ASK KIM


Your Financial-Crisis Questions Answered

Kimberly Lankford

From home foreclosures to safeguarding your retirement account, here's what you need to know.



I have been flooded with reader questions in recent weeks regarding the financial crisis. Below are the most common and pressing queries about the impact the turmoil has had on everything from retirement accounts to mortgages to annuities.

RETIREMENT

I'm five to seven years away from retirement. My diversified portfolio in my 401(k) has lost 25% to 30% of its value in the financial crisis, and it's still sinking. I'm really frightened I'll lose more. What should I do?

If you have accumulated a comfortable nest egg that has achieved your goals up to this point, you might want to reallocate 30% to 40% of your portfolio into money-market funds and bond funds. The rates of return will be small, but stable, giving you piece of mind in this turbulent time.

If you are behind and trying to catch up, you may want to stay diversified. This bear market will lose its bite before you're ready to retire, so you'll benefit by making some investments at this year's depressed levels. There's less risk to putting new money in a fund that's already down 30% than holding accumulated gains through a plunge.

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The value of my IRA on December 2007 was higher than it is now. Is that value still the one used to calculate my required minimum distribution amount in 2008? I'm 77 years old now.

Sorry, but yes. You need to use your IRA account balances as of December 31, 2007, when determining how much money you need to withdraw from your IRA by December 31, 2008 -- even if your account has lost a lot of its value, which has happened to so many people this year.

If you don't need all the money to live on, however, you can give up to $100,000 directly from your IRA to a charity and avoid paying taxes on the money -- a tax provision that was just extended for 2008 and 2009 as part of the Emergency Economic Stabilization Act of 2008.

For more information, see Dealing With Required IRA Distributions.

MORTGAGES

Is there any foreclosure relief or help for homeowners struggling to make mortgage payments coming out of Washington?

Yes, the HOPE for Homeowners program -- created in July as part of the Housing and Economic Recovery Act -- took effect October 1 and will provide up to $300 billion in government-insured loans for people at risk of default or foreclosure. It allows homeowners who got mortgages before January 2, 2008, to refinance into a 30-year fixed-rate loan. Homeowners have to meet several criteria to be eligible (see the Department of Housing and Urban Development's fact sheet for more information).

Plus, lenders have get on board for the program to work -- and the Federal Housing Administration has yet to release a list of participating lenders. But the federal financial rescue plan just passed by Congress and signed into law October 3 creates incentives for lenders to participate in the Hope for Homeowners program, says Bill Glavin of the FHA. The hope is that many lenders will participate.

For more information about federal assistance for homeowners, see Federal Rescue: Provisions for Buyers and Sellers.

I'm in trouble with my Countrywide mortgage. Will I be able to get help from the company's mortgage settlement?

You might. As part of a settlement that Countrywide made with state attorneys general, the company (now owned by Bank of America) agreed to make changes to nearly 400,000 loans to make them more affordable. The settlement applies to people who took out subprime or pay option mortgages on their primary residence with Countrywide before December 31, 2007, and have a loan-to-value ratio of 75% or greater. The company estimates that it will make up to $8.4 billion in interest-rate and principal reductions for these borrowers.

on December 1, 2008, Countrywide will start contacting borrowers who meet the criteria and will focus first on people whose mortgage payments are delinquent by 60 days or more. If you're delinquent on your payment, you can contact Countrywide any time at 800-669-6607.

Borrowers who have not been delinquent but might become so because of a rate reset will be contacted after that, says Countrywide spokesperson Jumana Bauwens.

The specific changes will be based on each eligible borrower's loan situation, but the rates can drop as low as 2.5% in some cases. For people with pay option loans, the negative amortization feature will be removed and the principal may be written down to as low as 95% of the current value of the property.

For more information about eligibility and the specific changes Countrywide will make, see Countrywide's fact sheet about the settlement.

I have a mortgage with Washington Mutual. Should I continue to send my payments to Washington Mutual or wait until I know what's going on?

You can't get out of making payments that easily! You should continue to send your payments to Washington Mutual. You'll eventually get word from Chase about a new mailing address for payments, but everything continues as it has been for now. See What the WaMu Collapse Means for Its Customers for more information. And keep an eye on the Washington Mutual Web site for updates.

Because the credit market has become so tight, now is not the time to miss any deadlines for your bills. Make all payments on time to keep up your credit score. (See Demystifying Your Credit Score for more information about improving your score.)

MONEY-MARKET FUNDS

Will tax-free money-market funds be covered by the new government-sponsored insurance program? Will Vanguard be participating?

Both taxable and tax-free money-market funds will be covered, if the fund company chooses to pay the fee to participate in the new insurance program. The temporary insurance will cover assets that were in money-market funds as of September 19, 2008. If a money-market fund that participates in the program falls below a $1.00 net asset value (called “breaking the buck”), the program will provide coverage for shareholders up to the amount they owned on September 19 (shares purchased after that date are not covered).

Funds had to decide by October 8 whether to sign up. Vanguard, Fidelity, T. Rowe Price and many other major fund companies have signed up to participate.

For more information about the program, see Money-Market Funds: Now a Safer Haven and FINRA's Investor Alert about the Treasury's Guarantee Program.

FDIC LIMITS

I have more than $150,000 in my checking and money-market accounts (I'm hoping to buy a house soon), but I worried that all my money won't be covered by the FDIC if my bank goes under. I thought about opening a savings account with ING Direct, FBNO Direct or Emigrant Direct. Are they covered by FDIC?

You're in luck -- the financial-rescue bill that was passed October 3 increased the limits for Federal Deposit Insurance Corp. coverage. People now have $250,000 in FDIC coverage for single accounts and $250,000 in their share of joint accounts at each bank. The increase from the old $100,000 limit became effective October 3. As long as your account balance stays below that limit, you're safe if your bank is covered by the FDIC. To check on your bank's FDIC status, use the Bank Find tool at FDIC.gov.

Your strategy was correct, though. If you exceed the new FDIC limits, you can easily expand your coverage by opening an account at another bank because the limits apply to each institution where you have accounts. All of the banks you mentioned -- ING, Emigrant Bank and FNBO Direct (First National Bank of Omaha) -- are covered by FDIC.

JOB LOSS

I didn't qualify for the tax rebate this year because I earned too much. But I lost my job a few months ago. Can I qualify for a rebate in 2008?

Yes, there could be a silver lining to the job loss. Those rebate checks that most people received in the spring and summer were actually a tax credit for 2008, which would normally reduce your 2008 tax bill. But to get the money into people's hands quickly to stimulate the economy, Congress had the IRS make a prepayment of the credit. That meant the rebate was figured based on information from your 2007 return.

If you didn't qualify for a rebate check when they were first sent out but your income dropped in 2008, you have a second chance. There will be a special calculation when you file your 2008 taxes. You'll figure how big of a credit you deserve based on your 2008 income and number of qualifying children, and compare that amount to the size of the rebate (if any) you already received. If the numbers show you deserve more tax savings than you received, you'll get the benefit on your 2008 return.

Most single filers received a $600 rebate, or $1,200 for married couples, plus $300 for every dependent under age 17. The rebate amount starts to phase out for single filers whose adjusted gross income is more than $75,000 or more than $150,000 for married couples filing jointly. For people who earn more than that, the rebate is reduced by $50 for every $1,000 above the income limit. It phased out entirely at $87,000 for single filers without children and $174,000 for joint filers without children.

People who had a good year don't need to worry: If you earn more in 2008 than you did in 2007, you don't have to pay back the rebate.

For help calculating whether you'll get a rebate, use our Kiplinger Tax Rebate Calculator.

AIG ANNUITIES

I've had an annuity at AIG for 12 years. Is it safe?

Regulators and ratings agencies say that American International Group annuity holders and policyholders are safe for now. AIG's insurance subsidiaries are subject to strict regulations to ensure they have enough money to pay claims and, as a result, have not had the same troubles as the holding company. See Don't Ditch Your AIG Policy for more information about the company's financial status.

However, the safety of your annuity also depends on the type you have.

If you have a variable annuity, the money is held in separate accounts that are invested in mutual funds and wouldn't be affected by the insurer's financial situation.

If you have a fixed annuity -- or an annuity with guaranteed minimum income benefits -- then you should keep a close eye on the insurer's financial strength. But you still have several layers of protection if the financial status were to change. If an insurer did have financial troubles, then state regulators would take it over and try to rehabilitate the company. If that didn't work and the insurer became insolvent, then policyholders -- and annuity holders – would be protected by the guaranty association in their state.

State guaranty associations must provide at least $100,000 in withdrawal and cash values for annuities. Some states have higher limits -- about a dozen states protect $300,000 in annuity values and at least four cover annuities up to $500,000, says Peter Gallanis, president of the National Organization of Life and Health Guaranty Associations. For links to your state's guaranty association, see the NOLHGA Web site.

But Gallanis also says that people generally get back much more money than those limits. Life insurers are required to hold a high level of reserves to pay claims, giving them a lot more money to distribute if they do have problems. "Policyholders must be paid in full before any other creditors receive anything," says Gallanis. "However, it is possible that, in a relatively rare case combining a very large asset/liability shortfall and a large face amount annuity, the annuity owner might face a reduction in benefits."

Annuity holders need to continue checking the financial strength of their insurer. AIG's major life insurance subsidiaries currently have an A rating from A.M. Best but are under review with negative implications. You can check an insurer's Best rating on our insurance page.

Before making any change, though, find out about your state's rules and be careful about surrender charges. You may have to pay a steep fee to switch to another insurer, especially in the first few years after buying an annuity, and may have to pay an early-withdrawal penalty plus a tax bill if you cash it out.

INVESTING

Now that the federal government is supporting Fannie Mae, is this a good time to buy its stock?

This is not a good time to buy Fannie Mae stock. Yes, the firm is getting government support, but it is neither free nor cheap. On September 7 the Treasury Department announced it would put Fannie Mae into a conservatorship to save it from insolvency. In return for an immediate injection of $1 billion and the promise of more help if needed, the federal government gets preferred stock paying 10% annually and a warrant that can be exchanged for an 80% common-stock stake. Dividends for all other shareholders, common and preferred, have been eliminated.

Fannie's common shares closed at $1.09 October 8 (down from $69 less than a year ago) in hope that shareholders won't be wiped out completely. But there's no guarantee of that. Neither is there any consensus at this point on how, when or if Fannie will emerge from the conservatorship or in what form. Investing at this point is too much of a gamble.

Got a question? Ask Kim at askkim@kiplinger.com.




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