Harry Gross | It's possible we owe a debt of thanks to gov't for record-high credit woes

Dear Harry: I'm one of the lucky baby boomers who have not gotten himself head-over-heels in debt. I never made a lot of money, either. My highest salary point so far is less than $50,000. I saw some terrifying statistics in the last week that have me really worried about the possibility of another depression, not recession. Our personal and national debts are at an all-time high. I think we ought to consider doing away with the general credit cards that entice people to live in constant hock. We ought to do something short of a constitutional amendment to keep our government going into debt to benefit the very wealthy.

I discussed this with my parents, who are now retired, and they lived right at the margin of poverty in the '30s and '40s. They didn't have the enticement of easy credit, so they never had to go for bankruptcy. They remember all the fuss made over federal deficits by the progenitors of the current deficit-justifiers. But they recognized that the Great Depression was a national emergency of epic proportions, and they didn't use it as an excuse to go into hock themselves. Do you think credit cards and the example of national debt are the causes of people living on the brink of bankruptcy?

What Harry says: Certainly, the easy credit available is at least partly responsible for so many people being in trouble. There are other reasons: Living up with, or even above, the Joneses is a major cause of using that credit. Greed has been with us from time immemorial, but it has manifested itself today as never before.

How much is enough? The permeating thought that money gives power is reinforced every day in our political climate. Since the Depression, saving has become less and less important. We don't press our children to save part of their allowance and earnings. Too many people went into long-term debt to buy short-term assets (for example, a second mortgage to buy an expensive car).Let me once again repeat my motto that financial success can be achieved only by living beneath your means. Sure, your rich uncle could die and leave you a fortune, or you could hit the lottery, but the probability of either of these is microscopic. However, I don't know of anyone who uses the federal debt as an excuse for his own credit troubles, but I do see it as a possibility.

Dear Harry: My father lives in the South Philly house that he's had for what seems like a century. He is now 82, and he lives on his SS of $1,100 a month. We have been trying very hard to get him to sell his house and move to a retirement community, but he absolutely refuses. Meantime, with his medical insurance premiums and his cost of drugs, he has lately been unable to make it and has asked us for help. We are not wealthy by any stretch of the imagination, so we're considering a home-equity loan to be able to help him. But we are also worried about our own retirement. I think (but I'm not certain) that I can get him to go for a reverse mortgage. He doesn't seem to mind that we have to go into hock, but he is hesitant about doing this himself. He owns his home free and clear. He has the utmost respect for your opinion, Harry. Please let him and us know what you think about the idea of a reverse mortgage.

What Harry says: His is just about the ideal situation for a reverse mortgage. He will be able to tap the stored up value in his home to pay you back for any money you have borrowed and get extra money each month for his own maintenance. At his age, his monthly advances could be very substantial, depending on the value of the house. I think your willingness to go into debt for your father is an admirable thing, but you have your own life to live, and there is a good alternative.

Dear Harry: I have an IRA with an insurance company worth about $62,000. Last week, I got a letter from the company telling me that I have to make a "required minimum distribution" of $2,360 before Dec. 31, 2007. I'm only 61, and I thought that you didn't have to take a distribution until you're 70 1/2. I called the company and got shifted around from Jane to Mary to John ad infinitum. I must have spoken to 10 people before I got to someone who would admit that there seemed to be an error. They told me that they would send me a letter spelling out the rules. I got the letter today. I was right about the 70 1/2, but they still insist that I take the $2,360. They warned me about a penalty if I fail to take the distribution. I don't need or want the money now. What's going on here?

What Harry says: I can think of only two possibilities. Is it possible that they have an incorrect age for you? That could lead them to this error. Then there's the possibility that it's just an outright error on the part of someone at the company who is too stubborn to admit a mistake. Do not make the withdrawal! Try once more to get these toads to fly right. Send them a photocopy of the letter with the age 70 1/2 highlighted. Send them a copy of your birth certificate, and demand that they correct their records. Should you have a problem with IRS on this, a copy of your birth certificate will get them off your back.

Dear Harry: My husband and I are 59 and 57 respectively. We are both retiring because of disability. We are anticipating $600,000 from the sale of a piece of land we own in Philadelphia. We have an adult son for whom we'd like to purchase a home in the neighborhood of $200,000. Our present home is worth about $350,000 with a mortgage of $180,000 which we intend to sell. We also own a house in Center City that we hope to rehab and move into in the spring. This should cost about $200,000. In addition, we have about $30,000 in credit-card debt that we'd like to get rid of. The buyer of the land has offered to create a private annuity trust for us with the $600,000, but we would prefer the cash. What about the capital-gains tax on our two sales? Would there be a depreciation recapture tax on the land or on our home?

What Harry says: In your situation, getting cash on your two sales is almost a necessity. Don't go for the annuity. When you get the money, the first step is to set aside enough to pay the income taxes. On the land sale, you'll have to set aside about 15 percent of the profit (not the sale price). Since there's no depreciation on land, there will be no special tax on the recapture. The sale of your home will not bring a taxable gain if you've lived there for two of the last five years. The exemption here is $500,000 for a married couple. Once you've set aside the tax money in a money market fund, pay your credit-card debt down to zero. The interest rates on these debts are often unconscionable. I then suggest that you pay off the mortgage on your home. Even if you sell it before the spring, you'll save quite a bit on the interest. Keep the rest of the cash available by putting $50,000 into a money market fund with the balance equally in three- and six-month CDs. The reason for this is that the money necessary for your son's home and your rehabbing the house in Center City is only an estimate, and you may need more than you anticipate. Once you move, you'll be able to get a better handle on where to invest for a comfortable retirement. *

Write Harry Gross c/o the Daily News, Box 7788, Philadelphia, PA 19101. Harry urges all his readers to give blood - contact the American Red Cross at 800-GIVE LIFE.