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Liz Weston

The checks that could change your financial life

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Starting in July, most families with kids will start getting monthly payments of up to $300 per child as part of the American Rescue Plan’s expansion of the child tax credit.

The payments are scheduled to end in December, and it’s unclear whether they will be extended. But even six months of payments could make a big difference in many families’ finances.

For some, the money will be a lifeline to pay rent, food and other essential expenses. For others, the cash could be a chance to make lasting changes that could help them become more financially stable.

In my latest for the Associated Press, find out more about the child tax credit expansion.

Tuesday’s need-to-know money news

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Today’s top story: Easy ways to get started with sustainable investing. Also in the news: Tips for finding pet-friendly lodging and flights, how to plan an eco-friendly remodel without overspending, and a recent letter from the IRS is not a scam.

Sustainable Investing: Easy Ways to Get Started
Sustainable investing doesn’t need to be complicated: Funds, stocks and robo-advisors make it easy.

Tips for Finding Pet-Friendly Lodging and Flights
Don’t assume you can fly or stay easily when traveling with your pets. Extra planning will be needed.

How to Plan an Eco-Friendly Remodel Without Overspending
You don’t have to spend big on an eco-friendly remodel. Here’s how to make it budget-friendly, too.

This IRS Letter Isn’t a Scam, and You Should Keep It
Notice 1444-C is legit.

Monday’s need-to-know money news

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Today’s top story: 6 signs you’re about to overpay for life insurance. Also in the news: A new episode of the Smart Money podcast on big purchases and overcoming money guilt, 53% of Americans support expanding Medicare benefits, and avoid penalties by filing for a tax extension.

6 Signs You’re About to Overpay for Life Insurance
If you focus on convenience or a policy’s extra benefits, you might pay too much. Here’s what to look out for.

Smart Money Podcast: Big Purchases and Overcoming Money Guilt
How to use credit cards to cover big purchases.

53% of Americans Support Expanding Medicare Benefits, Survey Finds
Some potential Medicare changes are more popular than others, according to a new NerdWallet poll.

Avoid Penalties by Filing for a Tax Extension
The deadline is midnight tonight.

Q&A: Restrictions on Roth IRAs

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Dear Liz: I read your useful summary of the advantages of Roth IRAs. I recently retired and decided to open a Roth (I know, pretty late) alongside my traditional IRA. I have an investment manager who will hopefully create some gains in that account. One thing that I learned is that I must wait five years before I can begin withdrawing earnings from the Roth tax-free. For this reason, it might be helpful to encourage readers to open a Roth IRA early, with at least a small contribution, to get the clock ticking toward that five-year deadline.

Answer: The five-year rule applies, as you mentioned, only to earnings, since contributions to a Roth IRA can be withdrawn at any time. Once you’re at least age 59½, earnings can be withdrawn without penalty provided the Roth IRA has been open for at least five tax years.

Hopefully you were also informed about the “earned income” rule, which requires you to have earnings — such as wages, salary or self-employment income — in order to contribute to a Roth or traditional IRA. Contributing more than you’re allowed to an IRA or Roth IRA can incur a 6% excise tax per year for each year the excess contributions remain in the account.

If you do have earned income — say you’re working part time in retirement — you can’t contribute more than you earn. If you earn just $5,000 in a year, for example, you can’t contribute the full $7,000 that’s otherwise allowed to people 50 and older. (The contribution limit is $6,000 for younger people.)

If you’ve contributed in error, contact a tax advisor about next steps.

Q&A: The right site for free credit reports

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Dear Liz: It would appear you have been taken in by a scam. In a recent column, you state a free credit report may be obtained through www.annualcreditreport.com. I went to the site and filled out the information requested. Instead of receiving a credit report, it signed me up for a paid membership. I was able to cancel it but I did not receive any credit report.

Answer: AnnualCreditReport.com, which has provided free credit reports since 2005, is not a scam. Unfortunately, many people navigate to the wrong sites and wind up being pitched credit monitoring or similar products. If you’re being asked for a credit card, you’re not on the right site.

One problem is that people search for terms such as “free credit report,” “annual credit report” or even “AnnualCreditReport.com” and click on the first link that comes up, not realizing that many search engines top their results pages with paid advertisements. The actual site, annualcreditreport.com, could be halfway down the page. The better way to access the site is to either click on a trusted link, such as the one provided here, or type the full URL into the address bar of your browser.

Q&A: Why 529 college savings plans are still worthwhile, especially for grandparents

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Dear Liz: The state where I live, Oregon, has removed the tax deduction for 529 college savings accounts. This was quite disturbing to discover upon getting my taxes done this year. Other than the obvious savings benefit, are these accounts still worth having? Fortunately our son is almost done with college, so it won’t affect us much, but I am thinking of my two granddaughters.

Answer: Although there’s no federal tax deduction for 529 contributions, most states offer some kind of tax break or other incentive to contribute to their college savings plans. Oregon now offers a tax credit capped at $150 for single filers or $300 for married couples that doesn’t benefit higher earners as much as the previous deduction.

(Some states have no income tax and thus no deductions for 529s, while a few — California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina — have a state income tax but no 529 tax break.)

College savings plans still allow your money to grow tax-deferred and to be used tax-free for your children’s education. That can be a big benefit for higher-income families, especially when they have young children. (The longer the money has to grow, the bigger the potential tax advantage.)

Grandparents may have additional reasons to contribute. Starting this year, money in a grandparent-owned 529 is completely ignored by federal financial aid formulas. (Although money in a parent-owned 529 has always received favorable financial aid treatment, distributions from a grandparent-owned 529 in the past were heavily penalized.)

So yes, 529 plans are still worthwhile for higher earners — and you’re not limited to your own state’s plan. If you’re not getting a tax incentive to stay home, you have many great options. Morningstar annually updates its list of the best 529 plans and last year singled out Illinois’ Bright Start College Savings, Michigan’s Education Savings Program and Utah’s My529 for top honors.