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Video: Ways to get items without cash

By
TODAY contributor
updated 10/13/2008 10:01:39 AM ET 2008-10-13T14:01:39

With the words "crisis" and "disaster," being used to describe the current state of the country's financial system, it was no surprise that my inbox was clogged with readers' questions. Many folks are looking for ways to save money, while others want to know where to put the money they've already saved. Nearly everyone wants some reassurance that the decisions they're making —whether they're about credit, their homes, or investing — are the right ones.

Q: The company I work for is closing. They are offering a severance equal to six months pay, which is coming from our salary pension fund that was over-funded. What are my options to avoid a heavy tax penalty, but still have my money available to me in case of an emergency? — Jim in Santa Barbara, California


A: I'm sure there are more than a few people who share your situation, although I have to tell you — you're getting a pretty nice package, particularly in this economy. So that's the good news. The bad news is that severance payments are treated — and taxed — as income. One thing you want to look out for, according to Nancy Hwa, spokesperson at the Pension Rights Center, is that if you find another job quickly (and, of course, I hope you do), the new salary on top of the severance could push you toward a higher tax bracket.

There aren't a lot of ways to dodge the taxes you'll owe, but here are a few things you should know about: You can deduct the cost of your search for a new job, as long as you're staying in the same field. These deductions go on your return as "miscellaneous itemized deductions," and have to exceed 2 percent of your adjusted gross income to qualify. Travel expenses to and from interviews may boost you into that category. You can also write off education expenses that enhance your current job skills and medical expenses — if they top 7.5 percent of gross income.

Your COBRA payments to maintain health insurance — which can be very pricey — are included in this total, so they may push you over the top, as well. The most important thing to keep in mind is that this is a very tough market in which to find a job. Make sure you plan carefully and watch your spending, to make that severance go as far as possible.

Q: I'm about to begin my second year in college, which I'm financing with a small private loan and financial aid from my university. After applying for a private loan for the school year, I was awarded an additional $2,000 in the form of a federal direct unsubsidized loan. I've already paid for the semester, so I'm wondering what I should do with the money? I also have $400 in credit card debt. — Pamela in Philadelphia, Pennsylvania

A: Pamela, you received that extra $2,000 because of a temporary measure that Congress enacted in May, which increased the borrowing limits for the 2008-09 school year. Ideally, you should have used this money for tuition and borrowed a little less from your private lender, says Kal Chany, author of "Paying for College Without Going Broke," now in its 8th edition. "You always want to max out your federal loan money before you turn to private loans, because private loans are typically more expensive interest-wise and they are often variable-rate loans."

So, you learned your lesson for next year. As for what you can do with the money now that you have it, your best bet is to pay off that $400 in credit card debt, then stash the remaining $1,600 in a high-yield savings account. When it comes time to borrow for next semester, you can use that money to minimize or completely eliminate the amount you need to borrow from your private lender.

Q: My husband and I are in our mid 50s and we contribute generously to both our 401(k) plan and Roth IRAs. We have one child in college and are paying the tuition from our small savings, but it is going fast due to the cost of gas and other items. Paying off my car would free up enough money to help absorb the additional expenses. The remaining term is two years and the balance is at about $5,000. The only funds available without a penalty would be the principle amount in my Roth IRA. What should I consider before making this transaction? — Shannon in Tampa, Florida

A: Good for you for first looking to money that you can access without penalty. When you pull money from the principal in a ROTH IRA, not only will you avoid a penalty, but you also won't be taxed — that's not the case with a traditional IRA or a 401(k). So you're off to a great start. The way I see it, you have two options here. It sounds like paying off that auto loan would really be a weight off your shoulders, so by all means, I think you should do it. But, instead of withdrawing money, which, in this market, would likely mean selling some of your investments while they're down, why not scale back your contributions for the time being and funnel that chunk of money to the auto loan?

The other area I'd look to for freeing up some cash is the university bills. Has your child thoroughly researched scholarships, grants and student loans? If you're starting to struggle a bit, there's no reason he or she can't rely on those options to help you out a bit. That way, you can shift some of the money you're putting toward college to the car loan and leave your retirement savings plan intact.

With reporting by Arielle McGowen.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, www.jeanchatzky.com.

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