Advanced Personal Finance

A few days ago, we signed a contract to sell our house.

It had been on the MLS for one day.

The selling price was greater than we listed it for.

I fully realize this story may seem unbelievable and some readers will simply say I’m lying. I am not.

Others will say I live in a special part of the country immune from the current housing fiasco. I do not.

Our Story

We bought our first house about eight years ago. It was a routine transaction in that the house wasn’t a fixer-upper, we used a conventional loan, and all the rest. We paid somewhat less than the listing price without incentives. Interestingly, we bought the house after it had been listed only two days.

Since buying the house, we’ve not done any major remodeling save the finishing of the basement to add some extra space. It’s a new-ish house (less than 15 years old) and about average for our neighborhood.

I recently decided to take a new job where I had some flexibility in where we could live. Taking a page from Free Money Finance’s book, we’ve decided to move to a lower cost of living locale. That meant we needed to sell our house. It goes without saying that this is about the absolute worse time to be selling a house. It’s the dead of winter. The market is in the toilet. The economy looks like it’s headed into recession. We’d have to be out of our minds. Yet we did it.

How We Sold In One Day

Since we bought our house, we’ve roughly doubled our money.  As a result, we weren’t looking to squeeze every last hundred dollars out of the place.  We also are not one of the many families who refuse to accept that the sales price of your house a year ago isn’t the sales price today.  Had we sold then, we likely would have been able to increase the price 10%.  But we’re not selling a year ago, we’re selling today.

I think that’s the mistake many people trying to sell houses are making, by the way.  It sucks to lose 10% on anything especially something as emotional as a house.  But wishing for something won’t make it happen.  You have to accept current market conditions.  I think the failure to do so is why there is a 10 month supply of houses on the market.

So going into this, we had two key things in mind:

1. We were selling at a bad time.  The market is down, ergo the value of our house is down.  We’re ok with that.  We have to be.
2. We’re not trying to get the absolute maximum price for the house.

With those two things in mind, we, with guidance from our realtor, priced the house at what the market would bear.  It’s that simple.  We thought like buyers and priced in such a way that the house was attractive to them.  As our realtor pointed out, what’s selling houses right now is price.  Not goofy gimmicks like throwing in a big-screen TV or trip to Paris.  Not putting the MLS listing in ALL CAPS.  Just price the house so it will sell.

Did we leave money on the table?  Possibly.  Who knows.  But who cares?  We’ve doubled our money on the place and we’re moving to a lower cost of living city.   Oh, and by the way, we’re now going to be buyers in this crappy market.

I don’t want this to be a ‘I’m so smart’ read.  I’m not so smart.  This is the first house we’ve ever sold, so maybe we left money on the table, like I said.  But you know what a good transaction looks like?  The sellers think they got a good deal and the buyers think they got a good deal.  And we think we got a good deal.

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Here’s a topic I’m sure to never face - inheriting an IRA. But for those people who might find it of some use, here’s a run-down on how to inherit an IRA.

Step 1: Have a relative wealthy enough to leave money to you.
Step 2: Help that relative set up an IRA naming you as beneficiary.
Step 3: Wait until relative dies.
Step 4: Decide what to do with inherited IRA.

Inherited IRAs really fall into two categories - spousal and non-spousal. Non-spouses can take all the cash out of the IRA immediately, establish a beneficiary IRA and begin taking annual distributions, or wait up to five years and then take the lump sum. Spouses have the additional option of making the IRA their own.

Cash-out option. Any beneficiary can use the cash-out option. This simply involves taking a lump sum and paying the tax on it as ordinary income.

Establish a beneficiary IRA. Going this route means taking annual distributions. The IRS publishes tables with life expectancy based on sex and age. Your annual distribution is based on how much longer the IRS says you’ll live. Since the IRS is always right, these tables come in handy for all sorts of things. I myself base my borrowing decisions on them. I try to arrange repayment beginning the year after the IRS says I’ll die. At any time, you can also take a lump sum.

Deferral cash-out. You can also do nothing for up to five years, then take the lump sum.

Roll-over option (spouses only). Spouses have the additional option of rolling over the IRA into one with their name. This also allows them to continue making contributions. Using this option, the spouse doesn’t have to begin distributions right away. Deferring taxes is nearly always preferable to paying them right now, so this is most likely the smartest move for the surviving spouse.

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Most of the time when you read about 401(k)s, it’s something like, “contribute at least up to the company match,” or, “don’t put too much in company stock.” But what do you do when your company’s 401(k) sucks?

Problem: Your company doesn’t offer a match.

Solution: Contribute as much as you can to a Roth IRA, then contribute to your 401(k).

I recommend maxing out a Roth IRA before contributing to a Traditional 401(k). The reason is that Roths are funded on an after-tax basis, but you withdraw the money at retirement tax free. I believe most people will be paying more taxes in the future, so a Roth is usually the best solution.

I also recommend contributing to a Roth IRA even if your plan offers a Roth 401(k). The reason is because you can always withdraw your contribution to a Roth IRA without penalty before retirement if disaster strikes and you need the money.

After you max out the Roth IRA, go back to your 401(k) plan. A 401(k) has great tax benefits. It reduces your current taxable income. Your contributions compound tax-deferred or tax-free, depending on with type you use (Traditional or Roth). It’s also an easy, automatic way to save for retirement. A company match is nice, but it’s not the best reason to use a 401(k) to save for retirement.

Problem: Most or all of the funds offered in your plan suck.

Solution: Figure out just how bad the funds are and decide if saving outside a 401(k) makes more sense.

Great, so how do you do that?

I’d consider a fund ‘bad’ if it has higher-than-average fees for its type and middling or below returns compared to its peers over many different time periods. If just some of the funds in your plan fit that description, invest instead in the ones that are good, even if it means overweighting your asset allocation. That is, if you’re offered a good stock fund in your plan, but no good bond funds, go ahead and invest in the stock fund. Outside your 401(k), say in an IRA, you can overweight bonds to compensate.

If truly all of the funds are bad, you have to consider not contributing to the 401(k) at all. Before you do, though, consider any employer match. If you’re offered a match, you’re almost certainly better off contributing to the match maximum and investing in bad funds. That’s because the immediate 50% or 25% return a company match gives you counteracts the general suckiness of the fund you invest in. For example, if you’re offered a 50% match on contributions up to 6%, go ahead and contribute the 6%. Even if your fund returns -20%, you’re still netting a positive 30% return - great by any standard.

So what if you have the worst situation of all - the funds suck and there’s no company match? In that case, there’s a very good chance you’d be better off not contributing to the 401(k) at all. Instead, invest in an IRA. I recommend a Roth IRA, but Traditional is good, too. That way, you can choose any fund you want.

Problem: Your match is in company stock and the stock is going nowhere.

Solution: Sell your company stock as soon as you can.

In 2006, Congress passed the Pension Reform Act that allows 401(k) participants to sell company matching stock. For stock given before the law was passed, you can sell 1/3 of the total each year over three years. For future matches, you can sell immediately. I advocate selling matching stock as soon as you can anyway, but this is especially true if the stock is declining or flat.

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Increasing identity theft. Government agencies losing personal data-rich laptops. Hackers breach retailers and data merchants. Is it time for a credit freeze?

What a credit freeze is

A credit freeze is used by someone to prevent their credit files from being shared with others. It places a certain level of security on your credit report by preventing most new accounts from being opened in your name. I say most because it’s possible for a company to extend credit without a credit check.

The prohibition against new credit is even for new accounts you authorize. That is, for you to open new credit lines, you must unfreeze your file.

A credit freeze involves informing the credit bureaus of your intent and, most likely, paying a small fee (typically $5 to $15). You also pay a fee to ‘unfreeze’ your file when you really do want a new account opened in your name.

As of August 2007, 32 states allow consumers to freeze their credit. Eight more make freezes available in 2008.

How to put a credit freeze on your information

The actual logistics of putting a freeze on your account varies by state. Consumers Union maintains this list of each state’s laws and instructions for freezing and unfreezing your file. By the way, I think it’s a freakin’ crime that the federal government hasn’t stepped up with uniform rules that apply across the nation, but whatever.

Why freeze

The benefits of a credit freeze are self-evident. Since no one can get new credit in your name, your identity cannot be stolen for that purpose. This doesn’t preclude the abuse of your stolen credit card account number, but it does stop credit unknown to you from being extended.

Obviously, it’s a pain in the butt to unfreeze and freeze your account when you really do want new credit. I say that’s a small price to pay. When 2008 rolls around (I live in a state where a law hasn’t yet taken effect), I’ll be freezing my file.

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You can easily stop most of the unsolicited credit card and insurance offers that come in the mail. I say ‘most’ because not every unsolicited offer uses prescreening through the credit bureaus. I did this several years ago when I first read how to do it. It takes all of two minutes.

“Prescreened” (also called “prequalified” and “preapproved”) offers come without your request from credit and insurance providers. Those firms buy lists from the credit agencies of people meeting their requirements.

How to opt out

Online - https://www.optoutprescreen.com/opt_form.cgi Using this form you can either opt in, opt out for five years online, or opt out permanently using a mail-in form.

Phone - 1-888-567-8688 This is an automated phone system version of the online one and is administered by the same people.

Note: You’ll have to provide home address, date of birth and SSN for verification.

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