Retirement dilemma: Old account. Moving overseas. Should we close it?
Retirement plan can be kept open, even though it's getting no new contributions, until your retirement. Question No. 2 in the reader's mailbag.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Trading cars before a move
2. Handling an old retirement account
3. State income tax after leaving
4. Student loan repayment plan
5. Unexpected job offer
6. Job change and unfinished mortgage
8. 401(k) loan for debt?
9. Which insurance policies?
10. Best books of 2011
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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Yesterday, my wife and I took a long walk in the park with our kids. The grass was green and there were people jogging and riding their bikes.
We stopped at the playground and played for an hour. Several other kids joined them at various points.
This is mid-January in Iowa, remember.
Q1: Trading cars before a move
In May 2011, I bought a 2008 Certified GMC Acadia for $28,5000. Currently we are paying 2.5% APR loan, a very comfortable $400 monthly payment, and owe $16,000. The problem is my husband just received news we are moving to Italy. Italy has small roads, lots of mopeds, and tiny parking spots. A SUV that has a lot of blind spots is not ideal when it comes to driving in traffic, mountain areas, or parallel parking in the city. Not to mention the likelihood of accidents and the high cost of repairs in not good. I also have a child and back issues. So considering all of this I am thinking about trade-in my GMC Acadia for a BMW X3 or something similar. My car is on only worth around $23,000. A total depreciation of $5,500 in 8 months. We do not have time to private sell, only about a month til we ship the vehicle. Am I making a huge mistake trading in the car? Can I ask the finance company to finance the other car, and will the dealership trade in a more expensive car for a cheaper one?
I agree that large SUV is really not a good choice in that environment. If I were in your situation, I would probably sell the Acadia.
Your challenge, of course, is the short time frame. If I were you, I would list the vehicle on Craigslist immediately for something approaching the list value of the car. We purchased our car on Craigslist and were able to go from listing to completed purchase in about two weeks, so you do have time for that.
If that doesn’t work for you, your best option is probably to trade in the car. You’re much more likely to get some value approximating the trade-in value in the United States rather than in Europe, so I would trade in the car for something smaller before I left. If you downgrade enough, you should be able to make the trade-in work without incurring a big lump sum expense.
Q2: Handling an old retirement account
My husband had a retirement account for his post-doc that ended in march. It was in a TIAA-CREF account. We are no longer making contributions to it and am wondering what to do with it. We will be leaving the country in 2012 and will be working in a different economic structure, therefore, we don’t know our future regarding coming back to the states or staying out. I think the balance last we checked was around $8000. We also have a state fund with maybe $300 or something in it. I honestly have no idea how these things work and the money is sitting. What would you advise us to do?
Our finances are simple: $1800 monthly income, about $1200-$1300 expenses, $6000 in student loan debt at 1.65%. no other debt/expenses.
I would leave the money for the time being. When you reach an appropriate retirement age, you can withdraw it as normal income in the United States.
The other option would be to empty it out right now, but you’re going to take a tax penalty for doing so. From what you’ve described, there really isn’t any sort of rollover option that would provide you any real benefit.
I would just leave the money there and consider it a start on your retirement. You’ll be able to get the money out of it wherever you’re at.
Monica had a follow-up question.
Q3: State income tax after leaving
Leaving the country, we are required to pay income taxes. I’m aware of the $92000 income limit on federal tax exclusion on foreign income. Virginia (where we live, we rent) requires tax on all income, regardless. This is what I know. However, we will be leaving and probably will forward mail to my parents (who live in VA). Would you happen to know how this works? We don’t own property and won’t rent so technically we aren’t residents anymore. Does that mean we still need to pay VA taxes?
In order to maintain U.S. citizenship, you have to continue to file federal income taxes each year, and you’ll have the income tax exclusion you mentioned.
However, it is often very difficult to get rid of your “tax domicile” status in states once you move abroad. You will need to remove all evidence of your residence in the state, including voter registration, addresses, your driver’s license, and so on.
If I were you, I would consult a Virginia tax attorney to help with this process. The cost of it will be more than made up by the taxes you’ll save by doing this correctly.
Q4: Student loan repayment plan
I’m a 25 year old college graduate that took out $29,500 in student loans (no credit card debt). In 28 months of repayment, I’ve gotten my outstanding balance down to $17,925. I’m fortunate enough to be able to afford my payments and even have some money left over to eat and have fun, but I want to start paying down this debt aggressively, and I’d like some help gaming the system. I’ve been running some numbers, but I’d appreciate getting them double checked by someone who knows a bit more than I do about the subject.
Now for the numbers (rounded to the nearest $5):
$3,545 @ 4%
$9,790 @ 4.538% (weighted average)
$3,180 @ 6.55%
$1,410 @ 2.625%
My current minimum payments are $277.53 and I’ve decided I can pay an additional $300 every month (which I’ve been applying to the loan with the highest interest rate). No matter what my minimum payment becomes, I’m going to continue paying $577.53 per month and applying the excess to principle.
The last three loans I listed are serviced by the same company and I’m eligible for an income contingent loan repayment option that would cut my total minimum payment to $173.40 (and possibly extend the repayment term up to 25 years).This seems to be the best option to me because what I didn’t tell you is that I’m planning on applying to graduate school in fall 2012 and will (hopefully) begin school again before my loans are fully repaid (in which case the lower monthly payment will be really helpful). Or should I consider consolidating all my loans and just pay that down aggressively.
Lastly, is there any way I could get in trouble for what I’m trying to do? I can’t imagine that I would, but I don’t want to get blind-sided by something I can’t imagine.
You should not consolidate your loans into a loan with a higher interest rate than any of the loans you consolidated. So, for example, unless the consolidation offer is less than or equal to 2.625%, I wouldn’t consolidate that bottom loan.
The reason for this is that the higher your interest rate, the more you’re going to pay over time to that financial institution in pure interest. You want to do what you can to minimize that interest.
If you’re not sure you’re going to be able to cover the payments in graduate school, save that additional $300 a month for now and use it to have a healthy emergency fund.
No, you’re not going to get in trouble for any sort of consolidation that you do.
Q5: Unexpected job offer
I have been at my current job for 6 months and I love it, but the pay is not great but I knew that going in and is enough to support my family especially when my wife finishes nursing school.
Recently though I have been approached by 2 separate companies about working on the private side in the same field for considerably more money. These jobs would require a few more hours and less flexibility. I was not searching for the jobs and had no idea before hand that they were available. They both would have me doing almost the exactly the same things in the same area.
If the money was not a good bit better I would not consider them because I am happy but that kind of pay increase would make a difference. MY main hesitation is I have only been here 6 months and don’t want to burn bridges because the new jobs would interact highly with the people I work with now.
Should I pursue these offers or stay? I would hate to leave and regret it if there is something I do not like. I would also hate to stay and wonder what if.
You never have to burn bridges when you leave one position for an obviously better position. If you’re open and candid about your reasons for changing positions, virtually all rational people will understand. If you leave in a way that makes the transition easy for your previous employer, that’s even better.
That doesn’t answer the question of whether the grass is greener on the other side of the fence, though. If you have enough to support your family, is the additional money worth the risk of having a worse job environment?
I can’t answer that question for you, but if I were in your shoes, I would lean toward sticking with the good thing.