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Liz Weston

This week’s money news

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This week’s top story: Smart Money podcast on saving on Disney trips, and self-employed retirement. In other news: How a credit card saved me over $1,100 on a home remodel, 5 times credit card rewards aren’t worth it, and as Fed resumes rate hikes, Chair Powell isn’t ‘optimistic’ yet.

Smart Money Podcast: Saving on Disney Trips, and Self-Employed Retirement
Unlock the magic of making your next Disney vacation more affordable with insider tips from travel Nerd Sally French.

How a Credit Card Saved Me Over $1,100 on a Home Remodel
A ‘triple-threat’ credit card, combined with a high-yield savings account, helped me defray a portion of the project.

5 Times Credit Card Rewards Aren’t Worth It (and 1 Rule Breaker)
Using a rewards credit card for purchases can put money back in your pocket, but not always. Knowing when to pay with cash can result in savings, too.

As Fed Resumes Rate Hikes, Chair Powell Isn’t ‘Optimistic’ — Yet
Still targeting inflation, the Federal Reserve has raised the federal funds rate a quarter of a percentage point to a range of 5.25% to 5.50%.

Q&A: Tax issues and trusts

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Dear Liz: You recently responded to a reader’s question about protecting an intended bequest. In the answer you wrote, “Assets in the trust get a step-up in tax basis when the first spouse dies, but not when the surviving spouse dies.” My understanding is that, in California and other states with community property laws, the basis of eligible inherited community property gets stepped up twice: once for the surviving spouse and then again for the person who becomes the final beneficiary of the asset. I thought that using a revocable trust does not affect this “double step-up.” A married couple whose principal estate asset at death is their jointly owned (and substantially appreciated) home may never explore the benefits of a trust if they believe that one-half of the anticipated step-up in basis will be lost. Might you clarify what the sentence in your column means?

Answer: The double step-up works somewhat differently from what you’re describing, and the trust in question is quite different.

A step-up in basis happens when someone dies and an inherited asset gets a new value for tax purposes. The asset is “stepped up” to the current market value, which means any appreciation that happened during the deceased owner’s lifetime is never taxed. (Basis also can be stepped down for assets that have declined in value.)

In most states, when one spouse dies, only half of a couple’s jointly owned assets gets a favorable step-up in tax basis to the current market value. The surviving spouse’s half doesn’t get a step up in value until he or she dies.

In community property states, however, both halves of the couple’s community property get the step up with the first death, said Los Angeles estate planning attorney Burton Mitchell. That’s what is known as the double step-up in basis. If the survivor dies owning the property, it gets yet another step-up in tax basis.

Now let’s move on to trusts. The double step-up in basis is not affected if you own property in a kind of revocable trust known as a living trust. Living trusts are designed to avoid the court process known as probate, and they can be changed during the creator’s lifetime (hence the term “revocable”).

The trust in question, however, was a bypass trust. The original letter writer asked how to make sure her son from her first marriage would receive an inheritance if she died before her current husband.

One of the options would be to create a bypass trust that gave the spouse income from her assets during his lifetime, with the assets transferring to the son at the spouse’s death. Such trusts can help ensure the assets actually get to the son someday and aren’t spent by the surviving spouse, or the surviving spouse’s next spouse. Among the disadvantages is the fact that assets placed in the bypass trust don’t get a step-up in tax basis when the surviving spouse dies.

Another type of trust to consider in this situation would be a qualified terminable interest property (QTIP) trust. Unlike the assets in a bypass trust, assets in a QTIP would be included in the deceased spouse’s estate, which means they would get a step up in basis when the survivor dies.

Clearly, this is a complex topic, so you’d be wise to get an experienced estate planning attorney’s advice.

Q&A: What to know about buying a house using retirement funds

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Dear Liz: My husband and I are thinking of purchasing a house near us. Can we use any funds from our retirement accounts to make the purchase? We would like to use this money along with some savings so that we do not have to carry a mortgage.

Answer: You don’t mention how old you are, whether you’re currently homeowners or what type of retirement accounts you have, which are all important factors.

If you’re under 59½, withdrawals from IRAs and workplace plans such as 401(k)s are typically taxed and penalized. You can avoid the penalty, but not the taxes, if you’re considered a “first-time home buyer” and you withdraw up to $10,000 from your IRA to buy a home. (“First-time home buyer” just means you and your spouse haven’t owned a home within the last two years.)

This exception doesn’t apply to workplace plans such as 401(k)s. However, if you’re still working for the employer who provides the plan, you could consider taking a loan from your account.

Loans typically must be repaid within five years, but your employer may offer a longer payback period for the purchase of a primary residence. If the employer permits plan loans, the loan limit is typically the lesser of $50,000 or half the vested account balance, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

An exception to the 50% cap is if 50% of your vested account balance is less than $10,000, Luscombe said. In that case, you can borrow up to the lesser of $10,000 or the balance in your account.

If you have a Roth IRA or Roth 401(k), the amount you contributed can be withdrawn for any purpose without taxes or penalties, Luscombe said.

Don’t let your credit scores retire

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Getting rid of debt before retirement is often a good idea. Getting rid of your credit scores? Not so much.

People who stop using credit also stop generating enough data to produce credit scores, the three-digit numbers used to gauge creditworthiness. Not having scores can make it harder and more expensive to get loans. Even if you’re sure you’ll never borrow again, lacking credit scores also can make insurance, cellphone plans and security deposits more expensive.

Fortunately, you don’t have to be in debt to have good credit scores. You do have to use credit, however. In my latest for the Washington Post, learn how not to let your credit scores retire.

This week’s money news

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This week’s top story: Smart Money podcast on smart ways to get out of debt, and pet insurance planning. In other news: Not enough homes are for sale, so let’s pay owners to sell, how to pay for an expensive summer move, and growing loyalty programs mean more travelers competing for perks.

Smart Money Podcast: Smart Ways to Get Out of Debt, and Pet Insurance Planning
Personal finance Nerd Tommy Tindall joins Sean Pyles and Liz Weston to discuss alternative ways to pay off debt when you can’t get a personal loan.

Not Enough Homes Are for Sale, so Let’s Pay Owners to Sell
Tax credits could encourage people to sell their homes in a meager housing market.

How to Pay for an Expensive Summer Move
A credit card or personal loan can help you pay for a pricey summer move, but pay attention to interest rates and trim costs where you can.

Growing Loyalty Programs Mean More Travelers Competing for Perks
If you thought it’s been harder to get upgrades or lounges have been more crowded lately, you’re not alone.

Q&A: How new rules let you roll unused 529 college savings into a retirement plan

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Dear Liz: I have about $3,000 left in my daughter’s 529 college savings plan. My ex-wife has about $8,000 left. Our daughter has graduated and is not planning to get an advanced degree. It’s my understanding that new rules allow unused 529 money to be rolled into a Roth IRA in the child’s name, after taxes are paid upfront. Would this be a good move?

Answer: Possibly, and you won’t have to pay federal taxes on such rollovers, which will be available starting in 2024.

The Secure 2.0 Act, which passed into law late last year, created this new provision that allows the owner of a 529 account to transfer up to $35,000 in unused education funds to a Roth IRA for the account’s beneficiary, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

The 529 account must have been established for at least 15 years for a rollover to be possible. No contributions or earnings from the previous five years can be transferred to the Roth. Also, the $35,000 is a lifetime limit that can’t be transferred all at once — it’s subject to most of the annual Roth contribution rules. In 2023, for example, the maximum that can be contributed to a Roth IRA is $6,500 for people under 50 and $7,500 for people 50 and older, so it will take a few years of transfers to reach the $35,000 lifetime limit.

The IRS has yet to issue needed guidance, including how the law will affect beneficiaries like your daughter with two 529 plans. But you and your ex probably will have to coordinate these transfers to avoid exceeding the annual contribution limit. Also, if your daughter contributes her own money to an IRA or Roth IRA, that contribution would reduce the maximum that could be rolled over from a 529. If, for example, the limit is $6,500 and your daughter contributes $5,000, you’d only be able to roll a maximum of $1,500 (assuming your daughter is under 50).

There’s also some question about whether the beneficiary needs to have earned income equal to the amount contributed each year, Luscombe said. On the other hand, someone with a high income won’t be prevented from receiving these rollovers into their Roth IRA, he says. Normally, contributions to Roth IRAs have income limits, so this could be good news for higher-earning beneficiaries.

Plus, states may have to issue guidance about whether the 529 rollover to a Roth IRA is a qualified distribution for state income tax purposes, Luscombe said. If not, you might owe state taxes on the rollover even if no federal taxes are owed.

You have a few other options for unused 529 money. For example, you could change the beneficiary to a “qualified family member,” which could include yourself as well as the beneficiary’s spouse, child or other descendant, a sibling, stepsibling, in-law, aunt or uncle or their spouse, niece or nephew or their spouse, parents or other ancestors or a first cousin or the cousin’s spouse. Withdrawals would continue to be tax-free if used for qualified education expenses.

You also could withdraw up to $10,000 to pay student loans for the beneficiary or their sibling.

Or you could simply withdraw the money and use it however you want. You would pay income taxes and a 10% federal penalty, plus any state penalty, on the earnings. Some states offer a tax break on contributions, so you’d also want to check if there are tax implications for such withdrawals.

For many account owners, though, the Roth rollover option will be a good, tax-advantaged solution to help their beneficiaries jump-start or enhance retirement savings.