March 11, 2024 By

Q&A: How to reduce the tax penalty from an IRA distribution goof

Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.

Filed Under: Q&A, Retirement Savings, Taxes
March 11, 2024 By

Q&A: Card closure reasons don’t matter

Dear Liz: Does the reason for a credit card closure affect credit scores? I’ve had retailers close a card simply because it hasn’t been used for a period of time, not because I mishandled the account.

Answer: Credit score formulas don’t distinguish between accounts closed by the consumer and accounts closed by the issuer. The closed account can still ding your scores, but you won’t suffer an extra blow because the decision to close wasn’t your own.

Filed Under: Credit Cards, Credit Scoring, Q&A
March 11, 2024 By

Q&A: Don’t make handwritten will changes

Dear Liz: I have a question about wills. Since circumstances change over time, is it permissible to make “pen and ink” changes to a will? For example, can I cross out a beneficiary that no longer applies and date and initial the cross out?

Answer: Think about how easy it would be for someone else to alter your will with a pen and a reasonable facsimile of your initials. Then you’ll understand why states typically require people to be a little more deliberate about changing their estate documents. Even when handwritten changes are allowed, they’re usually not advisable. Any money you save by not seeing an attorney could be spent many times over in legal fees, since handwritten changes would be susceptible to challenges in court. Is that what you really want for your heirs?

Small alterations to estate plans can be handled with properly drafted and witnessed documents known as codicils. But you’re often better off creating a new document and revoking the old one, especially when changing beneficiaries.

Filed Under: Inheritance, Legal Matters, Q&A
March 4, 2024 By

This week’s money news

This week’s top story: Mortgage rates will not fall in March. In other news: Rental housing prices 2024, why some millennials don’t want kids, and managing credit cards when you grew up in a cash-only household.

When Will Mortgage Rates Fall? Probably Not in March
Mortgage rates are expected to go down sometime in 2024, but the decline probably won’t start in March.

Will Rental Housing Prices Drop in 2024?
Rental inflation is slowing down, but prices are expected to stay elevated in 2024.

Why Don’t Some Millennials Want Kids? They Say It’s Too Expensive
A new NerdWallet survey finds that just 25% of millennials who don’t have kids plan to have them. A major reason why? The high cost of raising children.

Managing Credit Cards When You Grew Up in a Cash-Only Household
Debt-averse relatives may not understand your choices, but it’s OK to forge your own financial path.

Filed Under: Liz's Blog Tagged With: , , ,
March 4, 2024 By

Q&A: Is it possible to have too many credit cards?

Dear Liz: I have accumulated too many credit cards, sometimes to get bonus frequent flier miles. The frequent flier miles cards all have annual fees. I always pay cards in full each month.

My credit score is 800-plus every month. I have heard that your credit score is dinged when you close credit accounts. Is that true and by how much? How do you recommend reducing the number of credit cards?

Answer: Yes, closing cards can hurt your credit scores. The “how much” question is impossible to predict and will depend on your credit situation as well as how you go about reducing your card portfolio.

Keep in mind that there is no such thing as “too many credit cards” as far as credit scoring formulas are concerned. As long as you pay your bills on time and use only a small portion of your available credit limits, you can have lots of cards and great scores.

However, monitoring a bunch of different cards can be overwhelming. You also don’t want to keep paying annual fees for cards that aren’t delivering sufficient benefits.

If the fees are your primary concern, identify the cards you want to close and ask the issuers if you can get a “product change” to a no-fee card. This typically won’t affect your scores because the account is simply being transferred rather than being closed and reopened.

If you need to thin the herd, be aware that credit scoring formulas are sensitive to credit utilization, or the amount of your available credit you’re using on each card and overall.

If you have multiple cards from the same issuer, ask if the credit limit from the card you’re closing can be added to one of your remaining cards. Another option is to close only your lowest-limit cards.

You won’t want to close any cards if you’ll be looking for a major loan, such as auto financing or a mortgage, in the next few months. Hold off until after you’ve got the loan.

Also try to use up or transfer any points or miles you’ve earned on the cards you plan to close because those rewards may disappear at closure.

Filed Under: Credit Cards, Credit Scoring, Q&A
March 4, 2024 By

Q&A: Determining a house’s value

Dear Liz: I understand that as a widow, if I sell my house I get the stepped-up value from the year my husband died. Should I have gotten an appraisal at that time (26 years ago)? How do I find out what my home was worth then? We bought it in 1973 and he died in 1998.

Answer: In most states, half of a couple’s jointly owned property gets a new, favorable step-up in tax basis at a spouse’s death. In community property states such as California, both halves of the property may get that step-up.

A professional appraisal 26 years ago could have been helpful, although a good appraiser can do a retroactive assessment, said Jennifer Sawday, an estate planning attorney in Long Beach.

Before you hire an appraiser, though, hire a tax pro, Sawday said. The CPA or tax preparer will use the data to file your return, report your home sale and compute any capital gains taxes owed, so find out how they recommend obtaining it.

Filed Under: Q&A, Real Estate, Taxes Tagged With:
March 4, 2024 By

Q&A: Alternatives to paper checks

Dear Liz: Because I am concerned about check fraud, I pay most of my bills online. However, I still need checks for paying my housekeeper, gardener, etc. I use a gel ink pen to deter fraud but was wondering if there is something else I should consider doing.

Answer: Checks you hand to people you know are probably less risky than those you send through the mail, but there may be better options.

Most Americans have accounts with at least one peer-to-peer payment app such as Venmo, Zelle or PayPal. These can be a secure and convenient way to pay people you know.

Be sure to create a strong, unique password for your account and to keep the apps updated. Whatever payment method you use — checks, online payments or peer-to-peer apps — continue to monitor your linked bank or credit card accounts so you can spot and quickly report any suspicious transactions.

Filed Under: Identity Theft, Q&A Tagged With:
February 26, 2024 By

This week’s money news

This week’s top story: How to manage a retirement spending. In other news: The best time for high CD rates might be right now, the Credit Card Competition Act and credit unions, and what you can expect next if you got a SAVE student loan forgiveness email.

Retirement Spending Is a U-Shaped Curve. Here’s How to Maximize It
From defining your retirement goals to finessing your budget, here’s how you can manage a retirement where spending typically fluctuates over time.

The Best Time for High CD Rates Might Be Right Now
CD rates remain high but have started to dip. Consider if CDs fit your short-term savings goals.

Could the Credit Card Competition Act Impact Credit Unions?
The Credit Card Competition Act won’t directly impact most credit unions, but concerns over ripple effects exist.

Got a SAVE Student Loan Forgiveness Email? Here’s What Comes Next
If you’re among the 153,000 borrowers enrolled in SAVE who got debt cancellation emails, here’s what you can expect next.

Filed Under: Liz's Blog Tagged With: , , ,
February 26, 2024 By

Fighting over money? Ways to seek common ground with your partner

Figuring out how to manage money together might be an important part of a happy relationship, but it’s a skill that doesn’t always come naturally.

“When there’s conflict or discord, it’s usually not about the money itself, but related to the meaning each person is attaching to money. There’s always something deeper,” says Cohen Taylor, a licensed family and marriage therapist and behavioral wealth specialist at the registered investment advisory Wealth Enhancement Group.

Getting on the same page as your partner when it comes to finances usually requires a lot of communication and sometimes a little compromise. In some cases, it might include realizing your perception of your partner’s spending habits isn’t entirely accurate. In Kimberly Palmer’s latest for the Seattle Times, learn ways to seek common ground with your partner.

Filed Under: Liz's Blog Tagged With: ,
February 26, 2024 By

Q&A: Here’s something you might not know about how colleges hand out financial aid

Dear Liz: After the pandemic started, we received money from the federal government and decided to put it in a custodial account for our son, starting when he was 14. We invested the money in a Standard & Poor’s index fund. I now think I made a mistake and should have simply added the money to the 529 college savings plan we have for him. Can I close the custodial account and transfer the money to the 529? If so, what is the process? Another benefit I see to doing so may be that the funds might not be considered in financial aid calculations. He will not qualify for aid based on need as we are financially well-off but he may qualify for aid based on merit.

Answer: You can transfer the funds from a custodial account, but contributions to 529 college savings plans have to be made in cash. That means you’d have to sell the index fund, which likely means paying a tax bill on the gains.

If your primary concern is financial aid and your family won’t qualify for need-based help, then there may be little reason to incur that tax bill right now. The merit aid you’re hoping to get won’t be affected by where you save. Merit aid isn’t based on your financial situation but is instead an incentive to attend the school and reflects how much the college wants your kid.

Need-based aid, by contrast, can be profoundly affected by custodial accounts, which are considered the student’s asset. Because 529 plans are treated much more favorably by need-based formulas, a transfer could make more sense. If there are a lot of gains in the custodial account, though, parents would be smart to get a tax pro’s advice before making this move.

With college expenses looming, consider picking up a copy of “The Price You Pay for College: An Entirely New Road Map for the Biggest Financial Decision Your Family Will Ever Make,” by New York Times personal finance columnist Ron Lieber. The book offers a comprehensive but readable guide to a fraught, potentially expensive process.

Filed Under: College Savings, Kids & Money, Q&A