Q&A: How to improve your credit score and whether you should bother

Dear Liz: My credit scores are good, but I was wondering if there is a way to bring your scores to 800 or more if your income isn’t that high. I always pay my bills on time and my credit card off each month. In the last two years, I took out a small loan to pay off a car, then paid off furniture and now am paying on six new windows for my home.

My FICO scores run from 747 to 781. I’m told the reason they aren’t higher is that the number of accounts I have is too low and that my credit report shows no recent nonmortgage installment loans or “insufficient recent information” about such loans. I’m pleased that my scores are that high, but they say you get the best low-interest loans with a score over 800.

Answer: It’s not true that you need FICO scores of 800 or above to get the best deals. The best rates and terms typically are available once your scores are above 760 or so on the usual 300-to-850 FICO scale. Some lenders set the bar lower, to 740, 720 or even less. Also, your income is not a direct factor in your credit scores — although having a higher income can lead to creditors granting larger lines of credit, which could favorably impact your scores.

If what you’re after is bragging rights, there are some ways to boost good scores even higher.

The easiest may be to make more frequent payments on your credit card to reduce your credit utilization, or the amount of available credit you’re using. If your issuer reports your statement balance each month to the credit bureaus, paying off what you owe a few days before the statement closing date will reduce your apparent credit utilization. Just remember to pay off any remaining balance once you get your bill.

Another approach would be to apply for another credit card and spread your purchases between the two cards, which also can lower your credit utilization. Either way, continue to pay your cards in full, since there’s no credit scoring advantage to carrying a balance.

Taking out another installment loan could boost your scores, but it’s not smart to borrow money you don’t need if your scores are already good.

Remember, too, that there are many different credit scoring formulas. There are different versions and generations of the FICO score as well as FICO rivals such as VantageScore.

If you achieve an 800 with one type of score, you might not with another — and whatever score you achieve, you might not keep for long. Your scores fluctuate all the time, based on the changing information in your credit files.

It’s worth the effort to improve bad or mediocre scores because those can cost you in many ways such as higher interest rates, higher insurance premiums, bigger utility deposits and fewer options for cellphone service. Improving already good scores doesn’t offer much if any payoff, so it’s usually not worth incurring extra costs to do so.

Q&A: Revocable living trusts don’t help with taxes

Dear Liz: Thanks for your recent column on setting up a living trust. This sounds like something that I should do, but I have a few questions. Would federal and state taxes be due on earnings on assets in the trust? Would these taxes due be paid out of earnings of the trust? Would I continue to pay taxes on my income from sources other than the trust?

Answer: Revocable living trusts are an estate-planning tool used to avoid probate, the court process that otherwise follows death. Unlike many other types of trusts, revocable living trusts don’t trigger special tax treatment. You’re still considered the owner of the assets, so you’ll continue reporting earnings and income on your individual tax return, as you previously did.

Revocable living trusts also don’t get special estate tax treatment. Revocable living trusts are designed to eliminate the potential costs and delays of probate, not of the estate tax system. Living trusts may include provisions meant to reduce estate taxes, such as language creating a bypass trust upon death, but those are the same kinds of provisions that can be included in wills.

Q&A: Cash gift to daughter shouldn’t trigger fine

Dear Liz: I gave my daughter $30,000 in 2015. I was fined $5,000. Why? I had not talked with another daughter, who does my taxes, so I was not aware that I could give only $14,000. If I had known, I could have given her the money over two years. Why wouldn’t they advise me as such?

Answer: It’s not clear whom you mean by “they,” but you need to have a chat with the daughter who does your taxes, because it’s extremely unlikely you were fined by the IRS for your gift.

In 2015, you wouldn’t owe gift taxes until you had given away more than $5 million in your lifetime above the $14,000-per-person annual limit. (That lifetime limit, by the way, has been raised to over $11 million, and the annual gift exclusion limit is now $15,000.)

If you had to pay an extra $5,000, it was for something else. Let’s hope the tax-preparing daughter didn’t decide to “fine” you for favoring your other child.

Q&A: Why setting up a living trust may be wise, especially in California

Dear Liz: Is there a minimum amount of assets required before a revocable living trust is advisable? I am retired but my wife is still working. If we do not include our 401(k) plans, our total liquid assets (my wife’s monthly salary, my monthly Social Security benefit and my pension check) are below $100,000. We do not own a house or other real estate and do not have any major outstanding loans. We own our only car, a 2009 non-luxury vehicle.

Assuming we need a trust, do we still need to make out a will? If so, can we use a state-specific form online or just make out a handwritten will? Lastly, can a will be “until further notice” or do we have to update it each year? It should be obvious that we are trying to save expenses where we can.

Answer: Living trusts allow estates to avoid probate, the court process that otherwise oversees the paying of creditors and distribution of someone’s assets. (The sources of income you listed aren’t considered assets, by the way, since those will cease upon your deaths and can’t be transferred to other heirs.) Living trusts offer privacy, because probate is a public process, and can make it easier for a designated person to take over for you if you should become incapacitated.

There’s no specific dollar amount of assets for which a living trust becomes a good idea. In many states, probate isn’t a big deal, while in others — including California — probate is expensive enough that the cost of setting up a living trust can be worthwhile. Even in California, smaller estates (those under $150,000) can avoid probate or qualify for a streamlined process that can make living trusts unnecessary.

Those with larger estates may be able to avoid probate using other methods.

The money in your 401(k)s, for example, will pass directly to the beneficiaries you name. In many states, you also can name a beneficiary for a vehicle right on the registration form so your car could avoid probate. Some states also offer this “transfer on death” option for real estate.

“Plan Your Estate,” an excellent primer from self-help legal publisher Nolo, details your options.

Living trusts typically replace the need for a will, although a lawyer likely would recommend creating a “pour-over” will to include any assets accidentally left out of the trust. If you don’t have a living trust, you’ll definitely need wills to outline how you want your property distributed.

You also should create powers of attorney for healthcare and for finances, so that someone you name can make decisions for you should you become incapacitated. These documents are probably more important than a will because they can determine your quality of life at the end of your days rather than just what happens to your stuff when you’re beyond caring.

Do-it-yourself options are fine if your estate is small, simple and unlikely to be challenged by contentious heirs. Each state has specific requirements for making a legal will, which will be detailed in the software or online forms you use. You don’t have to update a will yearly but it’s a good idea to at least review your estate documents annually to see if any changes might be needed.

Q&A: Credit freezes complicate setting up online Social Security accounts

Dear Liz: You’ve recently written about protecting ourselves by establishing online Social Security accounts. Social Security prevents me (or anyone else) from creating an online account because I have credit freezes in place. As I understand the process, Social Security uses the credit bureaus to verify my identity. With a freeze, there’s no identity verification. In other words, in order to set up a fraudulent online account, someone besides me would have to unfreeze my credit report first. Is that correct?

Answer: Pretty much. Another way to establish an online account is to go into a local Social Security office with proper identification. But most hackers are unlikely to take the trouble to do either.

You may still want to create an online account to monitor your Social Security earnings record and promptly correct any mistakes or spot employment fraud (someone using your number to get work).

You could make a trip to a Social Security office or temporarily lift your freeze with the bureau that’s providing identity verification services. Currently, that bureau is Equifax — and yes, that’s the bureau that suffered the massive database breach that started this discussion.

Q&A: How to cash savings bonds for children

Dear Liz: My son is trying to cash in his children’s savings bonds, which seems to be difficult. You used to be able to go to a bank to do that. Is that still possible? If not, how can you do it now?

Answer: If the bonds were electronic, they probably would be held in a special minor’s account at TreasuryDirect.gov, the government site that allows investors to buy and redeem Treasury securities. If your son was identified as the person to have authority over the account, it would be relatively easy for him to redeem them.

We’ll assume, then, that your son is dealing with paper bonds. We’ll further assume that your grandchildren are still minors and that your son is cashing these bonds for their benefit, rather than his own. Many banks are leery of cashing children’s bonds precisely because parents (or people posing as parents) may be trying to rip off their kids.

Parents are allowed to redeem a child’s paper saving bond if the child lives with that parent and is too young to sign the request for payment, according to TreasuryDirect. The parent should write the following on the back of the bond:

“I certify that I am the parent of [child’s name]. [Child’s name] resides with me / I have been granted legal custody of [child’s name]. [She / he] is ___ years old and is not of sufficient understanding to make this request.” Your son should find a bank willing to certify or guaranty his signature. Then, in the presence of the bank representative, he must sign the request with his name “on behalf of [child’s name].”

Then he can send them to Treasury Retail Securities Site, PO Box 214, Minneapolis, MN 55480-0214. If the bonds are electronic, he can log into TreasuryDirect.com and follow the instructions there. Your son can contact the U.S. Treasury at (844) 284-2676 for further details.

Q&A: Why failing to pay your taxes is a risky form of protest

Dear Liz: I write in earnest hope that you might consider giving advice to those wondering about withholding federal taxes as a form of protest over the enactment of the new tax bill. What are the possible legal ramifications of withholding federal taxes?

If one is willing to accept the possible consequences, how might one go about the nuts and bolts of not paying federal taxes, and are there any measures one might take to mitigate the legal consequences somewhat? For instance, if one spouse withholds taxes but the other pays, does filing separately at year’s end afford any layer of protection to the paying spouse?

Answer: Please find another way to protest.

The Internal Revenue Service has extraordinary powers to collect what it’s owed. The agency can seize your bank accounts, property and a portion of your income. People who willfully fail to pay their taxes can wind up in prison. Filing taxes separately may keep the paying spouse on the other side of iron bars, but it won’t prevent his or her life from being disrupted.

Our duty to pay taxes doesn’t rest on our approval of every single aspect of the tax code. If that were the case, few of us would pony up. Fortunately, in a representative democracy you have plenty of legal options to work for change. The same Constitution that gives Congress “the power to lay and collect taxes” also gives you the right to express your opinion, to assemble in peaceable protest and to vote for new lawmakers at the appropriate times.

If you want to work for change, do so in ways that actually have a chance at success, rather than one that will succeed only in making your life worse.

Q&A: Freezing Your Social Security Number

Dear Liz: Recently you answered a question about whether Social Security files could be “frozen” to help prevent fraudulent activity, and your response was no. I had just researched that question after the Equifax breach, and found out the Social Security Administration does have a way to block electronic access to your records now, so I had that set up for me. The administration advised that it can be done whether you have an online account or not (I don’t). There is additional information about this on the Social Security website: https://secure.ssa.gov/acu/IPS_INTR/blockaccess

Answer: When you block electronic access to your Social Security file, no one, including you, is able to see your records or change your information online or through the administration’s automated phone service. Blocking access could prevent someone from tampering with your record, but it also could prevent you from detecting misuse of your Social Security number if someone is using it for employment or tax fraud. Blocking access certainly won’t prevent other kinds of identity theft involving credit, medical care or criminal arrest. A better approach might be to set up an online Social Security account to prevent someone else from doing so fraudulently, and to monitor that account regularly.

There is another government service, myE-Verify, that enables you to “lock” your Social Security number. That may prevent someone from using your number to get a job, but only if an employer uses the service to determine applicants’ eligibility to work in the U.S. — and many employers don’t. Even if you succeed in preventing employment fraud, your number could still be used in other types of identity theft. Also, a Social Security lock expires after one year, so you’d need to renew it annually if you want to keep it in place.

Unfortunately, there’s no easy way to prevent your Social Security number from being misused. As long as those nine digits continue to be used as an all-purpose identifier, we will be vulnerable to all kinds of identity theft.

Q&A: How to balance using retirement savings wisely with enjoying what you’ve earned

Dear Liz: I am 82, and my husband is 85. We are retired military, so we have a middling pension and some Social Security. Our monthly income of about $5,000 covers our monthly expenses. We rent in an independent living senior community. We have excellent health benefits via Tricare for Life. We both worked hard and are very thrifty. We have no debts.

We have savings of about $320,000. Our kids say we should spend some of our savings on cruises and things, but we just can’t let go! Are we in danger of running out of money? I am getting tired of always cooking and would like to eat out now and then. We do not want to be a burden for our kids and grandkids.

Answer: Your kids have the right idea. While you can, you should be enjoying some of the pleasures you’ve earned. You’re also smart to be careful.

You face at least two major threats to your financial stability. One is a reduction in income when one of you dies. The survivor will receive one Social Security check instead of two, and the pension income could go away or be reduced, depending on the payment option chosen at retirement.

The other threat is the potential need for custodial care. A long stay in a nursing home or a prolonged period where you need help at home could eat through most if not all your savings. Custodial care that helps people perform daily activities such as bathing, dressing, eating or toileting is not covered by Medicare or other health insurance, including Medicare supplements or wraparounds like the plan you have. Instead, Medicare covers limited periods of skilled nursing care, which typically requires licensed nurses to provide, while supplemental and wraparound policies can help pay co-insurance for such care.

There is a government program that pays for custodial care, called Medicaid. To qualify, the person needing care typically must have no more than $2,000 in assets. The spouse is allowed to have up to $120,900, although the limit can be lower depending on the state.

A visit with a fee-only financial planner could help you determine how much you need to prepare for these events. With that information, you should have a better idea of how much more you can safely spend.

Q&A: Retirement can bring some complex tax questions

Dear Liz: I was in the twilight of my career when the Roth became available, and I contributed the maximum for those few years before retirement. After retirement, I dropped to the 15% tax bracket, so I did Roth conversions of my regular IRA to fill out that tax bracket until I was age 70½. My reasoning was that I would likely be in the 25% tax bracket when I started my required minimum distributions from my IRA, and that turned out to be true.

The scary part is that the tax-deferred money in the rollover IRA has continued to increase each year in total in spite of the required minimum distributions. My tax preparer says he has clients who would be happy with my problem, so I should tread softly with my tax complaints.

One thing I regret is funding a nondeductible IRA for a few years before the availability of the Roth IRA. The nondeductible contributions only represent about 1% of the total. That means I can’t access that money I have already paid taxes on unless I have depleted all of my tax-deferred monies. Do you have any suggestions?

Answer: Absolutely. Listen to your tax preparer. Most retirees would love to have these problems-that-aren’t-really-problems.

You were smart to “fill out” your tax bracket by converting portions of your IRAs. For those who aren’t familiar with the concept, it involves converting just enough from an IRA to make up the difference between someone’s taxable income and the top of his or her tax bracket.

The top of the 15% bracket is $75,900 in 2017, so a married couple with a $50,000 taxable income, for example, would convert $25,900 of their IRAs to Roths. They would pay a 15% tax on the amount converted (plus any state and local taxes), but the Roth would grow tax-free from then on and no minimum distributions would be required.

These conversions can be a great idea if people suspect they’ll be in a higher tax bracket in retirement.

Now on to your complaint about getting back the already taxed contributions to your regular IRA. Withdrawals from regular IRAs are taxed proportionately.

The amount of your after-tax contributions is compared to the total of all your IRAs, and a proportionate amount escapes tax. So if nondeductible contributions represent 1% of the total, you’ll pay tax on 99% of the withdrawal. You’re accessing a tiny bit of your after-tax contributions with each withdrawal.

If you don’t manage to withdraw all the money, that’s not the worst thing in the world. It means you didn’t outlive your funds. Your heirs will inherit your tax basis so they’ll access whatever you couldn’t.