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Employee Benefits

Use it or Lose it? Don't Worry

You don't have to use up all the money in your flexible spending account to come out ahead.

I didn't use all the money in my health-care flexible spending account by the end of the year and ended up forfeiting what was left in the account. Should I contribute less in 2006? -- L.T., Milwaukee

Not necessarily. About half of employers are giving their workers an extra two and a half months to spend the money in their flex accounts. Even though yours apparently isn't one of them, don't get cold feet about contributing money for 2006. Because you're funding the account with pretax dollars, you don't have to use up all the money in order to come out ahead.

Let's say you set aside $3,000 in your flex account and you usually pay about 33% of your income in federal, state and social security taxes. You have to spend only about $2,000 to break even. To find your break-even point, use the flex-plan calculator.

Also keep in mind that you can use money in your flex account to pay for just about any health-related expenses that aren't covered by insurance. That includes items such as health-insurance deductibles, co-payments for doctor visits, dental work, orthodontia, eyeglasses, contact lenses, prescription sunglasses, fertility treatments, chiropractic care, doctor-recommended weight-loss programs, prescription drugs and some over-the-counter medications.

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Start your own fund?

I would like to start my own mutual fund, which will be a fund of funds. Where do I begin? -- Ed Brown, via e-mail

Are you sitting down, Ed? Starting a fund is a lot more difficult, and more expensive, than you might think. It would cost $100,000 or so in legal and filing fees just to launch the fund. Moreover, the Securities and Exchange Commission says a fund has to contain at least $100,000 in assets before it can begin selling shares.

That's the easy part. Once the fund was up and running, you'd have to pay for accounting, printing, legal and custodial services, which together cost a minimum of $100,000 per year, even for the most minuscule fund.

If you could get the fund's assets up to, say, $50 million, you might actually stand a good chance of making some money. "This can be a very profitable business once you reach that break-even point," says Charlie Hecht, of Hecht & Associates, which provides legal services to funds. For more information, read Start a Successful Mutual Fund: The Step-by-Step Reference Guide to Make It Happen, by Melinda Gerber (JV Books, $60). Gerber is the wife of Nick Gerber, manager of the Ameristock fund.

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Student debt

I have a lot of debt, but 75% of it is student loans. Do lenders view that as negatively as credit-card debt? -- Rachel Simon, San Diego, Cal.

No and yes. "Student-loan debt is actually viewed more favorably for purposes of calculating a credit score," says Bob Walters, chief economist with Quicken Loans. "But it's equal when a lender calculates your debt-to-income ratio to see if you can afford to repay a loan."

The FICO score -- the credit score used by many lenders -- divides debt into two categories: installment loans and revolving debt. Student loans, mortgages and car loans -- on which you pay a fixed amount every month -- are installment loans. Credit-card balances, on which your monthly payments may vary, are considered revolving debt.

Owing a lot of money for student loans, or any installment debt, isn't going to hurt you as much as maxing out your credit cards, says Craig Watts, public affairs manager for Fair Isaac, the company that created the FICO score. But you can still damage your credit score if you miss payments on your student loans, and you can improve your score by paying on time.

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Check your credit report to make sure positive student-loan information is being reported (get one free report per year from each of the three major credit bureaus at www.annualcreditreport.com). "For many recent graduates, their student-loan record and one credit card will be their entire credit history," says Watts. If your report is clean, it will boost your credit score.

In addition to your credit score, lenders also look at your ability to repay a new mortgage or other loan. That judgment is based strictly on your monthly income and your monthly obligations, says Walters. "If your new mortgage payment plus all of your other monthly payments together represent more than 50% of your gross monthly income, it may be more difficult to qualify for a mortgage."

Stocks gone missing

How do I find out about a stock that is no longer listed on the exchanges? The company may have folded, or it may have been bought out. -- Elecia Beebe, Manning, Ore.

If Google and other online search engines don't do the trick, you can hire a research firm to investigate the company's fate. For a fee, Stock Search International or R.M. Smythe will let you know if a company changed its name, merged with another firm or went bankrupt. SSI will also help you recover any money you may be owed, in return for a percentage of the recovered amount.

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Start by checking to see if the stock appears in SSI's online database of 40,000 companies that no longer trade (800-537-4523; www.stocksearchintl.com). If the company is listed, you can download a report for $40. If a company is not in the database, SSI charges $85 to research it.

If you hold an old stock certificate, Smythe (800-622-1880; www.smytheonline.com) will trace its history for $75. Or look for the state listed on the certificate, and contact that state's corporations division.

Lost savings bonds

My grandmother bought three savings bonds for my family, including one for my son, before she died, but we don't have any information about them. How can I find out where they are? -- Pam Myers, Laceys Spring, Ala.

The Bureau of the Public Debt can help you track down the bonds. Write the bureau a letter listing the names and social security numbers of the family members for whom you believe the bonds were purchased (along with your grandmother's name and social security number, if you believe she was a co-owner). Include the approximate date on which your grandmother bought the bonds, or at least a range of years. Also include any additional information you may have, such as the bond series (EE, I) and denomination.

Send the letter to the Bureau of the Public Debt, P.O. Box 1328, Parkersburg, WV 26106-1328. Filling out Form 1048, which is available at the Bureau's Web site, can also help if you have enough information (see www.publicdebt.treas.gov/sav/savlost.htm for more information about lost bonds).

If you know all the details about the bonds, including serial numbers, the bureau can generally track them down and have them reissued within three to four weeks, says spokesman Steve Meyerhardt. Otherwise, the search could take months.

If the bonds were in your grandmother's name, rather than your family's, you'll also need to prove that you're entitled to the money.

Tax-free gains

I have been married for more than two years, and my wife lives with me in the home we plan to sell. Do we qualify for the $500,000 tax-free gain on our home if the deed is in my name only? -- Jim Sullivan, Springfield, Va.

Probably -- as long as you've both lived in the house for at least two of the past five years and you file a joint return.

However, you can take the full exclusion only if neither of you excluded the gain from the sale of another home within the past two years. That could happen if, for example, each of you owned a home before you were married, and one of you sold a residence to move in with the other. "If the sale of the other spouse's residence occurred within the past two years, that spouse would be ineligible for the exclusion," says Mark Luscombe, principal analyst with CCH Tax and Accounting. "But the other spouse would be entitled to a $250,000 exclusion on the sale." For more information, see IRS Publication 523, Selling Your Home.

A matter of time

When tons of people act on your fund recommendations, such as those featured in "The 25 Best Mutual Funds" (May 2005), are those who invest later at a disadvantage? Should I invest in your recommendations only when I can commit the money immediately and am not the last one to get on board? -- Joyce Stewart, Yamhill, Ore.

Timing can be an issue with individual stocks and certain other investments, such as shares of closed-end funds, of which there is a limited and fixed supply. But at least in the short run, it's not a problem with open-end mutual funds. That's because the funds honor new investments by creating additional shares, so there's no supply-demand imbalance that could push up the share price. The same is true of exchange-traded funds.

That doesn't mean that a torrent of new money has no impact whatsoever. Funds that are inundated with cash may ultimately become too big to manage efficiently (see "7 Sure Ways to Bigger Returns," Sept.). Or managers may run out of good ideas and hold the cash, thus diluting future returns in up markets. But these are indirect, longer-term effects.

My thanks to Katy Marquardt for her help this month.