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American Morning

If You Still Haven't Done Taxes, It's Not Too Early to Think About What You're Going to Do With Refund

Aired March 15, 2002 - 09:32   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
PAULA ZAHN, CNN ANCHOR: It happens every spring, and no, I don't mean the start of the baseball season. I mean tax time. April 15th is exactly a month away. And even if you still haven't done your taxes, it is not too early to think about what you are going to do with that refund. This morning, personal finance expert Suze Orman joins us. She is the author of "The Road to Wealth," and she is here to answer some of your questions.

Great book jacket cover shot there. Nice job, Suze.

SUZE ORMAN, AUTHOR, "THE ROAD TO WEALTH": An author that actually looks like her book cover oh my God, can you imagine.

ZAHN: OK, straight to some of the questions this morning. Our first comes one from Kathy Reeves from Irving, Texas, and she writes, "Is it wiser to borrow money from my 401k to help finance my daughter's college tuition this year, or is it better to just borrow the money from another source and leave my 401k account, compounded interest undisturbed? Thanks for your help"

ORMAN: Kathy, listen to me, and listen to me closely here. You are never ever to borrow money from a 401(k) plan for the following two reasons: number one, any money you borrow from a 401(k) plan, if you lose your job, is due and payable within a week or two in most corporations. If you don't have the money to pay back, guess what? You will owe ordinary income taxes on that money and a 10 percent penalty.

Number two, money is in a 401(k) is put there with pre-tax dollars. You never pay taxes on it. When you go to pay it back, you are paying it back with after-tax dollars. When you get older and take it out again, you are going to have to pay taxes on that money again. You will be doubly taxing yourself. Don't do it. Get the money from another source.

ZAHN: Kathy, I hope you are listening to Suze this morning. You made that very crystal clear there. This next one is from Chase Berry from Austin, Texas. He writes, "What are the penalties if you are not able to pay your taxes by April 15? My wife and I both work and our wages went up 166 percent from the previous year, and the taxes taken out were not enough?"

ORMAN: Chase, it's like, you know, your name is an appropriate one here, because they will chase you. So usually, you will be charged an interest penalty, anywhere from 6-13 percent. It will depend on, why aren't you paying your taxes? Was there a fraud involved? There are all kinds of things that could be involved here. So call up the IRS. Arrange a payment plan. This is not like a credit card company where you just avoid their calls. Oh, no, no, no. Chase, you have go to them. Don't let them chase you. Call them up, tell them you don't have the money, arrange a payment plan. They will charge you, again, a small interest rate and just continue then to pay it monthly. This not a debt that you should avoid dealing with.

ZAHN: Go, Chase, go. Now we have Ieta (ph) on the line. I don't whether she's going to sing for us this morning, what she's going to do, but she has a question for us now. Fire away, Ieta. Good morning.

CALLER: Good morning, Suze. Suze, I'm calling you because I just opened -- I transferred my IRA into -- it's a retired IRA into a fixed annuity. And I was explained that they told me that my principal were always guaranteed. I will never loss my principles, but when I look at the disclosure and the application, all I see is there's risk, including possible loss of principle and investment. I don't understand this.

ORMAN: Ieta, let me ask you a quick question. Is it a variable annuity or single premium deferred annuity?

IETA: It's a single premium deferred annuity.

ORMAN: In most single premium deferred annuities, what you need to know is that it is only as safe as the insurance company has to be. When you put money in a bank, a bank is guaranteed by the Federal Reserve system. In an insurance company, it's by the legal reserve system. You have got to make sure that that insurance company is safe and sound. Check the Standard & Poors ratings on it, the Moody's rating on it. You want a solid, solid company. If they have the highest rating, nothing will really happen to your money. But the real question is, was it a wise thing for you to do? Is it a good investment? Does it make sense? Sometimes yes, sometimes no. It depends on the annuity.

But usually, an annuity within a retirement account makes no sense. You're better off doing other things than that.

ZAHN: All right, thanks, Ieta, and we now turn to Barbara Turgeon's question. She wrote to us from Newington, Connecticut. She said, "I had a residential rental property that I sold in 2001 and realized some gains. I also had stock losses that I realized in 2001. Can those stock losses be used to offset the gain on the sale of the rental property?

ORMAN: No, you know, they're very different separate properties. You cannot take a loss from one thing and apply somewhere else. Otherwise everybody would have done that. Everybody had losses in the stock market last year. Everybody -- a lot of people had still serious gains in the real estate market. Very separate entities; they have nothing to do with one another. ZAHN: All right, and we have Ray on the line from the New York City this morning.

Ray, what do you have for Suze?

UNIDENTIFIED MALE: Good morning. How are you doing?

ZAHN: I'm fine, thanks. Good morning to you?

UNIDENTIFIED MALE: Good.

Suze, my mother owns a nice apartment in Manhattan that she wants to sell. We're estimating the apartment probably worth somewhere around a million dollars, and she wants to leave the apartment, or the proceeds from the apartment, to her two children. Should she keep the apartment in her name and sell it, and then invest the money, and then put in will, or should she put the apartment in her two children's names and then we should sell it? How should we go about this?

ORMAN: So, Ray, you do not want -- the one thing you don't want to see happen is where mama gives you apartment then you sell it, because when she gives it to you, she also gives you cost basis on it. She paid $500,000, or even $200,000 for it, and it is now worth a million. If she does that, you're cost basis is going to be $200,000. When you sell it you will owe taxes on $800,000.

If she dies a you inherit it, you get a step up in cost basis on it. You sell it, you will not pay one penny in income tax. The big thing here is you said should she leave to you via a will. No, no, Ray, she needs to create a living revokable trust. Otherwise, a will is going to be probated. Statutory probate fees on a million dollars could $40,000 dollars. Therefore, if you just spend $1,000 or $2,000 on a trust, you'll avoid the $40,000. She just either sell it or keep it and give it to you that way.

ZAHN: Boy, Ray's going to be glad you took that question this morning.

Our next question from Doris in Lantana, Florida. She writes, "Can I have more than one IRA, a traditional and a Roth? Can I contribute more than the tax-deductible amount? But the overpayment won't be tax deductible, right? Thank you."

ORMAN: No, my love, you have as many IRAs as you want. You can have as many IRAs and Roth IRAs as you want, as long as between the combination of them, you don't contribute more than the maximum allowed, which is, this year, $3,000 if you're under 50, $3,500 if you're 50 and older. So that's the limit. Don't put more than that in. If you do, 6 percent penalty, taxes, you don't want to do it. Stick to the limits.

ZAHN: All right, last call from Vincent this morning from Connecticut.

Good morning, Vincent.

UNIDENTIFIED MALE: Good morning.

I'd like to have your opinion about investing in high-yield mutual funds that rely -- that are funded by convertible junk bonds as the sole vehicle.

ORMAN: I have a very simple answer to that. Stay away from them as far as you can. It is not worth. When you see the word "junk," that means risky. When interest rates go up, the value of fixed- income investment go down. There are more chances of that happening. Do me a favor, stay away from it, keep your money safe, or otherwise you are going to find yourself Enron-ed, if you understand what I'm talking about.

ZAHN: The new use of Enron in our vocabulary. How do you stay on top of this? You must read, read, read, read. I know you do.

ORMAN: I love this stuff. When you have passion for it, it's easy. I'd rather read about this than all the murders that go on.

ZAHN: I think we all would. Suze Orman good to see you again. And we hope to see you back real soon.

ORMAN: I like it here.

ZAHN: Have a good weekend.

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