Dear Liz: I left a job several years ago to become a full-time freelancer. I have a SEP IRA and a SIMPLE IRA from that job that have basically just been sitting there. What are my options in moving this money to a better retirement investment?
Answer: SEPs and SIMPLEs are just the tax-advantaged buckets into which you (and your then-employer) put money. It’s the investments you choose within those buckets that determine what kind of returns you’ll get. The financial institution that’s holding these accounts can be a factor as well: If it’s charging a lot of fees, your returns will suffer accordingly.
Your best bet is to make sure the accounts are being held at a low-cost provider and that you have sufficient exposure to stocks to offer growth that will offset inflation over time. Most discount brokerages and mutual fund companies offer target-date maturity funds that give you diversification, professional asset allocation and automatic rebalancing at a low cost.
Dear Liz: I got a big tax refund this year and am trying to figure out what to do with the money. Right now I have school loans with a 4% interest rate that I do not need to make a payment on until 2024 with my current payment plan, but the amount I owe is pretty hefty and I know it’s going to compound more over time. I also have a very low-interest car loan (1.9%) that will be paid off in 31/2 years. I also could put that money in the market in hopes that it will grow. I should add I am 27 years old. Any advice?
Answer: Yes: Please review the terms of your student loans, because it’s likely you’ve misunderstood your obligation.
Federal education loans typically don’t allow you to go 10 years without payment, said financial expert Mark Kantrowitz, publisher of Edvisors Network.
“With federal education loans, the economic hardship deferment has a three-year limit and most forbearances have a three-year limit, with one or two having a five-year limit,” Kantrowitz said.
“One could potentially consolidate the loans after getting a deferment and forbearances to reset the clock and thereby get a new set of deferments and forbearances on a new loan. But most of the forbearances aren’t mandatory, so one can’t count on stacking deferments and forbearances to get a 10-year suspension of the repayment obligation.”
Another possibility is that you’ve signed up for an income-based repayment plan that has reduced your payment to zero, but your eligibility is determined year by year. “2024 is a very specific date, so it seems unlikely that this is [income-based repayment],” Kantrowitz said.
“The most likely scenario is this borrower is misunderstanding the terms of his loan,” Kantrowitz said. “The next most likely scenario is that this borrower is not referring to a qualified education loan, but to a particular personal loan that he was able to obtain that few other borrowers would be able to obtain.”
Whatever the case may be, one of the best uses for a windfall is to boost your retirement savings. Even if you don’t have a workplace plan, you could set up an IRA or a Roth IRA as long as you have earned income.
Once you’re on track for retirement, your next goal would be to build your emergency fund, since you don’t have any high-rate debt. Once those goals are met, you can start paying down lower-rate debt (such as your student loans).
Dear Liz: I wish to add a little more information for the retired individual who had trouble getting approved for a home equity loan because he had no regular income (although he had plenty of assets). I’d suggest consulting a mortgage broker, not a bank. An independent broker is not captive to one set of policies. My broker suggested that I set up automatic withdrawals from my IRA to show that I had income in addition to Social Security. Once this was done and I met all the other credit requirements, I closed on a refinance in less than 30 days at a very good interest rate. Then, I discontinued my automatic withdrawals and went back to taking my funds as needed. I learned to use a qualified mortgage broker many years ago after a divorce and not having a job. I could not get a mortgage on my own, but my mortgage broker did and at very good terms. Each time I’ve used a broker, the process went smoothly and was stress free.
Answer: Many people don’t realize that lender policies differ quite a bit. In this case, mortgage buyers Fannie Mae and Freddie Mac have clarified that mortgage lenders can calculate a retiree’s income based on his or her assets, but not all lenders are willing to do the extra work these loans require.
People who are W-2 employees with solid income histories and great credit scores probably don’t need help finding a loan, because plenty of lenders will want to compete for their business. When your situation is outside the norm, however, a mortgage broker may be able to track down a lender when others balk. The National Assn. of Mortgage Brokers at http://www.namb.org offers referrals.
Dear Liz: I am trying to help my retired parents refinance their home. Currently they are paying over 8% interest. (This loan should be illegal.) The problem is their credit score, which is around 536. They had a tax lien in 2004 (it has been paid off for over four years) and some minor credit card issues. The total card debt is less than $1,000. I see several bad footnotes on these cards. Some of the cards have a balance of less than $100. What is the best and fastest way to help them get the mortgage they deserve?
Answer: Your parents don’t have a single credit score. They each have their own scores. Mortgage lenders typically get FICO scores for each borrower from all three credit bureaus, for a total of six scores. Lenders look at the middle score for each person and typically base rates and terms on the lower of those two middle scores.
If that number is indeed 536, your parents have serious, recent credit problems. You may not think an unpaid credit card is a big deal, but it is to credit scoring formulas, which are designed to help lenders gauge a borrower’s risk of default. People with unpaid bills are far more likely to default on a new loan than people who pay their bills on time, and their respective credit scores reflect that reality. What people “deserve” isn’t a factor. How they handle their credit accounts is.
What you’re calling “bad footnotes” are likely records of late payments and perhaps charge-offs and collections activity. Those typically can’t be erased, but your parents can stop the ongoing damage to their credit by paying their bills on time and paying off any overdue bills to their credit card companies.
If the accounts have been sold to collectors, the process gets trickier. Paying off collections typically won’t help credit scores, but lenders usually want these accounts paid off before they will make a new loan. Your parents can try negotiating to have the collection accounts deleted in return for payment, but they won’t be able to erase the late payments and other negative marks reported by the original creditor.
Once they start handling their credit accounts responsibly, their credit scores will start to improve. The improvements will happen slowly, though, and they may well miss the opportunity to refinance at today’s low levels.
Dear Liz: I went with my brother to his credit union to refinance his house and found out his wife has about eight medical bills that went to collections and he owes a phone company more than $2,000. Their debt totals about $6,300. I could lend them the money or they could do a debt consolidation or talk to a credit counselor. What’s your opinion on these options?
Answer: None of these options is likely to work the way you hope.
Your brother should be wary of any “debt consolidation” offers he gets, as many will be scams and others will charge outrageous interest. The collections accounts have trashed the couple’s credit, which means mainstream lenders will probably avoid them until their situation improves.
The debt management plans offered by legitimate credit counseling agencies, meanwhile, are designed to help people pay off credit card bills, not past-due medical or phone bills. A credit counselor may give the couple some helpful budgeting advice to enable them to pay their debts, but it typically wouldn’t arrange payment plans.
Lending your brother the money would enable the couple to pay off the overdue bills. That won’t help their credit scores, however, unless your brother is able to persuade the collectors to remove the accounts from their credit reports. That’s often difficult to do, said debt collection expert Gerri Detweiler of Credit.com.
Your brother could start by asking the medical providers to take back any accounts that have been assigned to collectors and making payment arrangements directly with those providers. Medical collections are often on consignment and can be called back if the provider wishes.
The phone account, by contrast, was probably sold to a collection agency and can’t be reassigned to the original company. Even if your brother can’t get the account deleted from credit reports, he’ll probably need to pay or settle it if he hopes to refinance his mortgage because lenders usually don’t like to see open collection accounts.
Before you lend him the money, you should understand that loans to people with debt problems often don’t get repaid. If you can’t afford to lose this money, don’t lend it.
Dear Liz: I was taken aback by your answer to the receptionist whose employer was paying her as an independent contractor although she should have been paid as a W-2 employee. I believe your response was to lie on her tax returns and hide the fact that her employer was doing something illegal. I cannot say in how many ways that is wrong. As a human resources professional, I would advise this person to contact regulators under her state’s whistle-blower protections and let them know what has happened and take the advice that they give. If the writer has been given a 1099, you can be assured that others in the company have too. Her name remains anonymous. Even if her employer finds out it was her, she has recourse if she’s fired. I’ve always enjoyed your column and look forward to reading it each Sunday, but this response was totally off the charts.
Answer: Actually, the advice was exactly the opposite. Tax pro Eva Rosenberg recommended telling the truth by filing new forms, which would alert the IRS to the employer’s deception. Rosenberg said that it probably would take the tax agency a couple of years to get around to auditing the employer, which would give the receptionist time to find a new job.
Also, not all states have laws protecting whistle-blowers, and some of those that do apply only to public employees. No one should assume she is protected by such a law without during further research.
Dear Liz: I am trying to increase my credit scores so I can buy a house in a couple of years. My scores are pretty bad, but I do have a car loan that I have never been delinquent on. I have recently obtained a secured credit card with a $300 limit. Will a credit card with such a small limit help improve my credit score?
Answer: Yes, but you may need longer than two years to get your scores up to snuff, depending on how bad they are.
Regaining points always takes much longer than losing them, so you should make sure to pay all your bills on time and use your new credit card lightly but regularly. Charge less than $100 a month and pay the balance in full, because there’s no advantage to carrying a balance.
After six months or so of regular payments, consider adding another card to the mix. In a year or two, you may qualify for a regular credit card that will continue to enhance your scores.
Also, make sure you’re looking at your FICO scores, because those are the credit scores most mortgage lenders use. Other scores may be offered for free or sold by the credit bureaus, but they typically aren’t FICOs.
Dear Liz: I am in a new relationship with a great woman. I’ve talked a little bit about money and retirement with her (she’s 30). I am trying to let her know that it would be wise to contribute at least enough to her company’s retirement program to get the full match. What are some books or articles that would show her the importance of saving for retirement? I like her, but this can be a deal breaker for me. What is the best way to introduce her to personal finances without scaring her?
Answer: You could start by hopping down from that high horse you’re riding.
The fact that she’s not saving for retirement is unfortunate but hardly unusual. Many people her age have trouble understanding the need to start saving young for retirement. Even those who do may have trouble investing their money, thanks to the 2008 market crash and subsequent recession. A recent survey by MFS Investment Management of people with $100,000 or more in investable assets found nearly half of adults under 34 say they would never be comfortable investing in stocks.
Of course, millennials need to get comfortable with the idea of stock market investing, because otherwise they’re unlikely to grow their wealth enough to afford a decent retirement. Some books that can help them understand the principles of investing — and the importance of scooping up those free company matches — include:
•”Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back,” by Kimberly Palmer.
•”Get a Financial Life: Personal Finance in Your Twenties and Thirties,” by Beth Kobliner.
•”On My Own Two Feet: A Modern Girl’s Guide to Personal Finance,” by Manisha Thakor and Sharon Kedar.
As you talk to your girlfriend, remember that few couples are on exactly the same page financially. Everyone has different family cultures and experiences growing up that inform how we deal with money. Asking her to talk about her background with money and taking the time to understand her perspective is a great place to start your conversations about finances. It’s certainly better than issuing ultimatums at this early stage.