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TESS VIGELAND:
I’m Tess Vigeland, here with our economics editor, Chris Farrell. How are you doing, Chris?

CHRIS FARRELL:
I’m doing well. How are you doing?

VIGELAND:
I’m doing all right. And we’re going to attempt to answer quite a few questions today in the mailbag, all your pressing financial questions. But before we do, please take down our web site address. It’s marketplace.org. Click on contact, or you can call us at our phone number. It’s 877-275-6669, that’s 877-ASK, M-O-N-Y. And we head to the phones now for Michelle who is in Ramsey, Minnesota. Hi Michelle.

MICHELLE:
Hi, Tess.

VIGELAND:
How’s the weather there?

MICHELLE:
It’s cold.

VIGELAND:
Yeah, well, I have to say, it’s kind of cold here in LA too, so I can sympathize for once.

MICHELLE:
It wasn’t minus 10 though, was it?

VIGELAND:
No.

FARRELL:
I have to say, everything is relative to us.

MICHELLE:
That’s true.

VIGELAND:
So tell us a little bit about yourself.

MICHELLE:
Well, I am an engineer and I just moved to the area and my husband is having some health issues.

VIGELAND:
All right. What kind of issues?

MICHELLE:
He’s a diabetic and he’s having some problems with his feet. So his mobility is hampered and we’re going to have visits to the doctors, very often with co-pays and medication and physical therapy. We have a pretty good health plan with my employer. It’s a PPO through Medico. So my question is, how should I be managing my money with respect to that. The flexible spending account deadline, I think, has passed. But I wouldn’t know how to budget for that anyway. And then it’s. . . then kind of the second part of that is, is there anything that I should be doing now to take advantage either this year or next year of maybe some tax exemptions?

VIGELAND:
All right, Chris, obviously a common question for a lot of listeners, how to set aside some extra money for unforeseen or even foreseen health expenses that are going to go above and beyond your insurance.

FARRELL:
Sure, I have a couple of ideas, Michelle. One is, you may be passed the deadline for this flexible spending account, but at least learn about the program, when you can sign up for it. Because the flexible spending account is ideal for your situation. I mean what this allows you to do is, you can kind of sort of sit down and figure out, roughly, what your medical expenses are going to be that are out of pocket.

VIGELAND:
And again, the advantage there is that that’s pre-tax.

FARRELL:
It’s pre-tax. And it’s a really wonderful company benefit if you have it. There’s one big drawback. Let’s say you estimate that, you know, your out of pocket’s going to be $2,000 and it turns out it’s $1,500. You’ve lost $500.

MICHELLE:
Right.

FARRELL:
My response to that is just lean on the conservative side. So, if you think it’s going to be $2,000 maybe you have set aside $1,500 and then you know you’re going to be covered. So spend time learning about the flexible spending account, figuring out how much you’re going to want to set aside when you can join it. And that really is a good program for you under the circumstance that you’re in. Actually for most people who are offered that benefit.

MICHELLE:
Okay.

FARRELL:
Secondly, in terms of your savings, go with a brand name company offering a good money market account. You know you could put some money into treasuries, into certificates of deposit. I mean everything that leans toward the conservative side and some sort of mix because to get a decent rate on a certificate of deposit, you have to tie the money up for six months to a year. So you’re going to want to have some money in a money market mutual fund because you can tap that right away.

VIGELAND:
Chris, let me ask you, you know there are a lot of advocacy groups out there that deal with health issues. And some of them will often have extra ways for people who are dealing with illness to be able to fund the treatment of that illness.
FARRELL:
That’s right. And I think that’s the most important investment that you can make MICHELLE: is just off of what Tess is saying is learning about the government programs and nonprofit institutions. There’s the American Diabetes Association. Because it may be that there are just certain expenses you may not have to pick up as things go on. So that, I think, is the most important investment. When we talk about savings and investment, it’s not always about the dollars and cents, it’s also knowledge. Whenever you’re dealing with a long-term illness, one of the best investments you can make is learning about the government programs, the nonprofit programs that are dealing with that area. You can get a really good payoff.

MICHELLE:
I never thought of that.

VIGELAND:
Does that help you out Michelle?

MICHELLE:
It does, thank you.

VIGELAND:
Terrific. Well, thanks for calling and good luck.

MICHELLE:
Thanks a lot.

VIGELAND:
All right, shall we hit the e-mail bag, Chris?

FARRELL:
Hit me.

VIGELAND:
All right. We have Lisa from Marietta, Georgia and she’s got two young sons, aged 10 and 12. And she wants to know if opening an e-trade account for both of them would be a good way to kind of get them interested in money, especially saving it, not spending it and also a little education in the stock market. Do we really want kids going online and spending mom and dad’s money on stocks?

FARRELL:
Now I understand why you’re using some poker language. Hit me, oh yes. No, we do not want to create the future generation of day traders.

VIGELAND:
No, we don’t.

FARRELL:
All right. That said, I think it’s wonderful. They can go online and they can research a company. They can create charts. They can follow it. A couple of points that I would make. One, do you want your children to make money or do you want them to learn about investing in the world of the markets?

VIGELAND:
Because sometimes you’re not going to make money that way.

FARRELL:
That’s right. And I think that’s fine. What I’m interested in is that the child learns about the markets, learns that stocks fluctuate. And then you can have these sort of wonderful, parental moments, going to the shopping mall or walking to a classroom, wander around your house and, you know, talking about where things come from–the refrigerator, maybe it comes from a company in China. Maybe you want to research that. It’s a publicly traded company in China, well that’s kind of intriguing. So there’s all kinds of things that you can research. You can have some fun. Making money is a byproduct. Hopefully, you make money, you know.

VIGELAND:
Sure.

FARRELL: But you may not. So if you want them to make money, then put the money into a broad based equity index fund and, you know, that’s the right thing to do. And that’s like you.

VIGELAND:
And just leave it alone.

FARRELL:
Leave it alone and that’s like saying, you know, eat that broccoli, okay, let’s just eat it. But if you want them to have a little fun, learn how to be a chef, you know, play around in the kitchen–I think exposing kids to that world and exposing adults to that world and looking at it that way is like a great novel.

VIGELAND:
All right. Well, read up, Lisa and best of luck to your two sons. And we’d love to know how it’s going with them, so do keep us updated, if you would. If you need to know how to guard your money, just give us a call. We’ll show you how to do it. Click on the contact button on our web site, it’s marketplace.org. Or call us at 877-275-6669. That’s 877-ASK-M-O-N-Y. Chris, you ready for another caller?

FARRELL:
Absolutely.

VIGELAND:
All right. Well, let’s talk to Fareed. He’s in Anaheim, California. You’re just a few miles away from us in Los Angeles. Hi Fareed, how are you today?

FAREED:
Good, good, good. How about yourself guys?

VIGELAND:
Oh, we’re doing pretty well, I would say. Wouldn’t you say, Chris?

FARRELL:
Absolutely. I am doing very well.

VIGELAND:
Excellent. Tell us a little bit about yourself, Fareed.

FAREED:
I have a small company and we have grown, basically about almost two million a year, now, we’re doing business.

VIGELAND:
How many employees do you have?

FAREED:
About 40 to maximum 50 employees.

VIGELAND:
Okay.

FAREED:
Yeah. And I just wanted to get some 401k retirement plans for my employees.

VIGELAND:
Let me ask you quickly, do you have any sort of retirement plan for your workers currently?

FAREED:
Nothing right now.

VIGELAND:
Okay, Chris, let’s talk about this. How exactly can Fareed get this accomplished, set up some sort of retirement plan like a 401k for his employees who really don’t have anything right now.

FARRELL:
First of all I have to say you’re a good employer.

VIGELAND:
Absolutely.

FARRELL: And I mean that’s just great that you want to offer this to your employees. And you are the growth market for the industry. I mean if you think about it, Fareed, big companies have their 401ks. It’s, all the growth is in small companies. So what the major mutual fund companies, major financial institutions have been doing is creating these turnkey products designed.

VIGELAND:
Turnkey products?

FARRELL:
Turnkey products designed for small business.

VIGELAND:
Meaning?

FARRELL:
What it means is you’re going to get a fairly simple 401k plan, maybe 10 choices. And that’s a way of keeping down the costs. So you can go to some of the major players, Fidelity, Vanguard, T Rowe Price and they will come with a turnkey product, like I say, limited choices, maybe down to 10, plus some educational material for your workers and then they’ll do the back office administrative work, obviously for a fee.

VIGELAND:
So they’ll do kind of bids for his company?

FARRELL:
Absolutely.

VIGELAND:
Okay.

FARRELL:
And what I would do, is, you know, focus for your employees to help them is really focus on plain vanilla products. You don’t want to go for anything that’s hot. You be wary of that. The other thing that I just want to throw in there: It’s just been really good evolution in the market, and they come under different names. But the one I’m most familiar with is lifestyle funds. They’re really taking good academic research, and they’re saying you know what? Most of us can’t figure out whether we should be 60 percent stocks and 40 percent bonds, or 70 percent stocks, or 30 percent bonds. So basically, they ask a couple simple questions. Do you like risk?

FAREED:
Yes.

FARRELL: Are you nervous about risk?

FAREED:
Not really.

FARRELL:
Well, some of your employees might be. It’s a really good way for the average person to invest. So if I’m looking for and getting bids for different funds, I’d like that type of fund included in the portfolio traces. Because I think it’s good for your employees. It’s low cost, and basically they’re taking advantage of good academic research for a well-diversified portfolio.

VIGELAND:
All right, does that help you out Fareed?

FAREED:
Yes, that’s great. Thank you very much.

VIGELAND:
Bye now. All right, do you have a question you’re dying to know the answer to? Give us a call. It’s 1-877-ASK-M-O-N-Y. That’s 877-275-6669. Or visit our website, marketplace.org, and click on contact. This is MARKETPLACE MONEY from American Public Media. All right, Chris, how about one more reach into the mailbag?

FARRELL:
All right.

VIGELAND:
All right. Sam from Waterford, Wisconsin, wants to know if we can explain exactly what is a. . . ready for this? Tax deferred Section 1031 exchange.

FARRELL:
All right . . .

VIGELAND:
I can’t help you.

FARRELL:
We are talking about novels. Here, we are talking about delving deep into the tax code.

VIGELAND:
Oh, boy. Well, he owns a rental unit that he wants to sell; maybe buy some property in another state for either a second home, or as housing for his son, who is in college. Would those qualify as this kind of exchange? First of all, let’s explain what this exchange is, because I’m completely clueless.

FARRELL:
All right. What it is, and there has been an explosion in these 1031 exchanges, and they’re just part of the tax code; and so you have a property that is for trade, business or investment. And then you exchange it for another trade, business, investment property, the same or more value. So you may have–let’s say you own an apartment complex, and then there’s another apartment complex, perhaps in another state or there’s some raw land you want to invest in that you’re going to build on or whatever, and you can do an exchange. What the exchange allows you to do is defer taxes. It does not eliminate taxes. Now, one thing that you cannot do is do it with a residence.

VIGELAND:
So he cannot use this for his son at college?

FARRELL:
There, you’re entering, because it’s a rental property, but it’s for his son for college. You know, you’re entering in this area that I think most lawyers are going to say, “You’ve entered the grey area where I can guarantee you you’ll be audited, because you’re not supposed to do related party transactions.” 1031 exchanges are for business transactions, not family, relatives, personal transactions. This could be a very good thing to do. But like all transactions where you’re deferring taxes, there’s lots of pitfalls. And you look skeptical. You look like…

VIGELAND:
No, actually I look like I’ve just learned something.

FARRELL:
Well good.

VIGELAND:
That’s what this is. I always learn something when we’re sitting here at the table together. Unfortunately, though, those are all the questions we can take right now. But if you still need more Chris Farrell, check out our new money clip videos, featuring Chris’ financial New Year’s resolutions. It’s on our Web site, marketplace.org. And if you have a question for a future program, let us know about it. We’re at 1-877-275-6669. That’s 877-ASK-MONY, and we spell that M-O-N-Y. Thanks, Chris.

FARRELL: Thanks.