Q&A: Invest or pay down mortgage?

Dear Liz: I usually finish the month with $1,000 to $2,000 left over after expenses to invest. My savings are with a money manager who has conservatively invested in a diversified portfolio. Given the uncertainty of the market, does it make any sense for me to start using that monthly excess to pay down the balance on my 15-year mortgage rather than continue to invest? The mortgage has about 91/2 years to go with a balance of just under $75,000. One added point: I would like to retire in about five years.

Answer:
It’s time to talk to a fee-only financial planner who can review your entire financial situation and offer personalized advice. The planner can give you a better idea if you’re really on track to retire within five years. If you are, then paying down the mortgage may be an excellent use of the money. Having a paid-off home will reduce your monthly expenses, which in turn can reduce how much of your retirement funds you’ll need to tap.

Before you prepay a mortgage, though, you should make sure all your other financial ducks are in a row. In addition to saving enough for retirement, you should have paid off all your other debt, accumulated a decent emergency fund (at least six months’ worth of expenses) and be properly insured.

Q&A: Using Roth IRA earnings for a first-time home purchase

Dear Liz: My 29-year-old son recently married, and as a gift I pledged $20,000 as a down payment on a house. My daughter-in-law is beginning a career as a registered nurse and I know they will not be buying for a few years. Is there any type of account that will grow tax-free or tax-deferred for a first-time buyer? Maybe I could gift this money to them into a retirement account for the time being?

Answer: You may be able to give them enough money to fund Roth IRA accounts for both 2015 and 2016. They would be able to withdraw those contributions tax- and penalty-free at any time in the future for whatever purpose they wanted.

Withdrawing earnings from a Roth can trigger taxes and penalties, but that’s not likely to be an issue in this case. Each person is allowed to withdraw up to $10,000 in Roth earnings for a first-time home purchase. If they plan to buy a home within a few years, it’s highly unlikely that your gift would generate enough earnings to cause concern.

The ability to contribute to a Roth begins to phase out for married couples filing jointly at modified adjusted gross income of $183,000 in 2015 and $184,000 in 2016. Assuming their incomes were below those limits, they each can contribute up to $5,500 per year to a Roth. The deadline for making 2015 contributions is April 15, 2016. If you give them the money now, they could fund two years’ worth of contributions at once.

Q&A: Best savings vehicle for a baby

Dear Liz: I recently gave birth to a little boy. I am wondering about the best savings vehicle that would offer flexibility for when family gives him money. I don’t want to tie it up in a 529 college savings plan in case he doesn’t want to go to college or has other needs.

Answer: If you want your child to have a reasonable shot at a middle-class lifestyle in the future, some kind of post-secondary education will be necessary. It may not be a four-year degree; it could be a one- or two-year training program, and a 529 college savings plan can help pay for that. Money contributed to a 529 plan grows tax-deferred and can be used tax-free at nearly all colleges, universities and community colleges as well as many career and technical schools.

You will remain in control of the account and can withdraw money for other purposes if necessary, although you would owe income taxes and a 10% federal penalty on any gains.

If you really can’t accept any limitations on how the money is used, then you can open a brokerage account in your own name and invest the money there. Putting the money in his name could hurt his chances for financial aid if he does decide to go to college.

Q&A: Authorized credit card users

Dear Liz: I have read that only the primary cardholder is responsible for the balance on a credit card, not the authorized user (such as a spouse). When that primary cardholder dies, there is no obligation for an authorized user to pay off the balance. Is this accurate? What would prevent someone whose primary cardholder is near death from racking up purchases and then, after the primary cardholder dies, refusing to pay it?

Answer: In a community property state such as California, spouses typically are both responsible for debts incurred during the marriage. In all states, the deceased spouse’s estate would have to pay all creditors before any leftover money was doled out to survivors. So a spouse who went on such a spending binge wouldn’t come out ahead, unless the primary cardholder was broke and left no estate.

Other authorized users might have no such restraints, however. Anyone who thinks an authorized user might pull such a stunt would be smart to take that person off the card before it becomes an issue.

Q&A: Social Security spousal benefit

Dear Liz: I am 57 and my husband is 60. I will have a bigger Social Security benefit than he will. He plans to retire at 65 when he will take his own retirement benefit. I will file and suspend at my full retirement age (66 and 6 months), at which time he can file for spousal benefits. Then at 70, I can take my benefits. Is this correct? Or is the spousal benefit half of what I will get, which would be less than his reduced benefit anyway?

Answer: The spousal benefit is never more than half the primary earner’s benefit. If that would be less than his own benefit, then it wouldn’t make much sense for your husband to switch from his own check.

In any case, Congress is eliminating the option to file and suspend in order to trigger a spousal benefit. Since you must have reached your own full retirement age to file and suspend, and you won’t have done so by the April 29 deadline, filing and suspending is off the table for you.

It still makes sense for you to delay starting Social Security as long as possible, because you’re the higher earner. When one of you dies, the other will have to get by on a single check, so it makes sense to ensure that the survivor’s benefit is as large as possible.

Q&A: IRA maintenance fees

Dear Liz: My son has an IRA at his credit union. He puts in small amounts when he can. Recently they lowered the interest rate and started charging a $25 yearly maintenance fee, which now is taking all the interest back. Is this legal?

Answer: Yes. It’s also a good reason to move the account elsewhere.

Your son’s retirement account was shrinking in real terms even before the fee ate up all his interest. Even though rates are now on the rise, they’re still lower than inflation, which means the money’s buying power is being eroded every day.

Your son needs to invest in stocks if he wants his savings to grow faster than inflation. A few discount brokerages, including ETrade, Fidelity and TD Ameritrade, have no account minimums or annual fees.

Your son also should consider making automatic contributions to his retirement account. This is known as “paying yourself first,” and it ensures that those contributions actually get made. Waiting until he sees what’s left over is paying himself last, and the result will be a much smaller retirement fund than he’s likely to need.

Q&A: College savings strategy

Dear Liz: I will be 66 in May 2016. My wife is 68 and retired. She began receiving Social Security when she turned 66. I am still working, making a high six-figure income, and will continue to do so until I reach 70, when my Social Security benefit reaches its maximum. I plan to use my Social Security earnings to save for my grandchildren’s college educations (unless an emergency occurs and we need the income). I want to maximize the amount that I can give them. What is the best strategy, taking into consideration the recent change in Social Security rules relating to “claim now, claim more later”?

Answer: You just missed the April 29 cutoff for being able to “file and suspend.” Before the rules changed, you could have filed your application at full retirement age (66) and immediately suspended it. That would allow your benefit to continue growing while giving you the option to change your mind and get a lump-sum payout dating back to your application date.

Since Congress did away with file-and-suspend for people who turn 66 after April 30, that option is off the table for you. There are other ways to maximize your household benefit, said economist Laurence Kotlikoff, author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” They include:

•Your wife suspends her benefit and lets it grow for another two years, then restarts getting checks when she turns 70.

•At 66, you file for a spousal benefit. People who are 62 or older by the end of this year retain the ability to file a “restricted application” for spousal benefits only once they turn 66. That option is not available to younger people, who will be given the larger of their spousal benefits or their own benefits when they apply.

•At 70, you switch to your own, maxed-out benefit. Again, the ability to switch from spousal to one’s own benefit is going away, but you still have the option to do this.

Consider saving in a 529 college savings plan, which offers tax advantages while allowing you to retain control of the money. You can even withdraw the money for your own use if necessary, although you would pay income taxes and a 10% federal penalty on any earnings.

You should know, however, that college-savings plans owned by grandparents can mess with financial aid. Plans owned by grandparents aren’t factored into initial financial aid calculations, but any disbursements are counted as income that can negatively affect future awards. One workaround is to wait until Jan. 1 of the child’s junior year, when financial aid forms will no longer be a consideration, and pay for all qualified education expenses from that point on.

Obviously, you won’t have to worry about this if your grandchildren wouldn’t qualify for financial aid anyway. If your children also make six-figure incomes, that’s likely to be the case.

Q&A: More on teens and cars

Dear Liz: Your answer to the parent wanting to purchase a convertible for his son reminded me of something that happened long ago. When I graduated from high school in 1966, a friend’s wealthy parents bought him a brand-new Lamborghini Miura as a graduation present. Two days after he got the car, he missed a curve in the mountains and rolled the vehicle. By a miracle he was not badly hurt, but the car was scrap. You gave good advice. Giving your teenage son the keys to a high-performance car is like handing him a live grenade. Kids often want things that they should not have.

Answer: These stories are legion at affluent schools where parents are so focused on indulging their children, or flaunting their wealth, that they don’t fully consider the risks involved. Sometimes the children aren’t as lucky as your friend was.

Parents can still make an ostentatious display by buying their children new four-cylinder luxury sedans, replete with air bags and other safety features, and replacing them when they’re inevitably totaled. But everyone involved would be better off if parents avoided high-horsepower vehicles, new or used, that tempt their kids to test their driving limits.

Q&A: Student loans and mortgages

Dear Liz: I recently completed a master’s degree in counseling and am now paying student loans. I am punctual and consistent in my payments. How does having a $30,000 outstanding student loan look to home lenders? We recently sold our home and moved. We are planning to buy another home and have a large down payment. Does this student loan affect my home purchase potential? My husband and I are retired, and we pay our bills on time.

Answer: Student loans can have a positive effect on your credit scores if they’re paid on time. On the other hand, your payments are factored into the equation of how much mortgage you can afford and will reduce the amount you can borrow.

You should be rethinking the notion of borrowing more in any case. It’s not clear why you spent so much on a degree if you’re not using it. Perhaps a health setback made working impossible or an inheritance made it unnecessary. Generally, though, you should borrow for an education only if you expect it to increase your earning power enough to easily replay the loan. If you’re pursuing an education just for the pleasure of it or for a feeling of accomplishment, you should pay for it out of pocket or with savings.

A mortgage in retirement is tricky as well. Although some wealthy people keep their mortgages so they can invest the money elsewhere, most people are better off without loans once they stop working. Having to pay a mortgage often means having to take more out of your retirement funds and increasing the odds of running short of money. Also, remember that your income will drop when one of you dies because one Social Security check goes away. That could make it harder to pay the bills.

Consider meeting with a fee-only financial planner who can assess your financial situation and offer advice about the best course. It could be that you can well afford student loans and a mortgage. Or you could be headed for disaster. It’s better to find out while there may still be time to put that degree to work to boost your income or take steps to conserve your funds.

Q&A: Divorce and mortgages

Dear Liz: Our daughter was divorced in 2012 from her husband of 20 years. He still lives in the house they shared and she lives elsewhere. He pays the mortgage. When she asks him to remove her name from the mortgage, he says she is harassing him. What are her legal options and steps to accomplish this?

Answer: The couple’s divorce agreement should have addressed this issue. If he agreed to take sole responsibility for the mortgage, she should consult an attorney about holding him to that agreement.

It’s not as simple as requesting that the lender remove her name from the loan, said Emily Doskow, author of “Nolo’s Essential Guide to Divorce.”

“Every once in a while you’ll come across a mortgage lender that is willing to release one of the parties,” Doskow said. “But that’s very, very rare.”

Typically, getting her off the loan would require him to refinance or sell the home. If for some reason the divorce agreement doesn’t address the debt, your daughter still has considerable leverage if her name is on the deed. If she’s still an owner of the home, she can force a sale, Doskow said.

If she’s not on the deed, her options are limited. She may need to ask a court to intervene, Doskow said.

As long as she’s on the mortgage, her credit and ability to buy another home are tied up with her ex. If he stops making the mortgage payments — because he can’t afford them or out of spite — her credit would be trashed, since they are jointly responsible for the debt.

This is why it’s so important to separate all credit accounts and refinance any loans before a divorce is final. Otherwise, the two exes can be tied together financially, if not for life then at least for the life of a loan.