Ask Liz Weston

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Liz Weston

Q&A: Ins and outs of HELOCs

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Dear Liz: We have a home equity line of credit through our credit union. I have been paying it down very aggressively and it will be paid off in two months. That is our only debt. I was considering leaving a small ($100) balance. It would cost $7.50 a year to have the loan available but we would have immediate access to $200,000 with no paperwork, etc. Your thoughts?

Answer: Contact your credit union and ask if it’s necessary to maintain a balance to keep the line of credit open, because typically that’s not the case.

You should know, however, that HELOCs typically have two phases: a five- to 10-year “draw” period, during which you can borrow and repay the line much as you would a credit card, followed by a repayment period of 10 to 20 years during which you pay down any amount still owed. You normally can’t draw out additional money during the repayment period.

If your HELOC is nearing its repayment phase, you can replace it with a new HELOC that you leave open and unused for emergencies. Closing costs often range from 2% to 5% of the loan amount, although some lenders discount those fees.

This week’s money news

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This week’s top story: Smart Money podcast on chatGPT vs. the Nerds, and rental properties. In other news: What new for Medicare is in 2023, economy is improving, but recession risk, inflation still hover, and small-business tax changes and tips to know in 2023.

Smart Money Podcast: ChatGPT vs. the Nerds, and Rental Properties
This week’s episode starts with testing out ChatGPT’s ability to give financial advice.

What’s New for Medicare in 2023?
In 2023, there’s a little of everything: Some costs have gone down, others have increased, and there are some notable tweaks to how Medicare works.

Economy Is Improving, but Recession Risk, Inflation Still Hover
At this point it’s still uncertain whether the U.S. is in the clear or instead glimpsing a recession on the horizon.

Small-Business Tax Changes and Tips to Know in 2023
Working with a tax professional can help you understand what tax credits you qualify for and how to claim them.

‘Bridge’ your way to Social Security

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Delaying the start of Social Security benefits is a powerful way for retirees to cope with inflation, survive bad investment markets and reduce the risk they’ll run short of money. The advantages of waiting are so great that financial planners often recommend their clients tap other savings, such as retirement funds, to help them delay claiming.

Employers could increase their workers’ financial security by offering a similar “bridge” strategy as part of 401(k)s and other workplace retirement plans, according to a study by the Center for Retirement Research at Boston College. The bridge strategy would tap a worker’s retirement account to pay amounts roughly equal to the foregone Social Security checks.

In my latest for the Associated Press, learn how to ‘bridge’ your way to Social Security.

Q&A: Taxes on a deceased spouse’s assets

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Dear Liz: My dear friend’s husband just passed away and she is immediately selling off all his antiques through an auctioneer. Sales should net well over $100,000 this calendar year. Is there any way to offset the tax hit she will take on this? This will be on top of selling the house in the same calendar year.

Answer: Previous columns have discussed the favorable “step up” in tax basis that happens when someone dies.

Their assets, including at least half of a jointly-owned home, typically get updated to the current market value for tax purposes. Appreciation that occurred during the deceased’s lifetime is never taxed. In community property states, both halves of jointly-owned assets usually get this step up.

The auction shouldn’t generate much if any tax bill unless the antiques jump significantly in value between the date of his death and the date of the sale.

The same is true of the home sale if the friend lives in a community property state. If not, she may have potentially taxable appreciation on her half of the property. If the sale occurs within two years after the year her husband died, though, she can exclude up to $500,000 of home sale profits from her income. Otherwise she can exclude up to $250,000.

Your friend should consult a qualified tax pro who can review her specific situation and offer individualized advice.

Q&A: What’s the best way to save for education? A 529 plan or I bonds?

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Dear Liz: Please write a comparison of 529 college savings plans versus using I bonds for education. I had given baby gifts of 529 funds to grandkids before they had their first birthdays. But due to market volatility, this year I matched those with I bond funding for the kids. The oldest is now 6, so there is time to get past penalty issues for withdrawals should they use these for education, as I hope they will.

Answer: As mentioned in previous columns, 529 college savings plans are a flexible, tax-advantaged way to save for education costs.

Money can be used tax free for private kindergarten through 12th grade tuition as well as qualifying college expenses. Plus, up to $35,000 of leftover funds can be rolled over into a Roth IRA.

Accounts owned by parents have minimal impact on financial aid, and accounts owned by grandparents aren’t included in federal financial aid calculations at all.

College savings plans typically offer an array of investment options, including age-weighted funds that get more conservative over time. The ability to invest the money means you have a good shot at generating inflation-beating returns over time, but you also have to deal with some ups and downs in the markets.

I bonds — technically, I Series Savings Bonds — have advantages as well.

These are government-issued bonds, so you can’t lose your principal, and they are designed to help investors keep up with inflation. I bonds earn a fixed rate for the 30-year life of the bond, which is currently 0.4%, plus a semiannual variable rate pegged to inflation (currently 3.24%).

The composite rate formula for I bonds issued from November 2022 through April 2023 is 6.89%. In the previous 6 month period, bonds paid 9.62%.

The interest is added every six months to the bond’s value, rather than paid out, so bond owners can defer federal taxes until the bond is cashed in. (I bonds are exempt from state and local taxation.) And the interest can be tax free if the bond proceeds are used to pay for certain higher education costs.

Getting that tax-free treatment is somewhat complicated, however.

First, the bonds would need to be owned by the parents rather than you or the grandkids. Qualifying college expenses must have been incurred by the bond’s owner, the owner’s spouse or a dependent listed on the owner’s federal tax return.

There’s an age restriction too: The bond owner must have been at least 24 before the bonds were issued. The ability to get the exclusion ends if modified adjusted gross income is above certain limits (in 2022, it was $100,800 for singles or $158,650 for married couples filing jointly).

I bonds have other restrictions. No withdrawals are allowed in the first year of ownership. Any withdrawals made within the first five years trigger a loss of three months’ worth of interest income.

People can buy $10,000 of electronic I bonds each year, plus they can use their tax refunds to purchase an additional $5,000 of paper I bonds.

I bonds are certainly a reasonable alternative for college savings, but the various restrictions on their purchase and use may make 529 college savings plans a better option for many families.

This week’s money news

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This week’s top story: Smart Money podcast on no-spend month 2.0, and recovering from credit damage. In other news: February mortgage rates on the downslope by end of month, having a conversation about fraud with older adults, and how to save your job from laying off.

Smart Money Podcast: No-Spend Month 2.0, and Recovering From Credit Damage
This week’s episode starts with a conversation about how to do a no-spend month that will work for you.

February Mortgage Rates on the Downslope by End of Month
With inflation in retreat, mortgage rates could follow downward.

Have a Conversation (Not a Lecture) About Fraud With Older Adults
Chatting with older adults about fraud and scams could help everybody in the conversation avoid becoming a victim.

Industries Most Likely to See Layoffs + How to Save Your Job
Money News & Moves: As layoffs escalate, these are the jobs most at risk — and how to protect yours.