It’s Never Too Late to Supplement Emergency, Retirement Funds

Question: My wife and I are 54 years old and have gotten into the proper mode of setting up our finances too late. At this point, we are fully funding my 401(k) at work and have paid off our credit cards. We would like to put aside at least six months’ savings for emergencies or job layoffs and fund our Roth IRAs, but don’t have enough for both this year. If we put $4,000 of our emergency fund savings in the Roths, could we then pull the principal out in an emergency? Would this be a good way to go? My job looks pretty solid right now, and we have only a little more than $6,000 in our savings, to which we are adding $250 a month.

Answer: You may have started late, but you’re making up for lost time.

Your plan to fund your Roths is a good one. You can withdraw your principal at any time, although you should avoid doing so unless you’re facing a dire emergency. Once the money is withdrawn you can’t put it back, and you lose out on all that wonderful tax-free compounding.

You also lose out if you don’t fund your Roth IRAs in any year that you possibly can. Once you’ve missed contributing for a year, you can’t make up for that lost opportunity. Congress has added a “catch-up” provision that allows people older than 50 to contribute an extra $500 a year starting in 2002, but that won’t make up for years in which the full contribution hasn’t been made.

You and your wife also should take another cruise through the family budget to make sure there aren’t places you could cut back on spending so you can divert more money to savings. Having a six-month stash of money is a great comfort in trying economic times.

If you’re a homeowner and the house’s value exceeds your mortgage amount, you also can open a home equity line of credit to help cover emergencies while you’re building up your savings. This is a revolving credit line that works something like a credit card, but it’s secured by the equity in your home.

Most lenders don’t charge anything to open such a credit line, and the annual fees typically are $45 to $75. When you borrow against the line, you pay a variable interest rate that’s usually tied to the prime rate. Any interest you pay typically is tax-deductible.

Once you open the line of credit, you’ll have to avoid the temptation to use it for other purchases. As a rule of thumb, try to borrow against your home’s equity only in emergencies or for home improvements that will last as long as the loan itself.

Debit Cards Enforce Financial Discipline

Question: For the life of me, I can’t see any advantage--except to the bank--in using a debit card instead of a credit card, and I can’t understand why anyone uses one. Can you explain why one would use a debit card (pay now) rather than a credit card (pay later)?

Answer: If you manage your finances so well that you never carry a credit card balance or face a credit card bill that’s difficult to pay off in full, then there is no advantage to a debit card.

Most people, however, aren’t quite that good at juggling their money. A debit card enforces a little financial discipline, because you generally can’t spend more than what’s in your checking account.

Other people have an aversion to buying on credit. People who have run into serious debt problems in the past often prefer to pay as they go.

Many people use debit cards instead of writing checks (that’s why some banks refer to their debit cards as check cards).

They find it more convenient, and their monthly bank statement includes detailed information about where and when the money was spent.

Don’t Let Tax Time Sneak Up on You

Question: Why is it that tax software and other income tax sources, including the IRS, presume that all of us file our taxes on time? Many of us miss the April 15 deadline and so we must file for a four-month extension. Then millions of us miss the Aug. 15 deadline and must file for another one until Oct. 15. Yet it’s hard to find the appropriate extension forms on the IRS Web site, and there isn’t even one question in TurboTax’s “interview” process that deals with late filers.

Answer: Yes, tax time is such a puzzle, isn’t it? You never know when April 15 is coming, so it just catches you unaware, year after year after year.

Perhaps instead of railing about how hard it is to file an extension, you could spend some of your excess energy on arranging your affairs so that you don’t have to file late next year.

It’s true that some people need more time to prepare their returns, but many file late because of simple disorganization or procrastination.

Thousands of people’s tax records may have been affected by the Sept. 11 terrorist attacks, and tax authorities have made accommodations for them.

Maybe you’d better start taking your taxes to a professional. You may have to file late, but at least your pro will know where to find the forms. They’re on the IRS Web site under “Forms and Publications.” You can find them in TurboTax under the “Miscellaneous” tab.

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Questions can be sent to Liz Pulliam Weston at moneytalk @latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. For past Money Talk columns, visit The Times’ Web site at www.latimes.com/moneytalk.