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Liz Weston

Q&A: Tax consequences of annuity conversion

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Dear Liz: Several years ago my wife inherited an IRA when her mother died. Her banker suggested rolling the IRA into an annuity with an insurance company. That company is difficult to deal with and not forthcoming about how the annuity is invested. She wants to convert the IRA into a certificate of deposit so it is insured by the FDIC. What are the tax consequences of doing that?

Answer: There are many different types of annuities. If your wife purchased an immediate annuity, which offers a stream of payments in return for a lump sum, then she probably can’t change her mind since those transactions are effectively irreversible.

If she purchased a deferred annuity, though, she has more options. Deferred annuities allow people to defer the stream of payments until later — often years or even decades in the future. In the meantime, the annuity may pay a fixed rate, a variable rate based on the performance of underlying investments, or an indexed rate based on a market benchmark.

Your wife won’t face taxes if she switches from a deferred annuity to a CD, since changing investments within an IRA isn’t considered a taxable event. The annuity itself may have surrender charges, however. Because annuities often pay advisors substantial commissions, surrender charges help discourage investors from withdrawing the money before insurers can recoup those fees.

These charges and high expenses in general make deferred annuities a poor fit for many investors, and many financial planners especially dislike seeing them in IRAs. A deferred annuity’s primary advantage is tax deferral, which an IRA already offers.

If your wife feels she was misled about this investment, she can make a complaint with her state insurance regulator.

A fall financial cleanse could get your spending back on track

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If summer is a season of spontaneity and indulgence, then fall offers a counterpoint: It’s a chance to get back on schedule, and back on budget.

“Summer, with travel and no school, tends to be a really spendy time. The fall is a nice reset,” says Ashley Feinstein Gerstley, a certified financial planner and author of “The 30-Day Money Cleanse.”

Gerstley says giving yourself a “money cleanse” offers a chance to carefully go over your spending and financial habits so you can make any necessary changes to end the year strong. With inflation and economic uncertainty in the background, that’s no easy task, but putting in the extra effort now can pay off. In Kimberly Palmer’s latest for the Seattle Times, learn a step-by-step guide to a fall financial cleanse that could help get your budget on track for the rest of the year.

This week’s money news

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This week’s top story:  3 ways to reduce taxes on Social Security. In other news: How one driver cut her auto insurance costs by almost 40%, how to budget with a fluctuating income, and divorce after 60 and health benefits.

3 Ways to Reduce Taxes on Social Security
There are a few ways to reduce that tax bite, however, especially if you can plan ahead.

How One Driver Cut Her Auto Insurance Costs by Almost 40%
Auto insurance rates are on the rise. Here’s what you can do to lower yours.

How to Budget With a Fluctuating Income
If you have irregular income, it’s important to track your spending and create a budget so that you can plan ahead.

Divorce After 60: What Happens to Your Health Benefits?
From COBRA to Medicare, here are the questions to ask about health care coverage after a later-in-life divorce.

Q&A: Getting a second financial opinion

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Dear Liz: My wife and I recently retired. Our investments are managed by a certified financial planner. Our nest egg has not shown much growth over the last several years. We think it is time for another professional advisor to analyze our portfolio and see if we are really heading in the right direction. Is this out of the ordinary to seek more advice and how would we go about it, without offending our current planner?

Answer: You can certainly consult another advisor, but consider talking to your own first.

Start by asking the certified financial planner how your portfolio has performed relative to an appropriate benchmark over the last five years. The planner should be able to explain what benchmark was chosen and why. A portfolio that invests heavily in bonds, for example, will have a different benchmark than one that invests mostly in stocks.

If your portfolio is lagging behind this benchmark, then ask the planner what changes can be made to improve your investment performance. Switching from actively managed investments to passive ones, such as index mutual funds or index exchange traded funds, could save on costs and improve performance because few actively managed investments manage to beat the market.

If your portfolio is performing appropriately relative to its benchmark, then discuss whether you want to take on more risk for better returns. Many planners recommend retirees have a substantial portion of their portfolios in stocks for inflation-beating growth.

Your certified financial planner should be open to this discussion and ready to course correct if necessary. If you find that’s not the case, then it may be time not just for a second opinion but for a new advisor.

Q&A: Divorced spouse benefits and remarriage

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Dear Liz: My recently divorced girlfriend receives Social Security based on her ex-husband, who is still living. If we were to get married, would either of us lose part or all of our Social Security benefits? It seems like a simple, straightforward question, but every Social Security representative I speak with by phone or in person gives me a different answer. My girlfriend did not work long enough to earn her own Social Security benefits. She was married over 30 years and is over 60.

Answer: The answer to this question isn’t complicated, so it’s unclear why you got different answers. If the ex-spouse is still alive, then your girlfriend’s benefit is a divorced spousal benefit that ends if she remarries.

If the ex-spouse were not alive, then your girlfriend would be receiving a type of survivor benefit known as a divorced survivor benefit. People receiving survivor benefits can keep them after marriage if they are 60 or older at the time of the marriage.

Q&A: How landlords weigh your credit history when deciding whether to rent to you

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Dear Liz: I recently paid off a large amount of credit card debt: over $15,000 in total to several credit card companies. How long does it take for my credit report to reflect that? I will be moving into an apartment in the next month or two. I don’t want my application to be denied because my debt is still listed on my credit report. I live with my father right now as he needs 24-hour care, but in the near future he will need to move into a nursing home as he has advanced dementia.

Answer: Credit card issuers typically report balances to the credit bureaus every month. Many report your balance as of your card’s statement closing date. If you paid off a balance a few days after the card’s statement closing date, you may not see the change reflected in your credit reports and credit scores until the next billing cycle.

High debt levels relative to your income could be a concern for landlords. Typically, though, they’re looking for bigger red flags such as late payments and collections that indicate you don’t pay on time.

Many landlords use credit scores as an initial way to evaluate applicants, followed by a closer look at applicants’ credit reports. If you maintain good scores and have no negative marks, you should be seen as a good candidate.