Money Management

Why education IRAs are worth a second look

Q I'm thinking of starting an IRA for each of my two toddlers to help pay for their college costs, because the annual contribution limit has been raised from $500 to $2,000 beginning this year. At a tax-free 7 percent, each IRA would grow to more than $50,000 in 15 years, and withdrawals wouldn't be taxed if they were used for college expenses. But what if one of the kids decides not to go to college?

A In that case, you could roll the IRA (known as a Coverdell Education Savings Account) into a Coverdell fund for your other child or a close family member.

Or, assuming you have early warning that your child won't attend college, you have another option, thanks to a law change effective in 2002: You could use the money from the account to pay for his or her precollege education expenses. Those could include tutoring fees, computer equipment and services, tuition, transportation, room and board, and other educational items or services provided by the school.

When you renovate your home, use plenty of ink

Q A general contractor and I have carefully discussed how my home is to be renovated, but the contract he drew up contains only a sketchy outline of the job. Since we've agreed on the details in our talks, is that sufficient?

A An oral agreement, said movie mogul Sam Goldwyn, "isn't worth the paper it is written on." The contract should spell out the work to be done, with drawings as needed, and should state that any changes and their cost must be agreed upon in writing.

Partial payment amounts should be specified and tied to completion of each stage of construction or to inspection of that stage by the local building department, if required. The contract should stipulate that a percentage of the total cost will be held back until the contractor provides waivers of mechanics' liens from all subcontractors.

Other items that should be covered, where appropriate, include: time limits; warranties on various elements of the job; material specifications; your right to approve subcontractors; contractor's insurance against injury to workmen and visitors; frequency of clean-ups at the site; grounds for termination of the contract; and the method of resolving any disputes. To guard against disputes, have a lawyer look over the contract before you sign. The advice won't come cheap—a fee of around $1,000 isn't out of line—but that's small potatoes compared with what you'll pay if you wait until trouble occurs before you hire an attorney.

What you should know about a financial planner

Q I intend to hire a financial planner and will interview several candidates. What subjects should I cover? And what can I expect to pay?

A Among other things, you'll want to find out about the planner's work experience, professional qualifications and licensing, services, investment approach, possible conflicts of interest, and whether he's had any problems with regulatory agencies. The Certified Financial Planner Board of Standards (www.cfp-board.org), a nonprofit organization, offers an itemized checklist of details to cover and keeps records on the disciplinary history of planners. If the candidate is registered as an investment adviser with the SEC or a state securities bureau, you're entitled to a copy of the disclosure form filed with the agency. You can access information on advisory firms in the SEC database at www.adviserinfo.sec.gov.

Financial planners typically charge about $120 an hour, although more than a third calculate fees in other ways. (See "Financial advisers: Making sure you're the winner in the battle for your bucks," May 7, 2001.

How the new tax law may help your 401(k)

Q I've read that the 2001 tax law contains a provision to encourage employees with low salaries to participate in 401(k) plans. I figure that that's good news for me, too, because greater participation by those employees would allow high-salaried staffers like me to contribute more. What are the details?

A Starting this year, an employee with adjusted gross income of $50,000 or less (on a joint return) or $25,000 (for a single) who contributes salary to a 401(k) or SIMPLE IRA can claim a tax credit in addition to any deduction he'd ordinarily be entitled to. The credit equals 10 to 50 percent of up to $2,000 of deferred salary or voluntary (after-tax) contributions. The lower the adjusted gross income (AGI), the higher the credit.

A married employee with an AGI of between $32,500 and $50,001 who defers $3,000 of salary in 2002 will get a $200 credit (10 percent of $2,000). If his AGI falls between $30,000 and $32,501 he'll get $400, a 20 percent credit. With a $30,000 AGI or less, the credit would equal $1,000—50 percent of $2,000.

These changes may not necessarily benefit you, though. Employees needn't necessarily contribute to your practice's plan to take advantage of the new law; they can also claim the credit if they contribute to a Roth or traditional IRA.

Naming a beneficiary of a savings account

Q I want to leave my savings account to a nephew. If I name him the beneficiary now, will I be making a taxable gift? And what happens if I change my mind later?

A What you propose is a POD (payable on death) arrangement, sometimes called a transfer on death or Totten trust, which is allowed for bank and brokerage accounts in most states. With a POD, you're not making a lifetime gift, since you retain full control of the account until you die. Then the fund will go automatically to your nephew without passing through probate, but it will be part of your taxable estate.

While you live, you can add money to a POD, make withdrawals, change the beneficiary, close the account, or even transform it into a joint account with someone other than your nephew. In that case, the joint owner will have the same rights you do, and your nephew won't inherit until both owners die.

It pays to go first class when insuring your car

Q I'm shopping for car insurance and debating whether to cut my premium by boosting the collision coverage deductible from $100 to $500. What should I base my decision on?

A Of course, the car's current value is a consideration, but the value of your peace of mind is even more important. Say the car's "integrated" bumper suffers some unsightly damage that won't affect the way the car runs. With a high deductible, would you agonize over whether to spring for a new bumper or settle for a cheap touch-up? A low deductible means the insurer pays most of the cost of such elective surgery.

But don't expect top-quality coverage at bargain-basement rates. Your total premium will likely be well above average. So before you buy, make sure you'll get trouble-free service. Verify that in case of an accident, the company's claims adjuster will accept an estimate from the repair shop of your choice or an approved shop that's conveniently located. Repair estimates should normally assume the use of new parts from the original manufacturer. And you should be entitled to a reasonable daily allowance for the expense of a rental car while yours is in the shop.

Keep a neighbor's shrubs from spoiling your view

Q A neighbor has planted some foliage on his property that interferes with our ocean view. He says he's within his rights to do so, and a lawyer won't take our case because the town has no view protection ordinance. Can we go to small claims court and get a judge to order the foliage trimmed?

A Probably not. Generally, small claims courts can only award monetary damages, not issue orders to abate nuisances. The simplest solution is to offer to pay your neighbor for the cost of cutting the planting back. Better yet, try to purchase an easement from him that will preserve your view permanently. If he agrees, have an attorney prepare and record it.

If you buy a house and let the seller delay moving

Q The owner of the home I'm buying wants to stay on after the sale closes, until his new house is ready for occupancy in a couple of months. If I consent, what precautions do I need to take?

A Insist on a formal agreement that states the daily or monthly rent and termination date, provides for a security deposit to pay for cleaning and damage repair, and includes other items generally found in a lease. This will enable you to evict the seller if he doesn't live up to its terms.

Your purchase contract should incorporate the agreement and require the seller to leave a sufficient amount of the sale proceeds in escrow to meet his obligations. Also check with your insurance agent to make sure you're properly covered while the seller is your tenant.

Paying employees for commuting expenses

Q Several of our employees commute by car to our new downtown office. We intend to reimburse up to $1,000 a year of their expense for parking nearby. Does this count as part of their income?

A Your employees won't be taxed on those payments, nor will you owe Social Security, Medicare, or federal unemployment taxes on them. However, thanks to a change in the pension laws effective in 2001, the payments will count as part of your employees' compensation for purposes of figuring the size of the retirement plan contribution for them.

Getting the most out of dependent care tax breaks

QMy wife recently took a job with a company that offers employees a $3,000 dependent care flexible spending account. Can we take advantage of this plan and still claim a tax credit covering part of the $7,000 a year we pay for the care of our two children while we're at work?

A Yes, but the credit will be lower. Without the FSA, a maximum of $4,800 of expenses would be eligible for a 20 percent tax credit, assuming your joint adjusted gross income is more than $28,000. That would cut your tax bill by $960. The $3,000 FSA reimbursement would reduce the $4,800 maximum to $1,800, limiting the 20 percent tax credit to $360.

However, putting $3,000 into the FSA would trim your wife's taxable salary by that amount, and the tax you save should more than offset the smaller credit. The FSA reimbursement for dependent care expenses is also tax-free.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2002;9:147.