Tax-savings account: Should you switch to a Roth IRA?

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. Making good credit better
2. Dealing with hostile coworker
3. Roth switch after job move
4. Capturing and bipolarity
5. Waiting for a pension
6. Top five personal finance books
7. Deciding between goals
8. Making your own deodorant
9. FHA and non-FHA mortgages
10. Handling an inherited car

For me, Monday mornings aren’t bad at all. Both of our kids have preschool and they’re both incredibly excited about it – they love going. So, most Mondays, they’re up and really excited and running around the house looking for clothes.

It’s much more fun than a typical dreaded Monday.

Q1: Making good credit better
I am looking to raise my credit score (it’s 717.) The two negatives I have on there are lack of credit accounts (I have no credit cards and no mortgage) and length of credit history (really only three or four years.) My husband and I would like to buy a house in five years, and I need to raise my score to get the best loan we can. Will a credit card (used wisely, with no balance) help raise my score in the long term? I have excellent self-control and will pay off the card balance each month, if you recommend I get one. Any advice would be great. Thanks!
- Rachel

The biggest thing you need is time. A credit history covers the previous seven years of your credit, and if your credit history only extends three or four years (I’m guessing it’s due to a student loan or a car loan), more time spent keeping your bills perfectly paid will do nothing but cause your score to inch upwards. Since you’re targeting five years down the road, this shouldn’t be a problem.

Will a credit card improve your score? It might cause a small positive improvement, but a 717 with only three years of history is pretty solid.

If you wish to go the credit card route, I would recommend getting a card that you use only for a specific purpose that you’re already doing, like a card tied to the gas station you use or the grocery store you use. Use that card only for purchases at the specific location, then pay it off in full each month. Why do this? Such cards usually have tremendous rewards at that specific retailer.

Q2: Dealing with hostile coworker
I currently work at a job that’s purposeful but stresses me out. The source of the stress is from a co-worker that really does not like me. When I reported the person and they were apparently reprimanded the hostility from them increased in a subliminal way. It’s really affecting my work habits and I’ve just been there only a few weeks and I’m already job hunting again but with the economy the pickings are slim. I took a pay cut to take this job in the first place because my previous employer was laying everyone off in a few months. How can I stay sane and moving in a positive direction career wise when everyday I’m miserable because I have to work in direct contact with this person. Please advise
- Charlie

My first thought would be to ask whether you have a mentor that can help you through these tricky times. Do you have a supervisor that you trust deeply and respect the advice of? Is there an older coworker who might know the situation? You might even want to seek out a former coworker who can offer advice.

The reason it is tricky for me to suggest what to do is because I don’t know your personality and whether or not you’re doing something to trigger this situation. A mentor probably would and would be able to offer you specific suggestions on what to do.

If you don’t have a mentor (and I’m assuming, based on your email, that a direct conversation is out of the question), your best bet is probably to seek a path out of the current job situation.

Q3: Roth switch after job move
I’m the CFO of our household and I’m stuck on a new situation. My husband recently started a new job. His old job matched his 401K contributions up to 6%, so each paycheck we were putting away (with their contribution included) 12% or approx. $201. The new job is a lateral move with a nominal pay increase but more of the type of work my husband enjoys. It offers a 401K, but not matching benefits. We’ll be cutting how much we contribute in half for about 6 months to help pay off a small student loan with an annoyingly high monthly payment, but that’s beside the point!

After that 6 months is up, we plan to save $201 out of each (biweekly) paycheck for retirement. Would we be ahead to put his 401K savings into a Roth IRA instead? I’m having trouble figuring out the risks/benefits of this one!

Also, if it matters at all, that’s our entire retirement savings. I’m 32 and currently a stay at home with our two children with some freelance writing income here and there, and my husband is 33 and a product designer.
- Christi

I would recommend switching to a Roth IRA, for two specific reasons.

First, with a Roth, you’re paying income tax on the money now rather than later. Right now, income tax rates are very low compared to historical numbers, and every sign seems to indicate that they have nowhere to go but up in the future. They’re either going to go up, government is going to cut spending, or we’re going to be in a disastrous situation over the long term. I’m betting on higher taxes.

Second, with a Roth, you’re able to choose among many, many more investment options than with whatever offerings your 401(k) plan at work has. Very rarely are you getting the “best” investment options at work. Spend some time comparing the costs and returns of your investment choice at work with, say, some of the offerings at Vanguard, like their Target Retirement funds. I’m pretty confident the Vanguard funds will have much lower fees and possibly better returns.

Q4: Capturing and bipolarity
I have led a chaotic life since childhood, primarily because I have bipolar disorder (as well as other issues like OCD, perfectionist tendancies, and some Aspergers). Once I was diagnosed after a recent hospitalization, the rest of my family started taking a hard look at great-grandma’s “erratic” behaviors, and we all realized that mental illness abounds on both branches of our family tree. We are all working hard to seek treatment, and I personally am looking for systems to manage the mess of my life.

As GTD has helped so many, yourself included, I was and am excited to read both books by David Allen (and your review of MIAW. The GTD review was fabulous, by the way, and inspired me to first rent the book at the library and then purchase it). My problem is, I am stuck on the capture phase. As a rapid cycling bipolar with mixed states, it is very easy to enter into a manic phase, where I have little perspective and a great deal of hypographia, as well as a pressure to do everything perfectly, all at once. There’s just too much in my head due to the illness, and whenever I start even thinking about the capture phase, I become anxious and overwhelmed. The problem comes in that I do think this system would really help.

How would one such as myself maintain perspective so as to remove some of my anxiety surrounding the capture phase?
- Cass

My suggestion would be to not do all of the capturing at once, but to just do it a bit at a time as you go through your day.

Instead of just having a few days of trying to capture everything in your life, just start carrying a pocket notebook around and capturing whatever comes into your head wherever you are. At the end of the day, go through that notebook and do appropriate things with each item – add them to your calendar, add them to your to-do list, and so on.

The biggest thing you’re trying to do here is just make capturing seem normal to you and, more importantly, make it seem like a very simple thing to do. If you can show yourself that this small simple thing has a big net positive in your life, you’re going to have much more drive to want to do it.

Q5: Waiting for a pension
I have worked at my job for four years, and while it’s not always my favorite place to be, I don’t hate it either. I finished up a master’s degree in my field last December, but there weren’t many openings because of the bad economy, and I figured I should just stay put for the time being. Now the job market has started to turn around a little bit, and I’ve begun to see some openings that would use my degree. The extra pay wouldn’t hurt either. My current job, however, has an old fashioned pension program. To qualify for it, you have to work a minimum of five years (which I’ll reach next year). So my dilemma is, should I start looking for a new job now and forget about the pension or stay here in a position I’m overqualified for to get the pension. My husband thinks it’ll be worth it to stay for the pension, but I feel bad not using my degree. I don’t think what I’ll get from the pension will be much if I’m only here for five years, but it will be something I can count on and will go up for every year that I stay. Another thing to consider is that with my current job, I get discounted undergraduate classes for my husband and me. He’s hoping to start on a master’s degree and while this wouldn’t get him a free degree or anything, it could help with the prereqs. To throw another wrench into things, we’re planning to start having children in 2-3 years, and once that happens I’d like to be a stay-at-home mom. So I’m wondering if it’s even worth it to get a new job for a couple of years to just quit to stay home. I could always just stay with my current job and hope something opens higher up. I do like my coworkers and the work environment, and we have good benefits.

Some other finance things – my husband has a 401k and we each have a Roth IRA (although we don’t fully fund them every year). We have six months of emergency savings and the only debt we have is student loans and our mortgage. We are aggressively paying off our mortgage and plan to have it finished within three years (not bad considering we bought the house last winter). We plan to tackle the student loans when that is done. If my husband does go to graduate school, this would delay all the paying off of debt though, as we’re hoping to pay for his whole degree in cash.
- Dee

I’ll be flat-out honest with you: I don’t trust pensions. I’ve seen too many pensions ripped out from under people’s feet in lots of different ways, the biggest one being that the company offering the pension goes under.

The only form of retirement planning that I trust is the kind where you’re controlling the investing with real dollars, such as a Roth IRA or a 401(k). That’s your money, and if it’s invested with a group with SIPC protection, it’s going to stay your money (up to a pretty high cap), no matter what.

I would not make life choices based on getting a pension, particularly if you’re trying to get one at a young age, many years from retirement. I particularly wouldn’t do it if you can get a higher salary elsewhere.

Q6: Top five personal finance books
You review quite a few personal finance books. I was curious if you had a top 3 or top 5 list.
- Harry

If we’re looking strictly at personal finance books, four of them stand out from the pack for me (each one linked to my review of the book).

1. Your Money or Your Life by Joe Dominguez, Vicki Robin, and Monique Tilford changed my life when I read it. It caused me to completely re-evaluate my relationship with money and the role it played in my life. This book led me not only to get my money in shape, but to switch careers as well.

2. The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, Michael LeBoeuf, and John Bogle is simply my handbook for investing issues. They offer a consistent voice, sensible advice, and rich explanations for just about everything.

3. The Total Money Makeover by Dave Ramsey is the best book I’ve ever read – far and away – for the big problem that many people have with their money: recovering from debt. Dave’s stripped-down plan and coach/preacher attitude makes this work like nothing else.

4. The Complete Tightwad Gazette by Amy Dacyczyn can best be described as such. Imagine the best frugality blog you’ve ever read, and make it 50% better. Now, imagine that blog was never published online, but that a 900 page compendum of posts is available.

There’s a big pile of books that are very, very good, but fall just a bit behind these four in my eyes.

Q7: Deciding between goals
I am wondering about how to best manage my money once I get my student loan paid off. I am very proud that in four years of working life, on a fairly modest income, I have managed to pay off all but $5000 of a 15k loan AND put 6k into a retirement fund. I had to budget pretty frugally, but my parents co-signed that loan so I really wanted to pay it back as soon as possible, and now that I am nearly done, I am wondering what to do with all that money once the loan is paid off this March.

The problem is, it seems like there are a lot of important areas this extra money can go. I want to put more into my retirement account because I was late finishing my education and so did not start it until I was 30 (I am 33 now). I also want to start saving up for a down payment on a townhouse or condo. And finally I do want to have a little budget for fun since I feel like I have spent the last few years really depriving—it would be nice to go on vacation once in awhile, or fix up my apartment a little. I have also been really wanting to join a gym and take some fitness classes but hesitated to spend the money, until now…

So how do I distribute the money given these numerous, but to me equally important goals? I am currently spending about 55% on fixed expenses, and I can;t get it down any further—it’s rent, bus pass, cell phone, groceries and that is pretty much it. I also am spending 15% to retirement fund, 10% to emergency fund and the rest (which only amounts to about $200 once I subtract the extra loan payments) on ‘fun.’ However, once the loan is paid off (which will be in March) I will have an extra $500 a month to play with.

So, what to do? Should it all go into retirement? Or down payment fun? Half and half? Some mix? And if I did want to take a little for ‘fun’ since I have never been able to do it so far, then what is a reasonable amount to take for that given the priorities I already mention?
- Joanna

So, you’ve got one clear goal right now that you’re just about finished with. After that, you have several goals that seem important to you and you’re not sure how to prioritize.

Here’s the thing: if you split your efforts among a lot of goals, it becomes much, much harder to reach any one of them. Even more, you’re trying to decide between your short-term desires (your “fun” money), your medium-term needs (the down payment), and your long-term needs (retirement).

For me, a big part of this would come down to the question of whether or not you’re on a career path that will have salary escalation in the future. Based on your education, I’m guessing you either have a masters degree or a doctorate. What do your career options look like with that degree?

If you’re going to see a big salary jump in a few years, I’d hold off on the “fun” spending until then and keep it within the $200 a month you’re already spending. I would then start an adequate retirement savings – 10% of your salary. If there’s anything left, put it away for your housing.

If you’ve got a salary cap that’s not going to raise much, you need to choose between traveling and fitness classes or owning a town house. I don’t think ditching retirement is a good long-term option.

Q8: Making your own deodorant
I was recently inspired by making your own laundry detergent! I have purchased all of the “ingredients” but have yet to make it (waiting until I run out or get close to running out of my other detergent). In any case, it got me thinking about what else I could make on my own. I looked up deodorant and low and behold, it is quite easy to make. Here is my recipe:

8 T cornstarch
2 T baking soda
2 T Crisco

Mix well and shove into an old deodorant container. I tried it and it works wonderfully. I just did some serious gardening and I still smell fresh! In addition, it is healthier because it doesn’t have aluminum (aluminum is carcinogenic. This is especially a problem for women as many of us shave. The aluminum absorbs into the minor cuts.). The other bonus is that it doesn’t leave those ugly yellow stains on your clothing (or so I read).
- Mary

I have tried a lot of homemade items over the years and I’ve found that homemade deodorant is really tricky. The stuff you mentioned above is a mix I’ve tried – and, as you’ve mentioned, it’s aluminum free. It does certainly eliminate odor and it deals with a small amount of perspiration. The problem, however, is that if you sweat very much, this type of deodorant offers minimal protection against moisture and then, eventually, odor.

I think, if you are seeking a low-cost aluminum-free solution and you work in an environment where you don’t perspire significantly during the day (like an office), this stuff will work just fine. However, I wouldn’t expect it to hold up if you’re active and perspiring significantly.

There are some very good aluminum-free detergents out there… but they’re very expensive (on the order of $15-20 per container, seriously).

Q9: FHA and non-FHA mortgages
My wife and I are saving to buy our first home. We are saving about $3,600 a month towards the down payment and have $5,000 thus far in a separate account just for this.

I talked with our Credit Union (SAFEcu.org) and they do both FHA loans and regular fixed 30 yr loans which require 5% down. The loan agent said that she’d recommend the regular loan because the FHA loan would take longer to process and generally just be more “difficult”.

We want to purchase a home costing about $350k. 3.5% is $12,250 and 5% would be $17,500. Not a huge difference, but if we could use an FHA loan to get in sooner and lock in a lower APR maybe it would be a good thing.

Wondering if you have any opinions about an FHA versus the “regular” fixed variety. Wondering if she didnt recommend the FHA because she makes lower commissions?
- Jeremy

If you’re eligible for an FHA loan and you’re buying a home that costs less than the FHA lending limits in your area, then it seems to be an apples-and-oranges situation. I don’t think commissions really enter into this, because a FHA loan is just an ordinary loan that the FHA is insuring for the bank so that it’s easier for new homeowners to get a home loan.

FHAs do take longer to set up because of the paperwork involved. If you gave a strong impression of “we must get this done as soon as possible,” I understand where the bank was coming from on this one. The “difficult” part does give a bit of a sense of a lazy loan officer, though.

There’s also the situation of mortgage insurance. With your small down payment, you’re going to have to pay insurance anyway, but with the FHA loan, you’re locked into mortgage insurance for seven years.

If you’re feeling uncomfortable with the situation, shop around and look for another financial entity to handle your mortgage.

Q10: Handling an inherited car
My mom recently passed away unexpectedly. I have inherited her SUV (and some money). I’ve been driving the SUV ever since. My ’93 car had finally died after 175k miles, and I needed a reliable vehicle. It’s time I decide whether I’m keeping the SUV – which was brand new when I inherited it. It’s a 2009 Ford Escape Hybrid Limited SUV and has every possible option. The dealer fleeced her – she bought in April 2010, paying 40k for a 2009 model.

While I know it’s generally a poor decision to purchase a new vehicle, I have inherited it. I know it’s depreciated significantly due to no longer being new (and, it’s been driven 4k miles now). It’s worth about 30k. I was previously driving a $6200 car (paid for in cash), which I’d had for many years. I was planning to upgrade (with cash) to a late model used SUV, costing 15-20k, but that got put on hold after my mom died and I inherited the SUV. Now that I have this SUV, it feels very excessive “paying” 10-15k more than I was intending to for a vehicle by keeping it. I realise I’m not “paying” it because it’s inherited, but it’s mine now, along with my savings. However, there are some advantages to keeping it.

First off, I’m the sole driver of the vehicle, and I’m very easy on my vehicles. I am a cautious driver, and very good about maintenance, so it will last a LONG time. If I keep it, I’m planning to drive it for at least 10 years, hopefully 15 (I drive about 6k miles/year). I will also have the peace of mind knowing no previous driver has done anything questionable to it. Secondly, it’s a hybrid and very fuel efficient. This should save me on gas in the long run as I’m a 90% city driver and it uses very little gas at low speeds. Thirdly, it has every option available, which is quite nice for a vehicle I plan to drive into the ground, but not necessary. I do not really care about features besides Navigation, Air Conditioning, and overall safety in a vehicle. The navigation system in this vehicle helps me a huge amount. I have no sense of direction and get lost very easily. Finally, my insurance premiums are incredibly low due to safe driving, so there is quite a small difference ($200/yr) between insuring a brand new vehicle and my old clunker.

My question is, should I trade it in for the late model used SUV (2005-2007ish) I planned on and keep the 10-15k in cash, or keep the Escape and be happy to have such a nice vehicle for the next 10+ years I own it? Will that 10-15k be made up for in the extra years I can keep it and lack of maintenance when it’s still new?
- Ashley

If I were you, I’d keep the great SUV you have on hand. I’m going to guess that the Escape Hybrid will also have far better gas mileage than you would have had from a different SUV purchase, so that’s another savings. An additional cost not mentioned is the extra insurance cost, but compared to a “2005-2007ish” SUV, the fuel savings will make up the difference at first and more than make up the difference later (based on some reasonable assumptions and my envelope math).

Another concern: if you just directly trade the thing, you’re going to probably get fleeced on the trade, as the car has already lost a lot of value simply because it’s been driven off the lot. You’ll also have a difficult time selling it with so few miles on it for the value you should get from it.

You’re going to get a lot of driving out of this car. I’d stick with it.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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