Q&A: Credit scores come in many forms

Dear Liz: I am now getting my credit score from three different places: my bank, one of my credit cards and a free online site. Why are all three of the scores always different?

Answer: You don’t have one credit score, you have many and they change all the time. Furthermore, you’re probably looking at scores created with different formulas that may be using information from different credit bureaus.

The FICO 8 is the most commonly used score, but the number you see may vary depending on whether the data is drawn from Equifax, Experian or TransUnion credit bureau and when the score was created. Your scores will change as lenders update the information in your credit report. FICO scores may also be tweaked for different industries, such as credit cards or auto loans, and be on a 250-to-900 scale rather than the 300-to-850 scale of other FICO scores. FICO scores also come in different generations, so your FICO Bankcard Score 2 may be different from your FICO Bankcard Score 5.

Free sites typically offer VantageScores, created by the three bureaus to be a rival to FICO. These scores are also used by lenders, but not to the same extent as FICO scores.

Q&A: Here are some tips for getting more retirement money into accounts with tax advantages

Dear Liz: My wife and I are about 35. I’m self-employed and contribute to a SEP IRA. My wife contributes to a workplace retirement plan. We don’t qualify to contribute to Roth IRAs. In order to get more money into retirement accounts, would you recommend doing back-door Roth contributions? What else is there to do to get retirement money into accounts that will have a tax benefit now or later?

Answer: Roth IRAs don’t provide an upfront deduction, but withdrawals are tax-free in retirement. That makes them especially enticing to people who expect to be in the same or higher tax bracket in retirement — mostly higher-income people and good savers.

People who earn more than certain limits, however, are prohibited from contributing directly to a Roth IRA. For 2018, direct Roth contributions aren’t allowed for people whose modified adjusted gross incomes exceed $199,000 for married couples filing jointly or $135,000 for single filers.

Several years ago, however, Congress eliminated income limits on who was allowed to convert a regular IRA to a Roth IRA. That change created the back-door Roth strategy, in which a high-income taxpayer contributes to a regular IRA and then converts the money to a Roth.

The strategy works best for people who don’t already have a large IRA filled with pre-tax contributions and earnings. When you convert all or some of an IRA to a Roth, you have to pay a proportionate amount of income taxes on the conversion based on all of your IRA holdings. If you don’t have an existing IRA and don’t deduct the IRA contribution, you’ll owe little if any taxes on the conversion.

The IRS hasn’t specifically blessed or banned the back-door Roth strategy, so it remains somewhat controversial. Many investing and brokerage sites promote it. Some proponents, however, recommend letting several months pass between the contribution and the conversion. The idea is to avoid IRS scrutiny by making the transactions appear to be separate decisions rather than one clearly meant to get around the contribution limits.

If you want to stay out of gray areas and potentially contribute more cash to your retirement, consider setting up a solo 401(k). This version of the popular workplace plan is meant for self-employed business owners with no full-time employees other than themselves and their spouses. Plan participants under age 50 can contribute up to $18,500 a year. Those 50 and older can contribute up to $24,500. The plan can have a Roth and an after-tax contribution option in addition to a pre-tax option. In addition, the business can make a 25% annual profit-sharing contribution (or 20% if the business is a sole proprietorship or single member LLC). The combined maximum of participant and business contribution is $55,000 for those under 50 and $61,000 for those 50 and older.

If you’re able to contribute more than these amounts each year, consider a traditional defined-benefit pension. Those involve considerable set-up and ongoing costs, so consult a tax pro to see if it’s a good fit.

Q&A: Identify the goal for rolled-over account

Dear Liz: I retired from civil service in 2014. Upon retirement, I requested that my Roth IRA funds be sent to a bank. The funds have been earning 0.6% interest. Is it possible to move the funds to another bank or elsewhere to earn a higher rate? Or, should I leave the funds at the bank until an unforeseeable emergency occurs?

Answer: It’s not clear from your letter whether you withdrew money from your Roth or simply had the whole thing transferred from one custodian to another (the bank). Either way, you’re free to move your money elsewhere. If the money is still inside the Roth, you’d move the Roth. If it’s outside, you’d just move the funds.

Before you do anything, though, figure out your goal for this money. If it’s your emergency fund, then it needs to be kept safe and liquid. An FDIC-insured bank account is likely the best bet, and many online banks are offering somewhat higher rates than you’re getting now.

If you want this money to grow, however, you’ll need to take more risk with it. That typically means investing a portion of it in stocks and bonds. If that’s your goal, look for a discount brokerage or low-cost mutual fund provider. If you’re new to investing, books such as Kathy Kristof’s “Investing 101” or Eric Tyson’s “Investing for Dummies” could be helpful.

Q&A: At retirement, should you roll your 401(k) into your IRA? Think about these factors

Dear Liz: I turned 70 last week and therefore I am leaving my part-time job after about 13 years. No big deal, but now that I am retiring I have a 401(k) worth about $60,000 and an IRA that is somewhere around $50,000. Should I roll my 401(k) account into my IRA or just let it sit there collecting dust? I do understand that at age 70½ I am supposed to start withdrawing some of the funds, but am not sure how much. It seems 70 years creeped up on me.

Answer: Years have a nasty habit of doing that.

You mentioned that you’re retiring because you’ve achieved a certain age. Few jobs have mandatory retirement ages, though. If you don’t retire, you can continue putting off required minimum distributions from your 401(k). You would still have to take minimum distributions from your IRA, unless your employer allows you to roll that money into your 401(k) plan.

But we’ll assume you’re happy with your decision. Rolling your 401(k) into your IRA isn’t necessarily the best option. What you should do next depends on the details of both accounts.

Most large-company 401(k)s allow retirees to take regular distributions, including required minimum distributions, from the plans. These plans also tend to offer low-cost institutional funds that may be a much better deal than those you can access as a retail investor with an IRA. If you’ve got a good 401(k) that allows retirement distributions, there may be no need to move your money.

If your employer’s plan doesn’t allow such distributions, don’t automatically assume your current IRA provider is the best choice, especially if it’s a full-service brokerage or insurance company. Compare the fees of the investment options with what’s available from a discount brokerage. Transferring all your retirement money to a lower-cost provider can help you keep more money in your pocket.

Calculating your required minimum distributions isn’t difficult. The IRS has tables on its website, and in Publication 590, to help you figure out how much money to withdraw. Various sites have calculators as well.

One caveat: If you keep your IRA and 401(k) separate, you’ll have to calculate required minimum distribution separately for each account and withdraw those amounts from each account, says Mark Luscombe, principal analyst for taxes and accounting at Wolters Kluwer. That’s different from the rules when you have multiple IRAs. When you have more than one IRA, you calculate the required minimum distribution based on the total of all your IRAs but are allowed to take the distribution itself from any one of them.

Q&A: How to cut back after spending a windfall

Dear Liz: I inherited a substantial amount of money when a relative died. I put most of it in retirement funds, but as a few stray accounts were found, sometimes I just deposited them in my bank account and lived comfortably on $1,000 to $2,000 over my normal income. I have no debt, but I’ve grown accustomed to this extra cash. What’s the best way to reel back into a lifestyle I can afford on my $62,000 annual salary?

Answer: Those windfalls represented a substantial increase to your regular income, so cutting back may be painful. It’s so much easier to ramp up our lifestyles than to crank them back.

Start by tracking your spending. Once you understand your patterns, you can figure out where to cut back.

Don’t automatically assume that the luxuries you were able to buy with the extra money are now off limits. If you traveled more and enjoyed it, for example, that should still have a place in your budget. You could cut elsewhere to make sure travel is part of your life. If some of your spending didn’t bring you much joy, though, pay attention to that as well. You may have started eating out more only to find your health suffered, or you didn’t enjoy it that much, and you’d be fine doing that less often.

Your goal with any spending plan should be identifying which expenditures are important to you and which aren’t — then reducing the latter so you can have more of the former.

Q&A: You may be good with money, but if sister didn’t ask your opinion, butt out

Dear Liz: My sister and her husband are in their 80s. They are not in the greatest health but still able to live on their own. They’ve had some bad luck financially in the past. Last year they decided to convert part of their property to serve as a short-term rental. I questioned the advisability and legality of this. I was told they had checked and it was all right legally. They proceeded, but it wasn’t legal and their homeowners association shut them down. They have now decided to rent the space month-to-month through a property management firm as the HOA will allow rentals of one month or longer.

I shared my experience with rental property, which has been very mixed. Busybody that I am, I also provided information from a friend whose family had invested in rental property. My brother-in-law insists that he had a good experience many years ago with rentals. Am I wrong to call this a bad idea? Should old people try to recoup the money they put into their ill-advised initial rental attempt with another ill-advised rental attempt?

Answer: The answer to both questions is most likely, “It’s none of your business.”

You didn’t indicate anywhere in your letter that your sister or brother-in-law had sought your opinion. You also didn’t mention any signs that they may suffer from diminished capacity or any other cognitive problem that would require intervention.

What you did do was call yourself a busybody. You might want to reflect on what causes you to repeatedly offer advice to people who aren’t interested in hearing it. Those of us who are “good with money” often feel justified in lecturing those who aren’t, or who have had (as you put it) bad luck financially. Our advice is seldom welcomed, though, and can be more about making ourselves feel superior than really helping someone else. Giving unsolicited advice is actually a terrible habit, and a hard one to break since it’s so deliciously enjoyable (although not for the recipient, obviously).

If we want our opinions to truly matter, we should be more sparing with them. We can start by proffering advice only when it’s specifically requested. When we’re tempted to make an exception to this rule, we should do so only after careful thought and preferably after consulting with a friend who already is in the habit of keeping her opinions to herself. We’ll likely discover what she’s already learned, which is that our meddling usually isn’t appreciated.

Q&A: When to consider creating a trust

Dear Liz: You’ve written about trusts recently, but I’m confused. What are the benefits of creating a trust and putting all of your assets in it? Does it make sense for someone in their 30s and without any major assets, such as a house, to create a trust? Will I need to create a new trust if I get married?

Answer: There are many different types of trusts, but they’re typically designed to protect assets in one way or another. If you don’t have a lot of assets, you may not need a trust — at least not yet.

One of the most common types of trusts is a revocable living trust, which is designed to avoid the potential costs and delays of probate, the court process that otherwise follows death. In some states, probate is not that big a deal, while in others, including California, probate can be lengthy and expensive.

It’s often possible to avoid probate using beneficiary designations on financial accounts and, in some states, on property including vehicles and real estate. That may be sufficient for small estates or people just starting out. Once you have a home and some assets you’ll want to investigate whether a living trust makes sense.

Q&A: A husband’s death. A pile of bills. Now what?

Dear Liz: After my husband died, I was in shock and really not in my right mind for at least a year, but really more. During this time I didn’t pay attention to bills. Only the ones that were getting shut off got paid. Now I’m behind on several credit cards that I’ve had for years. I can’t keep up anymore, but I don’t know what to do.

Answer: It’s natural in your situation to be overwhelmed and not know where to start. Your first task should be determining if you can realistically pay what you owe.

If your unsecured personal debt — credit cards, medical bills, payday loans and personal loans — equals half or more of your income, then you may not be able to dig yourself out. If that’s the case, consider making appointments with a credit counselor and a bankruptcy attorney to review your options. You can get referrals from the National Foundation for Credit Counseling at www.nfcc.org or (800) 388-2227 and the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org.

Even if your debts don’t total half your income, you may find it helpful to discuss your situation with a credit counselor or an accredited financial counselor (referrals from the Assn. for Financial Counseling and Planning Education at www.afcpe.org). These counselors can review your situation and help you craft a plan to get your finances back on solid ground.

Social Security survivor benefits also can be a way to restore your financial stability, depending on your age. You can receive survivor benefits starting at age 60, or age 50 if you’re disabled, or at any age if you’re caring for your husband’s child if the child is younger than age 16 or disabled.

Applying for survivor benefits doesn’t preclude you from applying for your own retirement benefit later. You could take a widow’s benefit at 60 and then switch to your own benefit when it maxes out at age 70, if your own benefit would be larger at that point.

Q&A: The reasons behind falling credit score

Dear Liz: Please explain to me how one’s credit depreciates. After paying off my home, my credit score went from mid-700 to mid-600. There were no changes or inquiries. I built it back up to 734, got into a tight spot and took a loan from my bank. I just checked the score again and now it’s 687. I have not been late or missed a payment. I thought keeping current on all payments and in some cases paying more would help, but it’s not. I need some help and direction.

Answer: We’ll assume that you’ve been monitoring the same type of score from the same credit bureau. (You don’t have just one credit score, you have many, and they can vary quite a bit depending on the credit bureau report on which they’re based and the formula used.)

Paying off a mortgage could have a minor negative impact on your credit scores if that was your only installment loan. Credit score formulas typically reward you for having a mix of installment loans and revolving accounts, such as credit cards.

But the drop shouldn’t have been that big. Something else probably triggered the decline, such as an unusually large balance on one of your credit cards.

Scoring formulas are sensitive to how much of your available credit you’re using, so you may be able to restore points by paying down your debt if you carry a balance or charging less if you pay in full each month. There’s no advantage to carrying a balance, by the way, so it’s better to pay off your cards every month.

Q&A: Can creditors get your IRA funds?

Dear Liz: You recently wrote that workplace retirement plans offer unlimited protection from creditors but that IRAs are protected only up to $1,283,025. When I transferred my 401(k) to a rollover IRA, the advisors at the brokerage assured me that the rolled-over money also enjoys the unlimited protection. Your article seems to imply otherwise. Can you clarify what is the correct rule?

Answer: Two sets of rules apply, which causes a fair amount of confusion.

In bankruptcy court, your transferred money would be protected. Money rolled into an IRA from a workplace plan such as a 401(k) enjoys unlimited protection from creditors in bankruptcy filings. Outside of bankruptcy court, however, creditor protection is determined by your state’s laws, which may not be as generous. If someone successfully sues you and wins a judgment, for example, your IRA could be at risk.