Q&A: Saving for retirement can’t wait

Dear Liz: I have a family member who at 57 has no savings, a house whose value is 58% mortgaged and debt from a family member of $180,000.

This person is just starting a new job that will cover expenses with about $1,000 left over each month. The job offers a 401(k) but doesn’t allow contributions until employees have been with the company for eight months.

This person has paid into Social Security so that will be there (hopefully!) at retirement. What would be the best way for this person to start saving toward retirement?

Answer: Your relative shouldn’t wait to be eligible for the 401(k). People 50 and older can contribute up to $6,500 annually to a traditional IRA or a Roth IRA, which is $1,000 more than the usual limit.

If your relative didn’t have a previous job that offered a workplace plan in 2017, then this year’s contributions to a traditional IRA should be deductible.

Next year, when your relative is eligible for the 401(k), the deductibility of contributions will depend on that person’s income. In 2018, deductibility begins to phase out when modified adjusted gross income reaches $63,000 for singles. If IRA contributions aren’t deductible, after-tax Roth contributions typically are a better deal, but the ability to contribute to a Roth begins to phase out for singles at $120,000 in 2018.

Encourage your relative to save and to delay starting Social Security for as long as possible. When Social Security makes up the majority of one’s income in retirement — as it will for your relative — it’s important to maximize that check.

It’s not clear why your relative has been saddled with a family member’s debt, but any retirement plan needs to include options for paying off, settling or even erasing (through bankruptcy) such a substantial amount. Your relative should talk to a credit counselor and a bankruptcy attorney to better understand the options.

Q&A: Free credit monitoring won’t prevent identity theft

Dear Liz: I thought I would share some information in light of the Equifax disaster.

Two of my credit card issuers provide free credit monitoring. Capital One scans my TransUnion file and Discover uses Experian. Both send email and text alerts about new activity and a monthly “reassurance” email when no such activity turns up in the previous 30 days.

Along with the credit freeze I placed at Equifax, I feel pretty secure at the moment. I’m sure that other credit card issuers have similar programs in place, and perhaps people should ask their financial institutions if such monitoring is available to them as account holders.

Answer: Free credit monitoring can certainly be helpful, but understand that it can’t prevent identity theft. At best, credit monitoring alerts you after the fact if someone has opened a new account in your name. Only credit freezes at all three bureaus can prevent those accounts from being opened in the first place.

Unfortunately, credit monitoring and freezes can’t help you with the most common type of identity theft, which is account takeover. That’s when someone makes bogus charges to your credit cards or steals money from your bank accounts.

Financial institutions use different types of software to detect fraud, but nothing replaces vigilance on the customer’s part. We should be reviewing transactions on our accounts at least monthly if not weekly. Online access to accounts can help you better monitor what’s going on.

You also can set up alerts that will email or text you if large or unusual transactions happen. (Just beware of a common scam where you’re texted an “alert” that your account has been frozen, along with a link that encourages you to divulge your login information.)

Even if you do everything in your power to avoid identity theft, you still can’t prevent scammers from using your information to file bogus tax returns, get medical care or commit criminal identity theft (by giving your name to the police when they’re arrested, for example). As long as Social Security numbers are used as an all-purpose identifier by businesses and government agencies alike, you can’t make yourself completely secure.

Q&A: To give or not to give can be a taxing question

Dear Liz: A good friend who is childless wishes to give his property to my daughter before his death. He has been an informal uncle for the whole 50 years of my daughter’s life, and we are, in effect, his family. However, I am concerned that the gift tax may be more than he bargained for. He is not tax-aware, and earns very little, so his tax knowledge is skimpy. He owns his property outright, however.

I know that someone can give as much as $14,000 without having to file a gift tax return and that there is a “’lifetime exemption” of more than $5 million. If his property is worth, say, $500,000, can he be tax free on a gift of that magnitude by, in effect, using his lifetime exemption?

Answer: Essentially, yes, but he may be creating a tax problem for your daughter.

Gift taxes are not something that most people need to worry about. At most, a gift worth more than $14,000 per recipient would require the giver to file a gift tax return. Gift taxes wouldn’t be owed until the amount given away in excess of that annual exemption limit exceeds the lifetime exemption limit of $5.49 million.

Capital gains taxes are another matter and should always be considered before making gifts. Here’s why.

Your friend has what’s known as a “tax basis” in this property. If he sold it, he typically would owe capital gains taxes on the difference between that basis — usually the purchase price plus the cost of any improvements — and the sale price, minus any selling costs. If he has owned the property a long time and it has appreciated significantly, that could be a big tax bill.

If he gives the property to your daughter while he’s alive, she would receive his tax basis as well. If she inherited the property instead, the tax basis would be updated to the property’s value at the time of your friend’s death. No capital gains taxes would be owed on the appreciation that took place during his lifetime.

There’s something else to consider. If your friend doesn’t make much money, he may not have the savings or insurance he would need to pay for long-term care. The property could be something he could sell or mortgage to cover those costs.

If he gives the property away, he could create problems for himself if he has no other resources. Medicaid is a government program that typically pays such costs for the indigent, but there’s a “look back” period that could delay his eligibility for coverage. The look-back rules impose a penalty for gifts or asset transfers made in the previous five years. He should consult an elder-law attorney before making such a move.

Q&A: Should grandma sue over the student loan she co-signed?

Dear Liz: You recently answered a letter from a grandmother who co-signed a student loan for a granddaughter who isn’t paying the debt. Although you did not suggest it, a very viable option would be for the grandmother to contact an attorney and sue her daughter and her granddaughter for the debt owed.

It doesn’t appear that they care for the grandmother anyway, so why feel bad about holding their feet to the fire? The grandmother may not have a legal leg to stand on with the daughter, but surely the granddaughter received the benefit of the loan and should ante up.

Answer: Suing a family member is a pretty drastic step that many people are reluctant to consider. If the grandmother is in fact “judgment proof” — if creditors who sue her wouldn’t be allowed to garnish her income or seize her property — then the lender might start focusing its collection actions on the granddaughter. The grandmother wouldn’t have to go to the expense of suing the young woman or trying to collect on a judgment.

Either way, the bankruptcy attorney I suggested she consult to help determine if she’s judgment proof also would be able to advise her about filing such a lawsuit.

To reiterate, student loans typically can’t be discharged in bankruptcy, but bankruptcy attorneys understand the credit laws of their states and can help people assess how vulnerable they are to lawsuits and other collection actions.

Q&A: How to divvy up your wealth when you don’t agree with one offspring’s life choices

Dear Liz: I am reasonably well off thanks to hard work, some luck and a hard-earned (by my mother) inheritance. I don’t spend much because I prefer a simple life, so the money has piled up over the decades.

I have two children. One has a college degree, a decent job, and is saving for retirement. The other dropped out, became an actor and lives hand-to-mouth, getting very little paid-acting work. I want to help my kids while I’m alive, not wait to leave them money. I will help my worker bee to buy a home but I am at a loss how to help my actor. I hate to reward a lifestyle of “I can’t work a 9-to-5 job because I need to be free to audition.” On the other hand, don’t affluent parents help their artistic kids pursue their dreams?

What kind of financial advisor or family dynamics expert can I consult? Do you have any suggestions? I don’t need a money manager as the funds are handled well already. I need help to disburse funds in keeping with my values.

Answer: Talk to your estate planning attorney. If you don’t have one, get one. These professionals do more than draw up wills and trusts to distribute your assets after you’re gone. They also can help advise you about disbursements during your lifetime, including any gift tax implications. A fee-only financial planner who charges by the hour could be another good resource for you.

In answer to your question about affluent parents, some do help their children pursue dreams that aren’t wildly remunerative. The parents might supplement the income of an altruistic daughter who wants to teach in a low-income school or a talented son who needs time to build up a portfolio of artwork for a gallery show. It’s the parents’ choice, obviously, and there’s certainly no requirement they support career choices they think are questionable.

You have many options to be fair to your kids without enabling them. For example, you could put aside an amount equal to the down payment you’re giving your daughter and let your son know the money’s available when he’s “ready” to buy a home. That is so much nicer than saying, “When you snap out of your delusion that you’re going to make a living in a field where so few actually do.”

Q&A: Obsessing over taxes is foolish

Dear Liz: Most of your articles are from people who have not yet retired. I am retired and always expected to be making less money now than when I was working. But the opposite has happened. I am making almost twice as much and I have a lot of money in stocks, which have increased dramatically. I want to travel and use that money but anything I sell will be taxed at the 25% rate. Any ideas how to get my money out and be able to use it?

Answer: Sure. Place a sell order, set aside 25% for taxes and enjoy your life while you still have a life to enjoy. If you’d like to reduce your yearly tax bill, consider bumping up your charitable contributions to help those who aren’t so fortunate.

Paying taxes is not fun, but obsessing about ways to avoid them or letting them dictate your decisions is foolish. You’ll still be far better off than you expected to be after you pay Uncle Sam, and you’ll have the cash to do what you want. So do it.

Q&A: Hard to predict tax rates

Dear Liz: I read your column answer to the 40-year-old who asked about regular 401(k) versus Roth 401(k) contributions. Obviously, the answer has more moving parts than you have space for. However, using before-tax dollars for the 401(k) gives him a small break now, but when he hits 70 1/2, those dollars will impact the taxability of his Social Security benefits. He could contribute to the 401(k) with after-tax dollars, get the company match and avoid that impact 30 years in the future, right?

Answer: The “right” answer requires knowing what tax rates will be 30 years in the future, at a time when no one is entirely sure what tax rates will be next year. Which means the smart approach is to hedge one’s bets. Given the original reader’s current financial situation, that translates into focusing most contributions into the pretax 401(k) but also making contributions to the Roth. That will give him some flexibility to control his tax bill in retirement without going “all in” on the bet that his tax rate then will be higher than it is now.

Q&A: How student loans can follow you to the grave

Dear Liz: Several years ago, my daughter called in tears asking if I could help because my granddaughter, who was halfway through her first year of college, would have to drop out if she didn’t immediately finish paying her tuition. I agreed to co-sign a loan, thinking after she got through that semester, they could see how things went.

Well, unbeknownst to me, she took out a loan that also covered the next semester. She dropped out of school in her second year. Now several years later, I’m being hounded by the lender because neither my granddaughter or daughter seem to think they should have to do anything about this. I sometimes get up to four calls a day, seven days a week. I have returned calls but gotten nowhere.

Meanwhile, my granddaughter recently got a brand-new car and posts pictures of herself enjoying partying with friends. I tried to get her to talk to me about it, thinking if she, along with her mom and myself, could each manage to pay a little each month we could work on getting this taken care of, but I got no response from either of them.

My daughter and son-in-law still go on cruises and do other traveling, drive newer expensive vehicles and will no longer talk to me.

I am 73 and struggling to live month-to-month on Social Security, which is my only income. I used to have an 800 credit score that has now gone down into the 600s because of this.

Now I am afraid they will start taking this out of my Social Security check. This loan is about 72% of my total annual income! My doctor has upped one of my medications as I have trouble sleeping worrying about this.

What am I to do? The only way I can see out of this would be my death, and then I’m afraid it would even follow me to my grave.

Answer: If you co-signed the loan, then it was likely made by a private lender that won’t be able to take your Social Security check. Federal student loans are a different story. The U.S. Supreme Court has ruled that up to 15% of borrowers’ Social Security benefits can be taken to repay those.

Federal student loans also have no statute of limitations, which means the government can indeed pursue you to the grave. Private student loans, however, do limit how long lenders have to sue you over the debt. The time limit varies by state and is typically three to 10 years, but the limit may be extended in some areas if you make a payment on the debt or even acknowledge that it’s yours.

You should make an appointment to talk to a bankruptcy attorney. Student loans typically can’t be erased in bankruptcy, but an attorney familiar with the credit laws in your state can advise you about how vulnerable you might be to lawsuits and other collection actions.

If Social Security is your only income and you don’t have other assets a creditor can take, you may be “judgment proof.” That means a lender can sue you, but won’t be able to collect anything.

If that’s the case, the attorney may be able to communicate the situation to the lender so that it can redirect its energies to collecting from your irresponsible granddaughter.

Q&A: Keep your ID papers current

Dear Liz: In helping my 92-year-old father update his trust, we ran into a snag. Both his passport and driver’s license had expired.

We thought he didn’t need them since he does not travel, drive or hit the bars.

But to notarize documents, you need current identification. Getting a state ID card added many weeks to the process.

Remind your elderly readers to keep their ID current.

Answer: Consider it done.

Q&A: Debt settlement vs. filing for bankruptcy: Pros and cons

Dear Liz: I owe a credit card company about $16,900. I have not been able to make payments for almost two years and have no money. They recently sent me a proposal to pay off the entire amount at 30 cents on the dollar by making 24 payments of a little over $200 per month. I’m concerned they can then resell the unpaid amount to a debt collector and that it really isn’t a solution for the entire debt to be extinguished, even if I agree to their proposal. Am I right?

Answer: In the past, poor record-keeping and unethical behavior meant some debt buyers routinely re-sold debts that were supposed to be settled. While that can still happen, it’s less likely, especially if you’re dealing with the original creditor or a company that’s collecting on the creditor’s behalf, rather than a company that purchased an older debt.

You’ve been offered a pretty good deal, says Michael Bovee, president of debt settlement company Consumer Recovery Network. Typically debts are settled for 40 to 50 cents on the dollar.

That doesn’t mean you should take it, necessarily. You have to be able to make the payments to get the debt settled, for one thing. Also, any debt that’s forgiven can be treated as income to you. The creditor will send you (and the IRS) a Form 1099-C showing the forgiven amount and you’ll typically owe income taxes on that amount unless you’re insolvent. If you’re in the 25% tax bracket, that would add roughly $3,000 to the cost of settling this debt.

Many people who can’t pay what they owe are better off skipping debt settlement and filing for Chapter 7 bankruptcy, which erases credit card balances, medical bills, personal loans and many other unsecured debts in three to four months. Chapter 7 typically has a bigger impact on your credit scores than debt settlement, but it legally erases the debts and prevents creditors from filing lawsuits against you. If you try to repay this debt and fail, or if you continue simply ignoring it, you could get sued.

You can get a referral to an experienced attorney from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org. Discuss your situation and your options before you decide how to proceed.