Focus 580; Personal Finance

Good morning this is focused 580 our morning telephone talk show. My name is Jack Brighton sitting in for your regular host David Inge our extraordinary producer is I wanted to give them you know a shout out to Harriet Williamson and Martha Diehl and our technical director today Henry Frayne during this hour focused 580 will do something we do every month on the show on the third Friday we'll talk about personal finance. David SUNO is our guest he is a professor of finance here at the University of Illinois. He is also an extraordinary guest when it comes to personal finance matters he has a wide range of education and background experience. And we'll talk with him about some of the trends going on in the economy and what it means to individuals and families trying to save invest and look to the future. Your questions are welcome. During this hour if you would like to join us the number around Champaign-Urbana 3 3 3 9 4 5 5. We also have a toll free line anywhere you hear us around the state actually anywhere in the U.S. if you're listening online you can use our toll free line that is 800 to 2 2 9 4 5 5. And David said Oh good morning.

Well good morning Jack and as always it's a genuine pleasure to be with you. This morning I'd like to take just a few minutes and discuss a particular asset class that we sometimes don't spend enough time talking about yet it's extremely important and that asset class being real estate. Now I must tell you that some of these introductory remarks are based upon a recent lecture actually given in my class by Professor John message who is a professor of finance at UC San Diego and also an adjunct professor at the University of Illinois. Professor Masoud referred to a recent Wall Street Journal article entitled Is your home in a bubble. Now I think most of us are familiar with the concept of market bubbles. In fact for many of us it is painful to recall the high tech in dot.com stock market bubble. Oh back in 2000 and 2001 in 2002 where many investors watched enormous paper gains in the stock market disappear they sort of

evaporated. And even their initial capital hemorrhaged leaving stock market investors with losses of some 60 70 80 percent or even more. Those were pretty tough times. It truly was a period of shall we call it irrational exuberance. I think we remember that term from Alan Greenspan and you may recall that short lived concept of oh that was a new economy or the old rules don't just apply any longer. Once again Federal Reserve Chairman Greenspan sounded the alarm just a few months ago when he said that while a severe drop in U.S. home prices is unlikely quote local economies may experience speculative imbalances. Now I think that's double speak for Watch out. If you're in a whole market where prices have rapidly escalated far beyond the average of most markets you may be in for a nasty correction.

At least that's my interpretation of what he was saying. Now with that in mind here's the good news. During the past 40 years single family homes on average have appreciated in an annual rate of somewhere between 7 and 8 percent annually. That's a phenomenal record of success. We haven't had 40 consecutive years in the stock market without losses we certainly haven't had 40 consecutive years without losses in the bond markets. So this is really phenomenal. And interestingly enough here's some other good news. In spite of tremendous housing appreciation in many markets all throughout the United States over the past three years the average household is still spending just about the same percentage of their household income for homeownership that they were spending some three years ago and that approximates about twenty two cents of every household dollar is being spent on homeownership today. And that's

about the same percentage that was being spent some three years ago. Well there's a lot of reasons for that. Interest rates have trended down until very recently so people have been able to get mortgages at lower interest rates. Many of them refinancing these mortgages so that is a major element of keeping that 22 percent number in line. Now some bad news. Several major studies have concluded that if you buy a single family home and you live in the home for only three to four years and then you go ahead and sell it you may actually lose money. This was based upon a massive Harvard study looking at tens of thousands of real estate transactions throughout the country. And it's due to the fact that there is a very high entry and high exit costs when it comes to a purchase and a sale of a personal residence. These costs may include commissions for example generally in the 6 percent range in central Illinois but higher indeed elsewhere financing costs

in the 1 to 2 percent range when you procure that mortgage annual maintenance costs annual real estate taxes fix up costs when you go to sell that home etc. and the breakeven on homeownership seems to be in that four to five year range because it's very very difficult to amortize all of these costs over a very short period of time and come out at least Delta neutral. Now what factors really drive housing prices certainly low interest rates which makes housing more affordable for many of us. And of course we have enjoyed a low interest rate environment for a number of years. One can still go out and procure a 30 year conventional mortgage in that 6 percent or perhaps just a little bit less than a 6 percent range. Truly still a wonderful rate. Factors such as increasing population certainly drive housing demand. In fact the US population is rapidly approaching

300 million of us I wonder where we're going to put all of these folks. However you may be surprised to learn that the major factor influencing housing prices in a given market over a long period of time is not interest rates. It's not population. It's net job creation net job creation. That is the number of jobs created versus the number of jobs lost in a given area. Invariably housing prices are most sustainable and are increasing beyond national averages. In those markets where net jobs are being created and really when I think about net jobs I think about decent net jobs good net jobs are being created. So if I was moving to an unfamiliar area of the country and I was contemplating a home purchase I want hard data on job creation and really more likely net

job creation. Where am I going to get this data. Well some of that data might be available through the internet simply going to U.S. Census information which is updated periodically or perhaps the local Chamber of Commerce in your area might be one of the best because they probably have the most information on job creation. Another way of looking at housing prices is to compare the increase in housing prices with increases in the personal income of an individual. Now Smart Money magazine created a housing index which basically compares local incomes in an area with local housing prices and when salaries and home prices increase at a similar percentage rate. Smart money concludes will that market is fairly valued. However if housing prices surge way ahead of local incomes that market is overvalued. And of course where you have price increases really falling

behind the income of an area that would be an undervalued area. Well this is just one measure of comparing market prices. Nevertheless the results are quite interesting. Based upon that index the most overvalued housing markets are. Surprise surprise. Orange County California Ventura California San Diego California. In fact 10 of the 50 most overvalued markets are indeed in California where average home prices are well beyond the $400000 plus range. Now let's take a look at that index for some of what we would refer to as a fairly valued that is where prices are moving up. But so are incomes. They're sort of in lockstep sort of in tandem and these are areas where we have had solid appreciation. Let's give you some examples. Nashville Tennessee. And over the last five years houses have appreciated at approximately 20 percent. Hartford Connecticut

Boise City Idaho Toledo Ohio. Fort Collins Colorado. They've had appreciation of 35 to 40 percent yet salaries have dramatically increased in that particular area so we call that a fairly valued area. And interestingly enough one of the other fairly valued areas in the Midwest is St. Louis. We've had good job growth. We've had good increases in homes. But again based upon this index fairly valued Well where is it undervalued Where have incomes actually moved up faster than the price of homes Fargo Morehead North Dakota. Now I don't know how cold it is up there today. Maybe Mike or Ed could tell us how cold it is up there today but I probably don't want to be there today. Dayton Ohio used in Texas about Memphis Tennessee a pretty dynamic area. Syracuse New York Baton Rouge Louisiana Fort Worth Arlington Texas Montgomery Alabama. So there you have it you have sort of a

menu of areas all across the country where you have. Decently priced housing based upon net job creation as well as the incomes of individuals now unquestionably for most of us the equity in our homes is an important aspect of our overall financial net worth. Therefore it's especially important that we carefully do our homework before we purchase or overextend ourselves on a large mortgage. And as I have counseled in the past you don't want to be facing a burdensome mortgage payment when you retire. In fact many retirees actually size down take their profits just to avoid a potential mortgage payment and negative cash flow situation. At retirement. Also remember if your home is rapidly appreciating and you sell it and you have lived in it for the past two years as your personal residence IRS gives us a break. Iris says you don't have to pay the tax on the gain or the profit

on the first $500000 of gain or profit from the sale. If you are married. And if you are a single individual the number is two hundred fifty thousand dollars. Now that doesn't happen too often in central Illinois Jack I don't think it's happened to me I don't know if it's happened to you but hey maybe that's something we have to look forward to. So that's certainly positive news for people who have the good fortune of owning a rapidly appreciating home. So again some caution is residential real estate overpriced probably in some areas it's probably fairly priced in others and maybe there are some of these areas where it's actually under priced. Bottom line do your homework. Bottom line if you're only going to live in that property for a year two years maybe three. Pretty tough to even break even Unless you are very lucky very fortunate to be in a very hot and appreciating area. And if you believe interest rates are moving up well that probably is going to have some dampening

impact. This rapid escalation this rapid appreciation of residential homes. So there you have it a brief idea of are we in a bubble a potential bubble etc.. And I'd be delighted to try to answer further questions on this topic. Or of course tackle other financial planning questions from our listening audience. Well very good. We have a caller waiting will get to in a moment let me just mention the phone numbers again and that we are talking about personal finance with David SUNO professor of finance here at the University of Illinois Urbana-Champaign. Your questions are welcome on either the real estate issue that we began with or any other personal finance topics. 3 3 3 9 4 5 5 around Champaign-Urbana. Anywhere else 800 to 2 2 9 4 5 5. We have an Indiana listener on line number four. Good morning. Two questions the first one is. You're talking about some graphs and I was wondering if. I'm sure they do. But keep track of the number of mortgages where the bank asked you fix

somebody and close it down. Offer it for sale again I wonder if you have any percentages on that. You know is that is that enough sort of thing it correlates well with anything you know. Well its atoms are under abundance or whatever. That's a great question actually it's been a pretty stable number. It's been a pretty steady pretty stable number in the 1 to 2 percent range as I recall and it hasn't moved very much. I think a lot of that is a factor of interest rates have stayed pretty stable. In fact a lot of people have actually been able to refinance at lower rates. What I really caution about if you really look at those numbers and you look where those foreclosures are coming from they're typically coming from mortgages where people have sort of been drawn in with no money down or no requirements to qualify. Other than equity in your home for example that's where those foreclosures are taking place. But in the long term conventional mortgage market we really haven't seen a lot of that foreclosure.

So I haven't really looked at statistics because you've asked a really good question the relationship of foreclosures in a particular area of the country and what impact that's had on housing prices I really don't have that information at my fingertips but it's a great thing to look into and I'll try to look into that for the next program. OK. Next thing I was wondering there's a general guess or call an algorithm you mentioned in in California San Diego of interring orange all that that the price of home is like four hundred thousand dollars. Now under regular scrutiny by the bank what would one have to earn per year if it's looked at that way or whether it's looked at it in terms of you know expendable income you can use later on how much money you need to be making per year to get into that kind of market. Well you've got to be making well in excess of $100000 it seems to me. I mean remember that there is a rule of thumb that you take your gross income

and basically that gross income is in the area of twenty eight percent and that 28 percent needs to cover your real estate taxes your insurance and your monthly mortgage payment. And on those $400000 properties with conventional financing you're going to see people that are in the low six figures that are handling that but in California just to survive a couple of people working they better be in the low six figures with their incomes as well. But now just for example over the last five years in San Diego alone appreciation has been over 100 percent. That's a 20 percent compound in per year. Pretty darn tough you know things of Ventura Lee regress to the mean that saying that San Diego is going to have a huge negative impact in housing prices are going down all the professor has said it's you I was talking to just yesterday said you know for the first time in San Diego California housing prices have finally leveled off and now the questions at the

cocktail party are not whether the prices are going up but are they going to not only level off but go down. So where you've seen these rapid appreciations in to some of these California communities where you see hundred percent increases you know it just can't continue forever because the things eventually regress to the mean it reminds me a little bit of the high tech bubble where you just can't go up 20 40 60 80 percent a year and expect that to continue you know. Thank you. OK thanks for the call. A couple callers waiting will get next to a listener in Urbana. Lie number one. Good morning. Yeah you mentioned the two years and Alyse requirement something about five years is that after you saw the house previously is that the way that works or what's that. Well there are a couple of other rules. The first rule the best rule is that if you live in a house consecutively for two years you call it your own personal residence and then you sell it. If you're a single person and you have again you don't pay tax on the first $250000 again if you are married it's $500000.

There's another rule that is a five year rule that isn't used nearly as often anymore. And that is has to do with if you've lived in the house two of the previous five years and you've called it your personal residence then you rolled into another house and you can defer the gain so long as you purchase a more expensive house. OK so it's a little bit different rule most people now are using the two year rule. But keep some people you know and that's a tricky rule you've got to prove that you were in that house for two consecutive years now interestingly enough. What if you sell the house after two consecutive years and you take your gain and you move somewhere else into another house and you're lucky again you just have the golden gift or something and you're going to sell the next house you're going to make more money. Can you do this all over again and the answer is yes. The answer is yes this is not a one time deal. This continues and it's no matter is to be based on your age do you have to be over. You know that day is over. That day is over.

So it shows that if you use my money right. In terms of tracking your every two years there right. Yeah and that's that's a that's a pretty good trick if you can pull that off that's very impressive but that is the rule is that in a recent issue for many of the the information that you cited I'm trying to think of where that article took place but I believe it was in the October 2004 issue of Smart Money. The other question is that what about this market here. How does this view apply these statistics to the champagne area. Well I think the champagne area has had inflation but it doesn't have the kinds of inflation that you see in these other areas. And part of that is because of developable land. For better or for worse we have substantial amounts of farmland that can be turned into subdivisions in development. And remember that when we're talking about residential real estate in most areas land appreciates faster than bricks and sticks or land appreciates faster than the construction project on it.

So where you have limited amounts of buildable land that also is going to put upward pressure on homeownership prices. We're here still in central Illinois we have this magnificent bountiful farmland which in many cases is turning into bricks and sticks. I'm not making a value judgment on that I'm simply saying that we have substantial amounts of land and that in the long run keeps prices reasonable. So we really have very reasonable prices in Champaign-Urbana And I think when you look at national reports on liveability of areas the champaign always ranks very well because we have the University of Illinois. We have outstanding health care facilities and we have decent homeowners prices. Well thank you. Thanks so much for the call. We're almost at our midpoint here with David SUNO professor of finance at the University of Illinois Urbana-Champaign talking about personal finance and taking your questions. We have a couple callers waiting and room for others if you'd like to join us. 3 3 3 9 4

5 5 around Champaign-Urbana. 800 to 2 2 9 4 5 5 anywhere else. We'll go next to a listener in Aurora on line number two. Good morning. Yes hi good morning David. Good morning nice to hear from you. It's nice to speak with you also. I recently was able to get the opportunity to make an investment and they didn't pay it as a reward. I don't know. What you call that you give me the correct terminology they give you 15 to 20 places that you come visit or go on vacation. As far as the cost is free for the trip they are but other words to look at a timeshare for example. No they don't call it timeshare. It's just if you are having so much money in the bank you go well you know once ok ok. And they give you these benefits.

OK and they didn't have an option. What you had to do though was to put mom no money into a CD. They didn't call it a CD they just you put top line. Something funny and and there you are. You can take you can do get the advantages of these places to visit these resorts. So in other words by adding more money at your local financial institution that enables you to visit certain resorts. Yes. OK thanks. But OK. More succinctly than I did. But now they've taken that away. And I did not do it right away. I did not make that investment. So now I have a 30 month. You have to do with 30 months CD and put in a thousand or more. But each 10 months you can take take out money without penalty. Is that a good deal.

I don't think so. I don't think so. I really believe that we're going to see some increasing interest rates. So I'm a little concerned about just tying your money up for 30 months 12 months 18 months nine months that would be where I would have my money tied up. I'm not very excited about tying my body up 13. No 9 12 18 12 18 I wouldn't really want to go out any further than 18 months in a certificate of deposit. OK and I could I could you give me a nice award then I might you for what I feel the bank did when they all of us on you get midstream. And they changed the rule. Well I don't know I mean you know in the car business sometimes or and it's called bait and switch but I'm not willing to say that's what happened because I'm not really certain of what took place but that's sort of the way you're describing it but I guess I'd be a little unhappy too. Whatever you should complain probably to them I presume you did.

No I haven't found out about it I was going to make the part of it now. So why speak to rip out something like that. The president all over well you know I think probably you could start with your personal banker or one of the people who offers the program but I would be very nice about it let them explain it to you. That's where I am now to do with the nights that turned me out. That's right so you could ask them about it and feel that maybe you didn't either understand the whole program or alternatively that they sort of changed the rules in midstream. So give them an opportunity to re explain it to you and suggest well tell me about your rates for nine months 12 months and 18 months. OK OK they are right. Bye bye thanks so much and good luck. We'll go next to her band a listener on line number three. Good morning. Yes good morning I was wondering if you might you discussed the capital gains exemptions for single unmarried couples. And I was wondering what administration was that. Was there a law that was passed recently. What did ministration was that under well it wasn't under Bush so it was

under Clinton I believe. So that's when I think that took place and if I'm wrong maybe there's an accountant out there who can correct me so I'm not sure whether it was the beginning of the Bush administration or the Clinton administration. Well you know just hearing that. As a homeowner if I were going to sell my house I personally wouldn't mind paying a moderate tax on my capital gains you know. OK. But it's the social benefits you know how. Education that kind of stuff and I'm wondering you know what are your thoughts on that. And I'll hang up thanks. OK thanks. Well I have I have no problem with paying capital gains tax on income property and income property. But typically on a personal asset I'd have to really think about it. My Billy haven't got an opinion off the top of my head on it but I can tell you with income properties that even though we pay lower tax rates on dividends for example we actually pay higher capital gains

rates on the income property with respect to real estate for example. If you go out and you buy a share of IBM stock for a dollar and you later sell it for 100 in $1 you have a capital gain of $100. And under current federal tax law you would pay a 15 percent capital gains tax on the other hand if you have an income property that you bought for a dollar and you sold it for one hundred one dollars and had $100 capital gain with respect to a real estate property. At bare bones you'd be paying a 20 percent capital gains tax on that real estate and indeed a portion of your real estate would even be taxed at a higher rate which is the recaptured amount of depreciation which is a little bit more complicated. So real estate doesn't enjoy at the time that you sell necessarily some of the gains in some of the benefits of the stock market for example. Now real estate does have other benefits you can depreciate your real

estate. You can rent your real estate etc. and hopefully you have a cash flow from your real estate. So there are other benefits as well but it's important to recognize that when you sell your real estate if you don't exchange into another piece of real estate you're actually paying a higher tax rate. And for purposes of the state of Illinois when you sell your stock at a capital gain you would pay 3 percent capital gains tax on that gain and the same with your real estate. So those are the current rules as far as I understand. They get you question because the color the color is gone so will move on and let me just mention again we're past your midpoint here with David SUNO professor of finance at the University of Illinois talking about personal finance the real estate market etc. any questions you have are welcome. 3 3 3 9 4 5 5 around Champaign-Urbana toll free elsewhere 800 to 2 2 9 4 5 5 and a Chicago listener is next on line number four.

Good morning good morning. Yes this morning I was curious about putting years of Security money into private accounts. Hard to talk about that. What that stock market. Well there have been lots and lots of pundits and lots of commentary about it and I think it's important to remember that it's a voluntary program. People forget about this that no one under as proposed or as the trial balloons have been pushed up thus far that it is entirely voluntary with people whether or not they would even put money into private accounts. And I know that you Jack I think you've had several programs about it. And so I don't really want to spend a tremendous amount of time talking about it. So the answer is I really don't know because I think it would be based upon the numbers of people and the the amounts of

money that would be going into such a program. But I can tell you that from my understanding of it that people would have choices between fixed income which is the bond market and the stock market. And if you figure that 50 percent of the money went into the bond market in only 50 percent of the stock market and it's a voluntary program at a low percentage. I'm not so certain that it's going to have any major dramatic impact on increasing the market value of stocks. And that's sort of an initial analysis. Well let's wait. I guess so all right yes oh ok thanks for the call. And it is a topic that I'm sure we will be taking up on future shows as well as the debate over Social Security reform revamping whatever you want to call it continues. Meanwhile we have a couple callers waiting we'll get next to a listener in Champaign on line number one. Good morning you're on focus 580. Hi. The question about these mortgages and stuff like that. We bought our house about three years ago here in Champagne County and we did one of those

kind of a mixed loan where 80 percent was an actual mortgage. And then 10 percent wasn't a home equity loan and then we put down 10 percent. So we had. So we had basically two different loans and. About a year later we refinanced at about five and a quarter percent for the full mortgage. But the home equity loan we didn't refinance it just it's a standalone loan but that's at a higher rate that's at a fixed those I guess. 67 percent. So now we're at the point where I think we only have a year left to pay off the home equity loan which was about 25000. And we've we actually refinanced for a 15 year mortgage on the main mortgage. So now we're wondering we'd like to buy a car. We haven't bought a new car in many years and we're just wondering if we could if it's a good

idea to refinance everything clean the home equity loan and maybe take some of that money and buy like a new used car we don't like buy new new cars totally and then just trying to take advantage of the can to lower rates now because we know they're going to go up anyway. What footy's suggests. Well those are all good questions let me ask you a couple of preliminary questions. And that is do you have enough equity in your house to refinance all of the outstanding indebtedness into one master mortgage. Probably by the in the maybe by the middle of the summer we should do it the way we figured it out so far is that we've probably paid off maybe about 20000 off the main loan and then we've probably paid off that good. So I think that'll cover the 25000 that equity loans.

OK well I know your your five and a quarter raid of course is a very handsome rate. And I think you'd be moving up if you refinance over that 15 year period to about a 5 7 5 currently. OK. All right so you would be sacrificing a little bit of interest rate there. However I really am not excited about your second because one that's going to come due and two if you have to renew that second it's probably going to be at a significantly higher rate especially if interest rates move up. Well that's the second mortgage we've only got like a year left to pay that off. Right. And basically at the time that that mortgage is due and you sit down with the bank they will be delighted if you have substantial equity in your home to renew that second or that second line of credit. The only problem is that again interest rates might be higher and you're paying a premium to have that second out there.

So if it when it does well the our plan is we've been paying more. Yes I see that. But I would rather have you be paying more against your second. OK. Not your first. No we're not the first one we're not. We've actually we've worked it out it's not a look we be a little bit more but not a lot. The second one that we. We've doubled the payment. Good. And what's the outstanding balance on the second. Second is only like about. I think I've calculated that we've only a little bit over that and I say we would have a year left. So that's probably 10000 maybe left on it. All right and your idea is to refinance all of that so that you could pay off the second and buy the car. Rye All right it is the car an absolute necessity. No no it's just that we've had had a baby about a year ago or actually since Yanks and. It's a smaller OK. So you know if I understand people need

cars it's usable. I won't give you my standard car lecture other than to say other than to say I like the idea of your buying a car that is not a new car right. Because typically that first year you can save yourself 40 percent. That's how much so many of these cars depreciate right. And then the most important element when you buy the car is what you need not what you want. And safety especially with a child. So I am really into side curtain airbags example which we foresee was more right we could maybe get they came out about a year ago. We're thinking if we could find you know right about a year old this is great. This is thinking this is I think you've got all this stuff that we would waddle you don't need all the bells and whistles you need the safety right like that. That's what I need and that's what you need. We don't want the DVD in the car you don't need any of that. You don't need sun roof you don't need any of that stuff. So I applaud you for paying down this second.

I'm very happy about that. I can understand your desire to refinance the whole thing. I just as you know I just I'm negative on debt. It's very important that you properly manage your debt and that is the most important element of getting ahead with kids with family is proper management of debt that's why we figured instead of taking a loan out for the car. If we refinance it maybe it's you know hopefully we have to look at the rates we have. Absolutely the answer the answer is that if you take a personal loan out for the car the interest is not tax deductible right indeed you're itemizing are you itemizing. Yes OK so in that sense you probably don't want a personal car loan right. And so it may well be if you are very prudent in your car purchase you continue to pay down on these loans as much as possible and manage debt. I'll I'll go along with you and give you my OK to refinance but you should shop that refinance if you get shot and get that was frighted question I had because we

we first moved even before we moved here we actually went with just a local bank just because we didn't kind of our first practice is a competitive business. So when you showed where bottom line is where do you get the best deal. OK that's it. Compare apples and apples. And do you have a good recommendation for places to look for those re. I think there are any number of places in Champaign County they are all very competitive. They're very ethical and your job is just to get the best rate and compare rates. OK so even using a local bank isn't a bad bank or certainly don't discount the local mortgage companies as well the local mortgage loans make certain that you check not only the banks but mortgage brokers and compare rates. So I local newspaper has rates that are quoted each weekend. OK. Phone number so you can take a look at that. And I must say that I see we've got about three or four phone calls waiting. So I think we better move on but it's been a pleasure talking with you. He could just say a word or two about mortgage brokers as opposed to bankers I hang up and now listen.

The only difference between mortgage brokers and mortgage bankers is typically mortgage bankers use their own money to close the loan but then they immediately sell it into the secondary market. Mortgage brokers on the other hand have the money sent to them it is not their money and then that loan is sold into the secondary market that's the only difference. It's invisible as far as you are concerned. You are interested in where you get the best rate the best terms and the lowest closing costs. OK a couple calls waiting will get next to the listener I'm not sure where they are calling from on line number two. Good morning. Hello. My question is about IRA withdrawals for older citizens recently it's come upon me to straighten out some of my father's affairs he's near to 90. And basically he had apparently $80000 in an IRA at his bank and some other figure of an IRA with an investment. Pennie he

rolled over the 80000 from one Ira. And yet it entered into the other and a net of approximately 5000 ended up in my dad's possession I guess is his annual amount he has to withdraw to avoid some kind of penalty. My questions about this are one can you explain briefly the rules of that cause my dad would have to withdraw this money every year. And second as regards that $5000 that ended up being withdrawn. I've pretty well the term in that the bank made a mistake filling out one of the forms and I want to know what should what. Is the former number or paperwork that the bank should've issued to might they had required that annual withdraw money. OK those are great questions. First of all we have to know what kind of Ira this is I

presume this is a traditional IRA as opposed to a Roth IRA correct. Because with the Roth IRA the truth of the matter is you never have to take the money. There are no minimum distribution rules with respect to a Roth IRA. So you could be in your 80s or 90s and never take any money out with a traditional IRA generally you are required to take what's called a minimum distribution. That's what your father was required to take a minimum distribution once you are 70 and a half. The actual rule says the April following the year in which you are seven and a half. But that creates another complication so most people take their first minimum distribution when they are 70 and a half or older during that calendar year. And there is an iris chart based upon the age of the individual and the named beneficiary determining then what percentage. Of the previous year ends balance has to be withdrawn.

Now when your dad rolled his eighty thousand dollars into another IRA because he was older than 70 and a half then he was required at the time that he rolled that money to take a minimum distribution then before that money was rolled into that second Ira. And that's why your dad got the $5000 for that $5000 number one is subject to federal income tax. So we have to pay federal income tax on it. And typically typically the institution may have withheld 10 percent of that amount and sent it already to Iris. So you've got to find out whether any money was sent by the IRA sponsor directly to IRS. Also by the law let's see what's the date January 30 first. The bank should have sent a ten ninety nine. And that 10 day 9 would have shown that I or a distribution the 10 99

form would have been sent to your dad a copy already would have been sent to the government so they will then know that you have properly reported that on your 10 40 on the 10 99. Yes the amount listed. Should've said the $5000 number unless there was a larger number like fifty five hundred five hundred dollars was sent to the government. OK now I understood I was correct about the mistake because they did. I got a copy of the ten ninety nine. Yes and they filled in the first box. Gross distribution 80 grand. And then and I'm positive this was a mistake box number two says taxable amount and they put 80 again. OK no. Well what happens is they don't know that you rolled that money over all right and they made the check to the other institution well my dad.

Well that's right they should have done what's called a trustee to trustee transfer which it sounds like they did. So it probably is coded in correctly had they written you the check. Then it would have showed taxable $80000 and then on the 10:40 you would have shown that you rolled it over within 60 days so there would be no taxes owing. So you probably should get a corrected 10 ninety nine from the bank because this was a trustee to trustee transfer enhance Anse only the distribution would have been taxable. OK and then as to the 75 that went to the other institution I've contacted them and they let me know that a form and I think it was 54 or 98. Yes would be issued in May. That would reflect that right that they coded it as a trustee to trustee transfer and that and when I ask because. My dad representative who's not the sharpest indicated that she needed this before tax time.

The the investment institution explained to me the reason they wait till Mays because you're allowed to continue to make contributions all the way up to April 15th. That's absolutely correct. OK. So beyond beyond what you're going to do is on the 10:40 when it gets filed you're going to show on your 10:40 that only $5000 is subject to income tax. That will basically solve the problem. OK. And so therefore it follows then that the other institution which had the other IRA will be will should've issued a ten ninety nine for whatever amount the current cable told them my dad had to withdraw for that. That's correct that's correct. Okay great. Thank you. OK. Best of luck. We have one caller waiting in probably time for others if you like to join us in the remaining eight minutes or so David Souter was our guest taking your questions on personal finance. The number around Champaign-Urbana 3 3 3 9 4 5 5. Toll free elsewhere. Eight

hundred to 2 2 9 4 5 5 Urbana listener on line number three is next. Good morning. Yes hello. My question is this I have thirty five hundred dollars in a money market fund it was a gift from great grandmother to my girl who is good 8 years old and we were thinking about getting a computer but this is awhile ago and I just let it set there for several years and I really should have put it in some kind of a fund to save for college and I was wondering do you recommend 529 for college Illinois or maybe just. Vanguard index fund or. Well I think you've hit all three. I like saving for college which means a 529 plan. I have talked about college Illinois in the past which is the prepaid tuition program. And that's a great way to get started because tuition is you and I know is only going to go up. So that would be a wonderful use of the funds with college Illinois. You can go to their website w w w dot college Illinois dot com. You can read all about

it. And you can buy semesters of prepaid tuition and you can buy it all at once. You can buy it over time and with an 8 year old I believe you could even pay for it monthly and you don't have to buy eight semesters you could buy one semester or two semesters. So I think that would be a wonderful thing to do with with that money is prepaid tuition. Alternatively you could go to the other traditional form of a 529 plan where you essentially invest the money in a program the money grows tax free so long as the money is utilized for any kind of college educational expenses. And that of course presumes that you're a good investor and have made good choices. And I happen to like the Vanguard program Vanguard offers a number of excellent choices as far as a 529 program goes. So I think you're right on point college Illinois makes sense. A

529 program through Vanguard makes sense just as well. And do you know if either of them would inhibit them like you. If they're following their ability to obtain scholarships or even financial aid I mean is that a consideration as well. Will. It is but I wouldn't count on it. OK. And who knows what the rules are going to be with an 8 year old 10 years from now. Sure. All right so I think you want to presuppose that this responsibility and this burden is going to fall on you. And the more you can do to ameliorate that impact now makes good sense. Ok rest question what about commodities for an index of what do you think of those. I think that's for the birds. OK I think it's for people who are extraordinarily sophisticated and I think it's a good way to lose your money. OK great. Thanks for telling me. Straight like it is and we appreciate that. Yes ma'am. Thank you sir but I. Thanks for the call. A couple calls we will try to get him both in line and one listener in Urbana next. Good morning.

Yeah hi I was listening to the beginning of your show. When you're talking about a real estate and how to kind of plan for or avoid this bubble that might be popping up in certain parts of the country and you mentioned. You mentioned a relationship is if I recall correctly you said that the best for Dichter overvalued real estate. What is the long term employment rates. Well actually actually what I said is I was quoting from a smart money study that just used a survey in a form of analysis which compared escalating prices to escalating incomes of individuals in the area where you had a tremendous increase in prices as compared to incomes in the area. That might indicate a market bubble. Great. And where you had income sort of in tandem with increases in prices that's a fairly valued area and where you had prices relatively stable or perhaps even decreasing. Yet you had

incomes of individuals moving up that might be an undervalued area. Okay that that is excellent and I was looking on the on the Census Bureau website as you were doing this which might explain why I was having trouble following what you're saying and I was. Having a little bit of trouble finding some of this data can you recommend a portal. You know I'd have to look it up I spent some time on the U.S. Census data and I remember utilizing some key terms and I guess you could call me off the air. Okay gotta call me off the air w i l has my phone number and I'll take a look into it for you. Great I'd appreciate that thank you. Thanks the call we will squeeze in one last caller. Urbana listener line number two. Good morning. Hi I'm calling you regard to what you said David about 15 percent tax on capital gains for US stocks versus these of a larger capital gains tax on real estate.

That's correct on the income property income property not not your home but income property so how about family property that's undeveloped. Well family property that's undeveloped is income property. So if you sold that piece of real estate ad again typically you would pay if it's vacant land a 20 percent capital gains rate. I hadn't heard that before. OK that's the rule. OK. All right a pleasure hearing from you. Good to hear from you. OK vibe right. Thanks for the call. Well we just have about a minute left and I had one quick follow up on the issue of the real estate bubble quote unquote whether or not it exists in a particular location. And we talked about the fact that low interest rates have a coup attributed to the rise in housing prices. We are entering a time when the federal deficits and various other deficits or sort of pushing the pressure on interest rushing the envelope to go up and you know presumably that would mean that it would cost more for people to do these home buying transactions no question it would therefore impact prices.

Absolutely. Absolutely it is certainly a factor that could exacerbate the situation. No question about it. But again the overriding factor is job creation for in an area where we believe that there is going to be substantial job creation over the next five to 10 years. That is the leading indicator of where prices are going in residential real estate. OK. We'll have to leave it there. Our guest has been David SUNO professor of finance at the University University of Illinois Urbana-Champaign. He joins us on the third Friday of every month to take your questions. And as always a great pleasure to have you with us. Jack it's been lots of fun today just lots of great questions. Thank you David.