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Caught in a Check Trap

A federal law requires banks to make funds available before verifying that the money exists.

My college-age son sold a Wii to someone over the Internet for $300. The buyer wrote him a $4,000 check and persuaded my son to cash it and give him the $3,700 left over. The bank cashed the check, but -- you guessed it -- the check bounced and the guy is gone. Is the bank at all responsible, or is my son at fault? -- C.V., Burke, Va.

Your son fell for one of the oldest tricks in the arsenal of scam artists. Yes, he is responsible for making good on the loss, and the bank can come after his accounts.

Check fraud is becoming a huge problem, largely because of a federal law that requires banks to make funds available for withdrawal many days before verifying that the money really exists. Or as Michael Benardo, of the Federal Deposit Insurance Corp.'s cyberfraud and financial-crimes section, puts it: "The bank where you 're depositing the check doesn't have a responsibility to call the other bank and verify that the check is real. But it does have a responsibility to make the funds available." That is usually within days after you deposit a check, or within one business day for cashier's checks and money orders.

But it can take much longer than that for the bank to discover that a check is fraudulent -- and longer still if the check has to travel across the country and back, or if the crook tears the check a bit to slow down automated check-reading equipment. If you send off money or merchandise before then, as your son did, the criminal is long gone.


The easiest way to avoid these problems is to refuse to accept checks from strangers. And it's always a big red flag if someone asks you to cash a check for more than is owed or says that you've won a sweepstakes you never entered.

Cashier's checks and money orders are generally safer than personal checks, but they're being counterfeited more often now, too. Benardo recommends asking for a money order from the U.S. Postal Service, which can verify that the money order is valid. Or call the bank that a cashier's check is drawn on and ask if it issued the check. Rather than call the phone number printed on the check, which could connect to a dummy answering machine, look up the number online or through the FDIC's bank directory ( Also type the bank's name into the search engine at to see if the FDIC has issued an alert about counterfeit checks in that bank's name.

Let your bank know if you deposit a questionable check. "Explain the details of the transaction," says Tim Chambers, of Wachovia's Deposit, Control and Loss Management department. Until you know that the check is good, don't withdraw the money.

A good deal

I work for a large money-center bank. My employer is charging me one-third of 1% of the balance in my 401(k) account. The fees never appear on any of my statements, and I'd like to know if that's normal or even legal. I would assume that if an employer is charging fees, it would be required to report what an employee is charged. I have $350,000 in my account, and I believe my fees for this year alone are more than $1,000. This seems excessive. -- S.J.E., New Castle, Del.


You may have a better deal than you realize. "One-third of 1% doesn't sound excessive to me, if that is the total fee being paid," says Rick Meigs, president of 401khelpcenter .com. "In fact, I'd say it was a pretty good deal." He says most plans charge fees ranging from 0.5% to 1.5%.

Ask whether the fee you are quoted covers investment management, which represents the bulk of the costs, as well as administrative fees. Because of economies of scale, some large employers can charge as little as 0.33% for both fees combined, says David Wray, of the Profit Sharing/ 401(k) Council of America.

The U.S. Government Accountability Office recently found that most people have no idea what they're paying in 401(k) fees, and there is no legal requirement for plans to disclose the dollar amount of fees charged (see Shedding Light on 401(k) Fees). Instead of an expense ratio, most plan participants are told only about the net total return on their investments, which is the return after the investment fees have been deducted.

Feeding a Roth IRA

As a retiree, can I contribute to a Roth IRA? Is it a good idea to contribute to a Roth even though I've retired? -- Thomas Yagi, Kailua, Hawaii


To contribute to a Roth IRA, you or your spouse must have earned income -- even if it's from a part-time job.

If you do qualify, it can be a good idea to make Roth contributions even if you're well into your senior years. There's no maximum age for contributing (unlike a traditional IRA, which prohibits contributions after 70#189;), and you can withdraw the money without taxes or penalties after 59#189;, as long as you've had a Roth for at least five years.

If you've crossed those thresholds, then there's little downside to contributing to a Roth. You can take advantage of the account's tax benefits but still have tax-free access to the money if you need it at any time. If you die with money in a Roth, your beneficiaries won't owe income tax when they inherit it.

To qualify for a Roth IRA in 2007, adjusted gross income on a joint return must be less than $166,000 ($114,000 for singles). The contribution amount starts to phase out at $156,000 ($99,000 for singles). The maximum contribution in 2006 and 2007 is $5,000 per person if you're 50 or older.


College-savings idea

I have a Roth IRA and would like to transfer or convert the account into a 529 college-savings plan. Can this be done? -- D.G., via e-mail

A Roth IRA has two components: what you contributed and what the account has earned. You can't transfer earnings from a Roth IRA to a 529 without owing income taxes plus a 10% penalty, and you probably wouldn't want to. "Most people would want to keep as much as they could in their Roth for retirement savings," says Joe Hurley, of

You can withdraw Roth contributions at any time and for any reason, though, and a few scenarios might warrant taking some of that money and investing it in a 529 plan. It could be a good strategy if, for example, you need the money for college costs and you can get a state income-tax deduction for your contributions and benefit from a few years of tax-free growth.

Shifting some Roth contributions to a 529 could also improve your financial-aid situation. "If you decide you are going to have to tap your Roth to pay for college, you should realize that the distributions (not just the earnings, but the contributions, too) will be counted for federal financial-aid purposes," says Hurley.

Distributions from 529s, on the other hand, are not counted as income in federal financial-aid calculations, he says. So if you know you'll need to withdraw money from the Roth for college, you may be able to improve your financial-aid picture by switching the money to a 529 before the junior year of high school (generally the first year that is counted for financial aid) and investing it in a 529 then, says Hurley.

Medical deductions

My 94-year-old mother had to move to assisted-living (not a nursing home) last year because she was no longer able to care for herself. Her doctor certified she could not bathe, dress or feed herself due to dementia and loss of mobility. The assisted-living home provided food and lodging and aided her with medicines and bathing, all of which cost $3,000 per month. Can the cost be deducted as a medical expense on my mother's federal income-tax return? -- Richard Zimmer, via e-mail

She may be able to deduct those costs if they aren't covered by insurance. Qualified long-term-care expenses can be tax-deductible if they are for diagnostic, preventive, treatment or rehabilitative services, or for personal care required by someone who is chronically ill. The services must be prescribed by a licensed health-care practitioner.

Your mother appears to meet the definition of being chronically ill -- needing significant assistance to perform at least two activities of daily living for a 90-day period, as certified by her doctor -- says Mark Luscombe, principal analyst for CCH, a tax-publishing company. A person can also qualify as chronically ill if he or she has cognitive impairment and must be supervised.

It appears that your mother would not be at the assisted-living facility but for the fact that she needs medical care, says Luscombe. So she might qualify for all of the $3,000-per-month charge to be considered as medical expenses.

Your mother has to itemize to deduct medical expenses, and she can write off only the amount of those expenses that exceeds 7.5% of her adjusted gross income. But for retirees with low incomes, this threshold can be easy to cross (see IRS Publication 502, Medical and Dental Expenses).