Dear Liz: We have four credit cards that generate airline miles, each of which has a yearly fee. We also have a Capital One card with no fee that we use for travel to avoid currency conversion fees. We pay all cards off every month. Since it is getting so hard to use miles, we are thinking of closing all but the Capital One account, which also accrues points toward air travel. I have read that closing credit cards is not a good thing to do. I am 73, my husband 79, so I doubt we will need to incur debt in the future.
Answer: You may want to preserve your good credit scores even if you don’t anticipate taking out any loans. Insurers in many states use credit information to set premiums (although not in California).
If you do still care about your scores, you could consider asking your credit card issuers if you could switch to one of their no-fee cards. The closures of your current accounts may still affect your scores, but having several open, active accounts probably will offset the damage over time.
Or you could just take your chances and close card accounts rather than pay unnecessary fees. But consider having at least one additional credit card, in case your Capital One card is compromised or lost and you need a temporary backup.
Dear Liz: In recent columns you’ve been discussing mandatory withdrawals from IRAs. Since these minimum required distributions are treated as income for tax purposes, can I use that money as the income necessary to make an IRA contribution this year? I am retired and lucky enough not to need the funds for current expenses.
Answer: Sorry. You need earned income, not just income, to make IRA contributions. For the purposes of an IRA, earned income includes wages, salaries, commissions, self-employment income, alimony and separate maintenance and nontaxable combat pay. It does not include earnings and profits from property or income from interest, dividends, pensions, annuities, deferred compensation plans or required minimum distributions from IRAs.
We recently lost my wonderful mother-in-law to complications from a stroke following a diagnosis of cancer. As we prepare for her memorial service, I’ve been thinking about what a blessing it’s been to be able to help care for parents in their final days—and to do so without having to worry excessively about expensive plane tickets, time off work and other potential financial burdens.
If you have parents who are elderly or in poor health, consider opening a savings account dedicated to making their lives, and yours, a little easier. That fund can pay for:
Getting there. In the five years my mom battled cancer, I spent a small fortune on plane tickets getting from my home (which was then in Anchorage) to hers in Washington state. Sometimes, these were pretty routine visits where I could plan ahead and score reasonable fares. Other times, I’d get the call that there was a crisis and that I needed to get there fast, grabbing whatever seat I could. Because I didn’t carry credit card debt and had a fat emergency fund, I was able to buy airfares without triggering a financial crisis.
Some other tips: Sometimes reward seats open up at the last minute, so if you have frequent flyer miles you can use, check out that option. If you’re within driving distance, consider buying a $50 or $100 gas card and setting that aside for use in emergencies.
Being there. About three years into her fight, Mom had a serious setback. Dad was providing most of her care and he was overwhelmed. I was able to take a two-month unpaid leave from work to help out—again, thanks to my emergency fund and to the flexibility of my employer, which held my job for me. (This was before the passage of the Family and Medical Leave Act of 1993, which allows covered employees to take unpaid, job-protected leaves to care for a spouse, child or parent with a serious health condition.) Two months with no paychecks took a serious bite out of that savings account, but I’ll never regret the cost. I was able to take another month off a couple of years later, at the end of her life, and was again so grateful to be able to be there.
Getting help. A few years ago, my father had a massive stroke while visiting a relative in Florida. We couldn’t fly him home, since he was too ill to travel. To help us manage his care long distance, we hired a geriatric care manager who was worth her weight in gold. She not only translated the medical-ese that baffled us, but helped us find a good nursing home for him and a friendly companion who could keep him company in between my frequent visits. Families are often left on their own to figure out how to care for an incapacitated relative, and she hooked us up with resources we might never have found otherwise. None of this was cheap—we spent about $10,000 on the care manager alone over four months—but she dramatically shortened our learning curve and ensured my dad got good care at the end of his life. Whenever friends are dealing with an ill or declining parent and don’t live nearby, I encourage them to hire a geriatric care manager to help them assess the situation and find solutions. A session with a care manager can even help when you live locally, since these folks live and breathe elder care, which is a new world to most of the rest of us.
It’s impossible to know in advance how much money you might need, but anything you can set aside will help ease the financial burden when the time comes to help your folks.
Dear Liz: Could you advise us on how to protect our 93-year-old mother’s assets if she should become ill or die? She does not have a living will or a trust regarding her two properties.
Answer: “If” she should become ill or die? Your mother has been fortunate to have had a long life, presumably without becoming incapacitated, but her luck can’t hold out forever.
Your mother needs several legal documents to protect both herself and her assets. Perhaps the most important are powers of attorney for healthcare and for finances. These documents allow people she designates to make medical decisions and handle her finances for her should she become incapacitated. In addition, she may want to fill out a living will, which would outline the life-prolonging care she would and wouldn’t want if she can’t make her wishes known. (In some states, living wills are combined with powers of attorney for healthcare, and in others they are separate documents.)
These legal papers aren’t important just for the elderly, by the way. You should have these too, since a disabling illness or accident can happen to anyone.
Your mother also should consider a will or a living trust that details how she wants to parcel out her estate to her heirs. Of the two documents, wills tend to be simpler and cheaper to draft, but a living trust means the court process known as probate can be avoided. The probate process is public, and in some states (particularly California) it can be protracted and expensive. A living trust also could make it easier for someone to take over managing her finances in case of incapacity or death.
You can find an attorney experienced in estate planning by contacting your state’s bar association. Expertise and competence are important, so you may want to look for a lawyer who is a member of the American College of Trust and Estate Counsel, an invitation-only group that includes many of the best in this field.
If she or you are trying to protect her assets from long-term care or other medical costs, you’ll need someone experienced in elder care law to advise you. You can get referrals from the National Academy of Elder Law Attorneys at http://www.naela.org.
Dear Liz: I have one comment in response to the reader who wondered whether she had to take minimum distributions from an IRA at age 70 1/2 even though she was still working. As you pointed out, she can defer taking minimum distributions from a 401(k), but she must take them from her IRA. I would point out that many 401(k) plans permit transfers from IRAs. Once the IRA becomes part of the employer plan, the transferred assets are no longer subject to required minimum distributions, as long as the employee continues working full time. This may be a viable option for someone who wants to delay or reduce the size of a mandatory IRA withdrawal.
Answer: Many people are familiar with the idea of rolling a 401(k) balance into an IRA when they leave a job. They may not realize they can roll money the other way as well if an employer permits it.
There are still several issues to consider before you transfer IRA money into a 401(k), said Mark Luscombe, principal analyst for CCH Tax & Accounting North America.
First, the rollover may not include any non-deductible contributions to the IRA. If the money in the IRA came entirely from tax-deductible contributions or from a 401(k) rollover, this won’t be a problem. If you made non-deductible contributions, they wouldn’t be eligible for transfer into a 401(k), Luscombe said.
“All of the sums rolled into the 401(k) plans must be funds subject to tax and not sums representing basis in the IRA,” Luscombe said. “If non-deductible contributions were made, only the taxable portion of the IRA may be rolled into the 401(k) plan.”
Another issue is that 401(k)s typically offer fewer investment choices than IRAs. Also, compare the fees with what you’re paying with your IRA. Some 401(k)s are run efficiently and give workers access to extremely inexpensive institutional funds, for example, while others lard on various account fees.
A final issue is that you’re likely to have less access to the funds in your 401(k) than you would with an IRA, Luscombe said, should you need to tap the cash. Many plans allow only hardship withdrawals from 401(k)s, although you may be able to access up to half of your funds with a retirement plan loan. Of course, if your intention is to delay required minimum distributions as long as possible and you won’t need the money, this point may not be a deal breaker.
A much-heralded new version of the VantageScore could offer big benefits to consumers, but only if lenders actually start to use it. Read all about it in “New credit score could change lives.”
HSAs still aren’t a household acronym, but more companies are offering these health care accounts–and yours might be next. For the right people, HSAs can be a way to supercharge your retirement savings since they allow you to invest unused cash contributions in stocks. But you also run the risk of having the market wipe out your health care funds right when you need them. Read “Should you invest health care funds?” for more.
Divorce doesn’t necessarily separate your credit obligations, and a vengeful or oblivious ex can really mess up your credit. Learn what you should know before and after your split in “Don’t let your ex trash your credit.”
Are you giving identity thieves the clues they need to hack into your life? If you use social media, the answer may be yes. Read “Secrets you should yank off Facebook now.”
Dear Liz: We are in our 60s and looking to downsize. We’re living in an apartment now and don’t like it, so we want to buy a small house. Also, our finances took some serious hits in the recent economy and we’re trying to rebuild. But in trying to sell our possessions, we’re learning that people want us to discount the item beyond belief or even expect to get it for free. People talk about using Craigslist and EBay to generate cash but it looks like a waste of time. Do you know of other options?
Answer: Your two goals are somewhat in conflict with each other, so you need to clarify which is more important. Is your primary aim to shed your excess stuff so you can get on with your life? If that’s the case, then your focus should be on getting rid of what you don’t need rather than squeezing top dollar from it. If it’s more important to harvest the maximum value from these unwanted items, you’ll need to invest more time and effort in marketing your goods.
It may help your decision-making to get a reality check on the value of your stuff. If you believe that you have some quality items — antique furniture, rare collectibles or expensive artwork — you could hire an appraiser to give you an idea of their market value as well as some ideas where these items could be sold.
Consignment stores and auctions can sell your stuff, although you typically have to split the proceeds. Another possibility if you have quality items is to hire a company that specializes in estate sales to sell your things. These companies also typically take a hefty percentage of the sale proceeds — often 30% or more.
If what you own is mostly mass-produced, though, you’re unlikely to recoup much of what you spent. Many people erroneously cling to the idea that their possessions are worth what they paid for them, or at least something close to that. In fact, that purchase price is what economists call a “sunk cost,” which can’t be recouped. The best you can do is get fair market value for your items. “Fair market value” doesn’t mean the price you think is fair; it means what a willing buyer would pay a willing seller when neither is under any duress to buy or sell.
Craigslist and EBay are two marketplaces that can give you a pretty good idea of what those values might be.
Dear Liz: I am about to begin graduate school to get my master’s degree in nursing to eventually become an advanced registered nurse practitioner. I have Googled scholarships, grants, fellowships, and am coming up empty-handed. I am fearfully looking at student loans to finance my degree (it would be about $34,000). I am appalled at the rates on federal student loans, and private school loans or just personal private loans are even worse. Are there any other options that I haven’t discovered? I don’t have any school debt to date, so this is all very daunting.
Answer: Let’s start with the good news: Your education should pay off. Advanced registered nurse practitioners earn a median of $86,625, according to the salary tracking site Payscale. That compares with a median of $55,311 for a registered nurse. There are no guarantees in education, any more than there are in life, but you should be able to recoup the cost of your education fairly quickly.
To find scholarships, you need to know where to look. One place to start is the Fastweb database, which tracks scholarships, grants and other financial aid programs. Fastweb lists the National Student Nurses Assn., the American Assn. of Colleges of Nursing and a variety of smaller programs, many of which are school-specific, publisher Mark Kantrowitz said. If you’re willing to serve in a high-need area, you also can check out HRSA Nurse Corps Scholarship (at http://www.hrsa.gov/loanscholarships/scholarships/nursing/). The ROTC also offers scholarships.
“Many employers of nurses provide signing bonuses or loan repayment assistance programs to help new nurses repay their student loans, since nurses remain in demand,” Kantrowitz noted.
You’re smart to be cautious about education debt, since too many people have overdosed on student loans. However, student loans in moderation can help you get ahead financially if you’re borrowing for the right education.
Since there’s strong demand in your field and excellent pay, you shouldn’t shy away from federal student loans, which offer fixed interest rates and a number of consumer protections, including forbearance and deferral in the event you become unemployed. You would be borrowing far less than you’re likely to make the first year after you graduate, so your payments shouldn’t be burdensome. If you decide to pursue a career in public health or work for a nonprofit, you could qualify for federal student loan forgiveness after 10 years.
Dear Liz: Help! We’ve just received devastating news from our accountant that we owe around $11,000 to the IRS and the state for 2012 taxes. The reason for the huge bill is that we cleaned out my husband’s IRA to pay for our son’s college expenses. My husband is almost 65 and working part time after being laid off, and I’m 61 with a full-time job. What is the best way to pay this bill? Here are the options I can think of: 1) Cash out my three-month emergency certificate of deposit of $12,000 that I’ve saved to cover expenses in case I get laid off. 2) Take money out of my IRA. 3) Use a credit card check that will be at zero percent for the first 12 months and then will slide to 8.9%. 4) Arrange a payment loan with the IRS. 5) Sell our house in which we have 70% equity. Which is best?
Answer: Let’s take No. 2 off the table, shall we? If you learn nothing else from this experience, it should be that tapping retirement funds can trigger a big (and often unnecessary) tax bill.
Selling your house over an $11,000 bill is overkill, so let’s eliminate that option as well. Which leads us to three remaining possibilities: Use cash, borrow from a credit card or borrow from the IRS.
Borrowing incurs costs. That zero percent credit offer almost certainly comes with a fee, which is usually 3% to 5% of the total. If you can’t pay the balance within a year, you start incurring interest charges.
The short-term rate the IRS charges for installment loans is pretty low — lately it’s been around 3% — but you also typically incur late-payment penalties. The penalty typically is one-half of 1% of the tax you owe each month or part of a month until the bill is paid in full. If you file by the return due date, that rate drops to one-quarter of 1% for any month in which an installment agreement is in effect. The maximum penalty is 25% of the tax due.
How much either option will cost you depends on how long you take to pay the bill. The cost for cashing out the CD is, by contrast, almost zero. Whatever tiny amount of interest you’re getting is far less than what borrowing would cost you. If you should get laid off before you rebuild your emergency fund, your access to cheap credit could come in handy.
Going forward, let your son pay for his college expenses and conserve what’s left of your resources for retirement.