear too eager, they would surely offer me less, if I ignore them, they will think I’m really not that interested.
- Millie

Given the current job market and the fact that they posted the job on Monster, my guess would be that they have a fat pile of applications and they’re sifting through them.

You may or may not be their leading candidate – that’s hard to determine from this information. My suggestion would be to be patient with it and give it a little more time. They may be interviewing several people before making a decision.

One other thing: never put all your eggs in one basket when it comes to a job search. Keep looking and keep applying. The businesses you applied to are certainly going to look at plenty of applicants – there’s no reason you shouldn’t apply to plenty of businesses.

What is your opinion on life insurance – do you need term or whole life and how much?

I am a 52 year old woman, making $40,000 annual and have $50,000 life insurance supplied by my employer. I have some additional whole life ($50,000) that I am considering surrendering and purchasing term, but not sure what amount I need. This policy has a loan against it. I have some health concerns (diabetes, overweight, high blood pressure). I am married and have two grown children (youngest is in his 3rd year in college).

My husband is 54 years old, making $80,000 annual and has $260,000 life insurance through his employer. He also has some whole life ($20,000 on a policy he has had since he was 17 and a $100,000 policy). We are considering surrendering the $100,000 policy and purchasing term. He has the same health concerns as myself.

I would appreciate your thoughts on this. My husband and I will be meeting with our insurance representative on Friday this week so a quick answer would be appreciated if it could be done.
- Connie

If you’re just starting out, the best move is usually to buy term life insurance. In general, the first few years of investment-based insurance models have pretty poor returns.

However, once you’ve been through that first decade or so with a whole life policy, you have to tack those first years up as water under the bridge. Those years are lost. You can’t worry about them now.

In your current position, the whole policy might actually be a good thing. It sounds like you’ve had the whole policies for a while. I would spend some time looking at the actual returns they’re providing today and see whether or not you feel that it’s giving appropriate value.

The key, though, is to recognize that the past years are past. The choices you make today can’t alter what happened then. Make the choice based on where the policies will go from here.

We are expecting $50,000 inheritance shortly and we don’t what to do with it. At issue is that we have a balloon note for our second mortgage coming due next October in which we will owe about $45,000. We are underwater on our house so it seems to me that I should try and negotiate this loan instead of paying it off since we will still be underwater, effectively throwing the money away for nothing. I was thinking about putting half toward debt (we have about 80K in various types of debt at various interest rates) and half in savings in anticipation of the bank not willing to work with us and demanding the money. The money we save each month from eliminating debt, combined with the other half we put aside should give us some options when the note comes due.

What do you think?
- Eric

If your lender is open to negotiation or refinancing, that’s the road I would go down before doing anything else. Balloon notes are mighty dangerous things for both the lender (risky) and the borrower (painfully expensive).

I would hold off on making any decisions about the money until the refinancing is finished up. Put the money in a savings account for now and sit on it until that’s taken care of (except perhaps to use some of it to cover any fees related to the refinance).

Once everything is in place, I’d then look at all of your finances and see where the remaining money should go.

In 2004 I bought a condo. I knew at the time I would only need it about 2 yrs, as I was just using it as an office. Had I put it on the market a few months earlier in 2006 I would have made about $40K, Today, I am underwater $40K.

I am 41 years old, will never marry, have no kids. I earn $50k a year, I have $100 (yes $100) in savings. I have $27K in 401K, I currently have a tennant in the condo, but the rent does not entirely cover my mortgage payments, association fee & property taxes. To cover those I have to supplement an additional $500/month. I have not been able to afford home owner’s insurance, (or landlord’s insurance,) on the property, so far I have been lucky. I need to purchase that asap because hurricane season is approaching, and this is located on the east coast of Florida. Cost on that will be another $666 annually.

Currently, I rent an apt on the other side of the state, with no desire to ever live in the town the condo is located in again. Financially, the condo is draining and burdonsome. Morally, I don’t feel comfortable to think about turning the property back over to the lender. My credit score is in the 750 range. What would you do if you were in my shoes?
- Mary

Sell it and take the loss.

All of those extra costs are adding up quickly. You’re losing $500 a month to this situation – for what? Every month you hold onto it, the financial situation gets worse and the only way you’ll recoup any of it is if the housing market suddenly undergoes a tremendous rebound, something which I don’t anticipate happening in the next couple years or so.

Much like the previous question, you have to ignore what might have been and look at the situation as it is now. What nets you the most money? Selling it now? Or holding onto it, watching $500 a month vanish, and hoping the housing market rebounds enough that you can recoup that $500 a month in lost money?

I wouldn’t bet on the housing market.

How is your “losing weight” resolution going? What strategies are you using?
- Sammie

It’s going fairly well. I set a goal of losing an average of a pound a week in 2010 with the knowledge that it would be harder for me to lose it in the winter months than the summer months because, where I live, you can’t really do a whole lot outside in the winter unless you want to freeze or you want to bundle yourself up like that younger brother from A Christmas Story. So far, I’ve lost an average of 0.6 pounds a week, which I’m happy with.

I’ve decided to use the idea that Michael Pollan proposed in his excellent In Defense of Food – namely, I’m acting as a vegetarian until 6 in the evening, at least during the week. That means that my breakfasts and lunches are strictly vegetarian right now.

As for exercise, I’m mostly just playing exercise games on the Wii (mostly EA Active, lately) when I can fit them into time gaps in my day. I’m at a point where I have a nearly-overstuffed schedule of things to get done each day so this is a convenient way to simply get my heart rate up.

I look forward to more outdoor activities when the huge piles of snow on the ground melt and spring comes to Iowa. I vastly prefer to take long walks.

I have a secure job (I know I’m not irreplaceable, but my work is unique) with good pay and benefits, while my husband is laid off for the second time since we’ve been married (12/01 & 9/09, economy both times). I have no education beyond high school, while he has an MBA. We live in the second largest city in Michigan but even so, his employment prospects are not good. We are at least $20K underwater on our mortgage and we couldn’t get enough in rent to cover the mortgage payment, so we are unable to move to where the jobs are.

We have a decent emergency fund, I have a steady paycheck, my husband still has several weeks of unemployment left (he was fortunate to land a paid tax season internship at a local CPA firm but that will end mid-April), and we have about $8K in CC and student loan debt. No car payments, no other loans. We kind of saw this last layoff coming so we started saving pretty seriously a few months beforehand and also started paring back our expenses. Because of those precautionary measures, we have about $10K in our emergency fund (ING), have not had to withdraw any money from it yet (and don’t foresee the need to even after a few medical and car repair bills), and are still able to save a little each month.

Our dilemma is this: we really want to get rid of the debt, but (and mostly because) we have no idea what the future holds. The monthly payments for the student loan and CC total $290, although we always pay more on the CC ($250-$400 depending on how things go that month). The interest rate on the student loan is variable but currently at 2.23% and the CC is 9.25%. Does it make sense to pay one or both of those debts off with our current savings (earning a paltry 1.20% APY) and then put those payments (and the extra) back into our emergency fund? Or does it make more sense to sit on that money and just keep making the payments as we have been since we don’t know what’s going to happen after April?

We could almost live on my salary alone but our mortgage payment would eat up a little over 2/3 of my monthly pay. We’re hoping it doesn’t come to that, but we just don’t know if my husband will be able to find a job before his unemployment runs out. Not having that debt would give us at least $300 more breathing room each month, but $10K would give us about 8 months of mortgage payments. Both options have benefits as well as drawbacks; which one makes the most sense to you?
- Cassandra

I would choose the path that keeps your head above water the longest in the event that your husband doesn’t find work. From my perspective, that would mean leaving the cash in the emergency fund for now and using it to cover the mortgage payments down the road.

The enormous uncertainty of your husband’s job is the real crux here. At this point, I think you have to bank on the idea that he’s not going to be bringing in a large income for the near future. In that situation, your best bet is to have the cash on hand to cover your mortgage payments and not worry as much about paying off unsecured consumer debt – that can wait a bit.

I would also suggest that your husband try to find any work he can during this rough stretch, even if it means working at a store or something like that. Income is income. When he’s not actively working – and even during the evenings right now – he should also be trying to make a name for himself in his career path online. Start a blog. Find people on Twitter in his career area and interact with them. He needs to get his name out there as much as possible.

How do I find paid blogging work on the internet that’s not a scam? My neighbor blogs once a week for amazon.com giftcards which would be the most awesome thing ever since it would make it so much easier to be able to buy books for my family guilt-free (I re-read almost every book I own so paperbook swap and the library just make me grouchy) guilt-free. Unfortunately, my neighbor won’t tell me what the name of her site is, for some reason or other. So, how do I find these things on my own? Thanks so much.
- Erin

Hello, I live in Canada and I am looking into ways to boost my income. Can you recommend any websites that promote legitimate work at home opportunities, websites for bloggers (who want to be professional), or any other reasonable possibilities?
- Tina

I’m combining these two questions because I get them – or some variation on them – all the time. I’ve even answered similar ones in earlier mailbags. This is going to be my definitive answer on the subject.

There are very few legitimate work-at-home jobs that can be found on the internet for people to simply show up and apply for. Most of the legitimate jobs are either self-made (like mine, where I started The Simple Dollar from scratch and built it in my spare time) or take more of a “we’ll call you” approach (where people approach you with writing opportunities).

There are many ways to earn a little bit of money online via things like Mechanical Turk, but those are good to earn a few supplemental dollars while watching television or something like that. They don’t earn enough to actually be a functional income.

How do you get involved in opportunities where they will want you to work for them? For starters, you have to show what you can do. Start your own blog. Write your best stuff there. Then, you have to get the word out. Join Twitter and talk about your area of interest. Converse with people there. Share links to your best stuff – and links to stuff you really like.

It takes time. It doesn’t happen overnight, no matter what you want to do.

Most importantly, ignore the people who tell you that you can start earning tons of money quickly via a work-at-home opportunity. Think about it – if that legitimately worked, wouldn’t they be doing it over and over again themselves instead of trying to sell you some shifty product? If something is a guaranteed money maker, it’s not sold as a product – it’s used by the person who throws their energy into the money maker, not into packaging something up to sell to you.

Got any questions? Ask them in the comments and I’ll try to include them in a future reader mailbag.

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