Q&A: When rolling your 401(k) into an IRA isn’t a good idea

Dear Liz: I have just retired. I have a 401(k) from work. Do I keep it as is or do I roll it over into an IRA?

Answer: Investment companies and their representatives like to push the idea of rollovers as the best option, but that may profit them more than it does you.

Leaving your money in your employer’s 401(k) has several potential advantages. Many 401(k)s offer access to institutional funds, which can be much cheaper than the retail funds available to IRA investors. Workplace retirement plans also offer unlimited protection from creditors if you’re sued or forced to file bankruptcy. An IRA’s bankruptcy exemption is limited to $1,283,025, and protection from creditors’ claims varies by state. (In California, for example, only amounts “necessary for support” are out of reach of creditors.)

If you retired early, you can access your 401(k) without penalty at age 55. The typical age to avoid penalties from IRA withdrawals is 59½.

You may opt for a rollover if your 401(k) offers only expensive or poorly performing options. Even if you decide to roll over the rest of your 401(k), though, get a tax pro’s advice before you roll over any company stock. You may be better off transferring the stock to a taxable account now so you can let future appreciation qualify for capital gains rates. Ask your tax pro how best to take advantage of this “net unrealized appreciation.”

Q&A: A ‘poor man’s trust’ may be a poor estate plan

Dear Liz: I am 85 and my wife is 76. We have a house free of mortgage worth about $1 million. We have market investments above $4 million and life insurance of $1 million. We do not have a trust, just a will. Our financial advisor says that we do not need a trust because we have named both of our grown children as beneficiaries on all of our accounts and on the deed to our house. Please advise us if a trust is needed in our situation or if we are fine the way things are set up.

Answer: If your financial advisor is an estate-planning attorney, he or she may be correct. Otherwise, you’d be smart to seek out a lawyer experienced in these matters to review what you’ve done.

Naming beneficiaries on financial accounts, and on deeds in states that allow that, can allow those assets to pass to heirs without going through probate. So-called transfer-on-death accounts and deeds are sometimes called “the poor man’s trust.” You’re far from poor, though, and a living trust may be a better option for distributing your wealth because there are many ways the current arrangement could go wrong.

The surviving spouse, for example, could change the beneficiaries. You both may be of sound mind now, but there’s no guarantee you’ll remain so. Fraud experts can tell story after story of caregivers, relatives, friends, advisors and romantic interests persuading a vulnerable older person to change beneficiaries in favor of the interloper. A living trust that bypasses probate can include language to prevent your children from being completely disinherited.

Another potential problem: paying funeral costs and the expenses of settling the estate. If everything does go to the kids at the survivor’s death, the executor may have to go after them to return some of the money.

This column isn’t long enough to detail all the other ways transfer-on-death arrangements can misfire, so you’ll want to make an appointment with an experienced estate-planning attorney soon.

Q&A: Building an emergency fund beats out building credit

Dear Liz: I am trying to raise my credit scores, which are very low. I have one negative mark on my account from a paid collection and I just got my first secured credit card. I have a bit of extra money right now and I’m wondering what’s the best way to use it to raise my scores. Should I get another secured credit card from a different issuer, get a secured 12-month loan through my financial institution or something else?

Answer: People rebuilding their credit often overlook the importance of an emergency fund. Having even a small amount of savings can keep a financial setback, such as a decrease in income or an unexpected expense, from causing you to miss a payment and undoing all your efforts to boost your scores. You can start with just a few hundred dollars and slowly build the fund over time.

Adding an installment loan can assist with building credit as well, but a secured loan may not be the best option if money is tight. The cash you deposit with the lender as collateral for the loan won’t be available again until you pay off the loan. Consider instead a credit-builder loan, in which the money you borrow is placed in a savings account or certificate of deposit to be claimed when you’ve finished making the monthly payments, typically after one year. That means you can keep the cash you already have for emergencies. Credit-builder loans are available from some credit unions and Self Lender, an online company.

You’ll want to make sure both the credit card issuer and the installment loan lender are reporting your payments to the three credit bureaus. If your accounts don’t show up on your credit reports, they’re not helping to build your scores.

In addition to making payments on time, you’ll want to avoid using too much of the available credit on the card. There’s no bright line for how much to charge, but typically 30% or less is good, 20% or less is better and 10% or less is best. Use the card lightly but regularly and pay it off in full every month because there’s no advantage to carrying a balance.

Q&A: Here are some ways you can improve your credit scores

Dear Liz: Two years ago I got out of prison after being there for nine years. I lost everything that I had. When I got out, my credit rating was 565. I recently bought a car and have made four payments so far. Can you tell me when I might have good credit again?

Answer: As long as you continue to make on-time payments, you should see gradual improvement in your scores. It’s impossible to predict how long it might take to achieve “good” scores, though. That depends on the information that’s in your credit reports, what credit score formula is used and what’s considered “good” by whichever lender is evaluating your application.

You should first make sure your payments are being reported to all three credit bureaus. Unfortunately, some car dealerships that specialize in bad-credit lending don’t report their loans, which means your payments wouldn’t be helping your scores. If that’s the case, consider getting a credit builder loan. These loans, typically offered by credit bureaus, put the amount you borrow into a savings account that you can claim after making 12 monthly payments.

Payments should always be made on time, by the way. A big chunk of your credit scores is determined by your payment history. Your low scores mean you fell seriously behind on your obligations, but even a single skipped payment can hurt. Consider putting payments on automatic so there’s no chance of a lapse.

Another large portion of your scores is determined by credit utilization, or how much of your available credit you’re using. Paying down an installment loan over time helps that ratio. So, too, does paying down or lightly using a revolving account such as a credit card. If you don’t have a card, consider applying for one. There may be a small initial hit to your credit scores, but that will fade quickly. People with bad credit often need to start with a secured credit card, which requires you to deposit a certain amount — typically $200 or more — with the issuing bank. Use only a small portion of your available credit — 30% or less is good, 20% or less is better, 10% or less is best. Pay the bill in full each month, since there’s no advantage to carrying a balance.

Another way to speed up your credit rehabilitation is to be added as an authorized user to the credit card of someone with a solid credit history. This other person doesn’t have to give you access to the card itself, but naming you as an authorized user may allow that person’s history with the card to be imported into your credit reports. Not all credit card issuers report this information, though, so the primary cardholder would need to ask. It’s also important that the other person continue to behave responsibly with credit. If the primary cardholder misses a payment or maxes out the card, your scores could be hurt, too.

You can track your progress using one of the many websites offering free credit scores. Your bank or the credit card issuer may offer free scores as well. The scores likely won’t be the same score a lender might use to evaluate you, but they should give you a general idea of where you stand.

Q&A: IRA distributions and the tax man

Dear Liz: I am 79, in fairly good health and fortunately have almost $600,000 in my IRA account. My minimum required distribution is currently about $30,000 a year, which means my IRA funds will last until I am well over 100! I realize that I can pay a penalty and draw down some of the funds but I don’t want to be pushed into a higher income bracket. Any suggestions on how I can enjoy the money while I am able?

Answer: You won’t pay a penalty for pulling more than the minimum from your IRA. That early withdrawal penalty disappeared 20 years ago, after you turned 59½. You will owe income taxes, of course, but a visit with a tax pro can help you determine how much more you can withdraw before you’re pushed into a higher tax bracket.

Q&A: Where to find financial planner fiduciary oath

Dear Liz: You often mention that a financial planner should be “willing to sign a fiduciary oath to put your interests first.” Is there a form or formatted letter available to financial planners who are willing to sign said oath?

Answer: There is. The Committee for the Fiduciary Standard, a group that promotes the idea that advisors should put their clients’ best interests first, has just such a form letter at www.thefiduciarystandard.org/fiduciary-oath.

Q&A: How to get a higher credit limit after the card company turns you down

Dear Liz: I asked for a credit limit increase on my Visa card from $5,000 to $20,000. I was turned down because of not enough income. I was very disappointed and wonder what if anything I can do to reverse the situation.

I am a 77-year-old retired widow who owns my home with no mortgage. My annual income is around $50,000 from Social Security and my required minimum distributions from IRAs. I have no debt. My investments and savings obviously don’t count. I was about to charge $12,000 in airline tickets and wanted to take advantage of the cash back on the credit card. I always pay my credit card bill in full every month. I feel discriminated against.

Answer: Imagine you’re a lender and one of your customers suddenly demands that you quadruple the amount you’ve agreed to lend her, with the resulting credit line equal to 40% of her income. That might give you pause.

Or perhaps not. Credit card issuers have different policies about when to grant or deny credit, and those policies can change over time as they try to manage the risks of their lending portfolios. Also, issuers may be less generous to their longtime customers than they are to the new customers they’re trying to attract.

Understanding all that can help you formulate a game plan to get what you want. One option is to call the issuer, explain your situation and ask for a temporary credit line increase so you can book those tickets.

Another (and certainly more lucrative) option would be to apply for a new credit card with a fat sign-up bonus from a different issuer. Several cash-back cards offer rewards of $150 to $200 once you spend a certain amount within the first few months, and you would meet that requirement easily with your ticket purchases.

If you’re willing to consider something other than a cash-back card, you can check out travel rewards cards that offer points or miles. Several have bonuses that can translate into $400 or more of free travel.

Applying for a new card might temporarily drop your credit scores a few points, but that shouldn’t be a concern if you’re not planning to apply for a major loan in the next few months.

Q&A: Don’t rush when setting up your living trust

Dear Liz: Your column recently answered a question about whether a living trust was the right move, and I thought you mentioned a free online form or worksheet that one could download and fill out. Where can I find that?

Answer: Many sites offering free software or forms are actually subscription services. You typically use a credit card to sign up and are charged a monthly fee after the free trial period ends. If you can wrap up your estate planning in short order and cancel before the fee kicks in, your trust may be free — but given what’s at stake, it’s not a good idea to rush.

After all, if you make a mistake with your estate planning that’s revealed after your death, you can’t come back and fix it. That means your desire to save a few bucks could cost your heirs dearly.

At a minimum, you should consider consulting with an attorney to ensure you’re not making obvious errors. Some of the do-it-yourself sites, including LegalZoom and RocketLawyer, offer the option to consult with a lawyer. RocketLawyer, a $40-a-month subscription service, has a seven-day free trial. LegalZoom sells a $269 living trust package that includes a 30-day free trial of its subscription advice service. After the free trial, the subscription costs $15 a month. Legal self-help site Nolo has an online living trust form for $60 that doesn’t include advice, but you can use Nolo’s attorney directory to find an expert you can hire for a review.

If your situation is at all complicated — blended families, special needs children, contentious heirs, family businesses, foreign assets and large estates all count — then it’s best to seek out an experienced estate planning attorney to draft your paperwork.

Q&A: Get your credit score ready for the home-buying process

Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.

Q&A: Ease identity theft fear by checking your credit report

Dear Liz: I am suddenly receiving junk mail addressed to my estranged brother at my house. I’ve been in this house for 15 years and have never before gotten mail addressed to him. Is it possible he applied for credit or something similar using my address? He has always had money issues.

Answer: It’s more typical for an identity thief to divert a victim’s mail to his own address than to cause junk mail to be sent the victim’s way. Still, it can’t hurt to check your credit reports via www.annualcreditreport.com to see if there are any accounts or activity you don’t recognize.