More than five years ago, I opened an E*Trade account with a couple thousand dollars. Recently, E*Trade told me it was closing my account because I hadn’t logged on in five years. I discovered I’d been charged an inactivity fee of $40 every quarter for the past five years -- totaling almost $867. I called E*Trade customer service, but no one would reduce the fees. What can I do? -- Greg Thompson, Seattle
Inactivity fees annoy us, too. That’s why we called E*Trade to discuss your situation. E*Trade agreed to cut your fees in half and stop charging inactivity fees if you put $70 more in your account. Our call to E*Trade saved you more than $430.
That said, E*Trade doesn’t keep its fees a secret; they are clearly posted on the company’s Web site and outlined in the customer-service agreement. To avoid an inactivity fee, you need to maintain a minimum balance of $2,000 or make one trade per quarter. Any trade of stocks, funds or options qualifies as activity.
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This case shows the importance of picking the right online broker. Clearly, E*Trade wasn’t a good fit for you. Among the online brokers that ranked higher than E*Trade in our 2008 survey, TradeKing seems like a better choice. It has no account minimums or inactivity fees and charges just $4.95 per trade for most stocks and exchange-traded funds.
Taxes and child care. Is it better to pay for child-care expenses using a flexible spending account or to claim the dependent-care credit on my tax return? -- Ryan Barrow, Lexington, Ky.
Most families who have access to a dependent-care flexible spending account at work are better off running their child-care expenses through an FSA. Money you set aside in an FSA is subtracted from your paycheck before income taxes are calculated, and it also avoids the 7.65% Social Security and Medicare tax. So if you’re in the 25% income-tax bracket, you avoid paying a total of 32.65% in taxes on that money, and contributing the maximum $5,000 to your FSA cuts your tax bill by $1,633. You’ll save even more if your contribution escapes state taxes.
Use our How Much Should I Put in My Flexible Spending Account? calculator to see how much you can lower your tax bill. You must generally spend the money in your flexible spending account by December 31 (or in some cases by March 15 of the following year) or else you will lose it.
You can use the FSA money to pay child-care expenses for children under age 13 while you work or look for work. Generally, both spouses must have earned income during the year, unless one is a full-time student. If your employer doesn’t offer a dependent-care FSA, then the dependent-care credit can be valuable. The child-care requirements are similar to the FSA’s, and you can take a 20% to 35% credit for up to $3,000 in child-care expenses for one child (the higher your income, the lower the percentage) or up to $6,000 in child-care expenses for two or more children. A tax credit lowers your taxes dollar for dollar.
You’ll qualify for the maximum credit only if you have a very low income -- currently less than $15,000. If your adjusted gross income is more than $43,000, you’ll qualify for the 20% break. For more information, see IRS Publication 503, Child and Dependent Care Expenses, at www.irs.gov.
If you have two or more children and child-care expenses exceeding $5,000, you might be able to benefit from both the FSA and the dependent-care credit. You can set aside up to $5,000 of pretax money in your FSA and claim the dependent-care credit for up to $1,000 in additional expenses.
Migrating Money. I have used Microsoft Money for many years. It has helped me keep track of financial information and even provided data for tax preparation. Now that support will be discontinued, what software do you recommend? -- Howard Smith, Monteagle, Tenn.
Microsoft stopped selling Microsoft Money in June and will gradually discontinue online services through January 31, 2011. But Intuit is making it easy for former Money users to migrate to Quicken. Quicken 2010 includes a converter to transfer your data from Microsoft Money. And if you have Quicken 2009, you can get the converter through a patch update.
In addition to converting almost all of your financial information from Microsoft Money to Quicken, the data will also import easily into Intuit’s TurboTax. As a bonus, Intuit recently announced that it would be acquiring Mint.com, which is one of our favorite budgeting sites, and is expected to incorporate its popular features into Quicken.
529 spending spree. Can I spend 529-plan college-savings money on a PC for my son, who is a college freshman? -- M.S., Bethesda, Md.
Now you can. The economic-stimulus plan expanded the rules to let families use 529 money for computers and Internet-access fees for any college student in 2009 and 2010. In the past, 529 money could be used without penalties and taxes only if the computer was required by the school. You can also take tax-free withdrawals from the 529 for tuition, fees, books and supplies in addition to required equipment. Even a student-activity fee can be an eligible 529 expense if it is charged to all students, says Joe Hurley, of Savingforcollege.com.
And you can use the money tax-free for room and board, as long as your child is at least a half-time student. The full cost of room and board counts as an eligible expense if the housing is owned or operated by the college. Off-campus housing costs can qualify, too, up to the allowance for room and board that the college includes in the cost of attendance for financial-aid purposes (ask the school’s financial-aid office for that figure).
For more information, see IRS Publication 970, Tax Benefits for Education, at www.irs.gov.
The federal 401(k). I now work for the federal government and have the opportunity to invest in the Thrift Savings Plan. Can I roll my 401(k) money into it? -- Gerard DiFiore, Melrose, Mass.
Yes. In fact, it’s a good idea because the Thrift Savings Plan has incredibly low fees (18 cents to 19 cents a year for every $1,000 invested for most of the funds). Pretax money in a traditional IRA, 403(b) or 457 can also be rolled into the TSP.
The TSP offers five index funds. Or you can choose one of the life-cycle funds, which builds a diversified portfolio using the other funds based on your investing time horizon. Contributions to the TSP lower your taxable income and grow tax-deferred until retirement. Many federal employees get an employer match (it generally depends on the retirement system you belong to), although most members of the military do not. You can contribute up to $16,500 to the Thrift Savings Plan in 2009, plus an extra $5,500 in catch-up contributions if you’re 50 or older. (Members of the military who are deployed can contribute all of their tax-exempt combat-zone pay, as long as their total contributions for the year don’t exceed $49,000.) You’ll generally have to pay a 10% penalty, plus taxes, if you leave your job before age 55 and withdraw the money.
SBA loan guarantees. I’m starting my own business. Can I get a loan from the Small Business Administration? How do I apply? -- Victoria Rothenberg, Silver Spring, Md.
The Small Business Administration doesn’t actually offer small-business loans (other than for disaster assistance). Instead, the SBA guarantees a portion of commercial loans. You apply for an SBA-guaranteed loan through your local bank, which must follow certain rules to be eligible for the SBA’s programs. The agency’s most popular financial-assistance program, the 7(a) loan program, is available to wholesale businesses with no more than 100 employees, and retail or service businesses with less than $21 million in annual revenues.
You negotiate the terms and interest rate with a lender, subject to the SBA’s rules. Loans that provide working capital can mature in as few as seven to ten years. Loans for machinery and equipment may last for ten to 25 years, and loans for real property may last up to 25 years. The interest rate may not exceed 2.25 points over the prime rate for loans of fewer than seven years, or 2.75 points over prime for loans of seven years or longer. Loans of $50,000 or less may be subject to slightly higher rates.
The SBA also offers special loan programs for veterans, active-duty members of the military and their spouses, and fast-turnaround micro-loan programs of up to $35,000 made through nonprofit lenders. See www.sba.gov for more information about the loan programs.
My thanks to Tom Anderson for his help this month.
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