Ask Liz Weston

Get smart with your money

Liz Weston

How to bolster your financial confidence

By

Melinda Perez, a financial educator, still remembers the first time she felt financially confident. She had recently started investing money outside of her employer-sponsored retirement account because she was finally earning more than she spent. “It was exciting because for once, I had what felt like extra money,” recalls Perez, who lives in San Antonio, Texas.

Financial confidence, or the belief in one’s money-related abilities, might not come up as much as financial literacy — especially in April, Financial Literacy Month — but money experts say it’s often the hidden ingredient behind savvy money decisions. “If there’s no financial confidence, there is no willpower to succeed. We translate that to financial self-efficacy,” says Perez, who also studies financial confidence as part of her research as a doctoral candidate in organizational leadership.

But confidence with money can be hard to come by. According to a NerdWallet survey in January, three quarters of Americans say they do not feel confident about their personal finances for 2023, and many of them cite the uncertain U.S. economy.

There are, however, ways to boost your financial confidence. In Kimberly Palmer’s latest for the Associated Press, learn how to bolster your financial confidence.

Q&A: 401(k) payouts and Social Security

By

Dear Liz: I was laid off from my job in late 2021 and at 62 was unable to find employment. After six months of unemployment benefits, I filed for Social Security. My 401(k) account from my previous employer was rolled into a traditional IRA. I also took a distribution to carry me through the months without unemployment and to repay a 401(k) loan I used as the downpayment on my home. I was taxed on the total amount of rollover funds, as well as on the distribution, which seems like I paid tax twice. All told, it looks like I made a lot of money in 2022. How will this affect my Social Security benefits going forward?

Answer: You don’t have to pay tax on the 401(k) funds that were rolled into the traditional IRA. If you’ve already done so, please consult a tax pro immediately about filing an amended return to get that money back.

You may have been confused by the 1099-R tax form issued by your 401(k) provider, which reported the entire amount that left your 401(k) account as a distribution. But only the amount that didn’t make it into the IRA is considered taxable.

The taxable distribution isn’t considered earned income that would trigger the earnings test. (The earnings test applies to people receiving Social Security before their full retirement age, currently ages 66 to 67. The test causes $1 to be withheld for every $2 earned over a certain limit, which is $21,240 in 2023.)

But distributions can cause more of your Social Security benefit to be taxable. Taxes on Social Security are based on a unique formula known as “combined income,” which includes your adjusted gross income plus any nontaxable interest and half your Social Security benefits.

If you’re a single filer and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your benefits may be taxable. Married couples filing jointly may have to pay income tax on up to 50% of benefits if their combined income is between $32,000 and $44,000. If their combined income is more than $44,000, they could owe tax on up to 85% of their benefits.

Keep in mind that you don’t lose 50% to 85% of your benefit to taxes. That’s the proportion that is subject to tax.

A tax pro can help you estimate the effect of future distributions and calculate how much you may need to withhold to avoid penalties.

Q&A: Here’s how to budget your money using the 50/30/20 rule

By

Dear Liz: What is the formula now for expenses? When growing up, we were told that one-third of net income should go to rent, but recently, I read that 50% is the standard with the remaining 50% divided between wants and savings.

Answer: You may be referring to the 50/30/20 budget, which suggests limiting “must haves” to 50% of after-tax income, leaving 30% for wants and 20% for savings and extra debt payments. (After-tax income is your gross income minus taxes and is often a different figure from your net income. Your net paycheck may include deductions for insurance premiums, retirement contributions and other expenses.)

The 50/30/20 budget was popularized by Sen. Elizabeth Warren (D.-Mass.) and her daughter, Amelia Warren Tyagi, in their book, “All Your Worth: The Ultimate Lifetime Money Plan.” Warren once headed Harvard University’s Consumer Bankruptcy Project and promoted the budget as a way to help people reduce their chances of going broke.

The “must haves” category includes more than housing payments. It also includes other costs that would be difficult, expensive or dangerous to forgo temporarily, such as food, utilities, transportation, minimum loan payments and insurance.

The budgeting rule you grew up with, just like the 50/30/20 budget, was meant to help people live balanced financial lives. Limiting spending on big expenses, such as rent or mortgage payments, helps ensure there’s enough left over to save for the future, pay off the past and enjoy the present.

Of course, many people find it difficult to limit their must-have expenses to recommended levels, especially in high-cost areas. Housing costs alone can eat up half their incomes, or even more. To avoid going into debt, they may need to reduce other spending or saving or find ways to increase their income.

Retiring? If you need a home loan, get one first

By

Retired engineers Kelly and Derek Barkey assumed they would be approved when they applied for a $50,000 home equity line of credit two years ago to fix up their new house.

The Barkeys, now 56 and 59, had just sold their longtime home in Southern California and paid cash for a house worth about $850,000 near St. Louis, Missouri. They had retirement accounts worth $3 million, $500,000 in a taxable brokerage account and excellent credit scores.

They were surprised when a national bank turned them down. They tried a local credit union, which also rejected them.

“We haven’t been turned down for credit since about 1987,” says Kelly Barkey, remembering when the couple applied for a rewards credit card while she was still a college student.

In my latest for the Associated Press, learn how to get a home loan in retirement.

This week’s money news

By

This week’s top story: Smart Money podcast on making your big money reset. In other news: what do financial experts say about investing in AI stocks, if COVID costs will be covered when the health emergency is ended, and what to do when Medicare doesn’t cover your prescription drug.

Smart Money Podcast: Making Your Big Money Reset, With Jill Schlesinger
This week’s episode is dedicated to a conversation with Jill Schlesinger, CBS business analyst, host of the “Jill on Money” podcast and author of “The Great Money Reset.”

What Do Financial Experts Say About Investing in AI Stocks?
Several publicly traded companies have links to artificial intelligence. But do AI stocks have a place in investors’ portfolios? Here’s what the experts say.

The Health Emergency Is Ending. Will COVID Costs Be Covered?
The health emergency expires May 11, with different impacts for those with private insurance, Medicare and Medicaid.

What to Do When Medicare Doesn’t Cover Your Prescription Drug
You may need to request a formulary exception or switch plans during an enrollment period.

Q&A: They lent their friend a van. It’s getting awkward. Now what?

By

Dear Liz: A friend of ours had a huge problem with car repairs last year. This friend got ripped off by a mechanic who took money for the work to repair his car and never repaired it. So my husband and I were kind enough to loan him our van for what we thought would be a short time. The loan has now lasted a year. He put a lot of repair work into it, but we need to ask for the vehicle back. It is not titled to him. I feel bad that he has spent money working on the van. Should we offer him any money or reimburse him for the work? I have a feeling it’s not going to go over very well. Any thoughts or advice on how to handle this would be appreciated.

Answer: As you probably know, the pandemic and a lingering microchip shortage have upended the car market, dramatically raising prices for both new and used cars. Interest rates have gone up as well, making car loans a lot more expensive. Your friend may well have made the calculation that repairing a borrowed vehicle made a lot more economic sense than trying to buy a replacement. He avoided lease or loan payments, plus he may have benefited from free insurance coverage if you continued to pay those premiums.

One approach would be to put a rough dollar value on those savings compared with what he spent on repairs and offer to reimburse him for the difference.

Should you ever again want to loan a potentially valuable asset to a friend, consider discussing in advance who will be responsible for maintenance and repairs as well as how long the loan is expected to last. Putting the details in writing could help both parties avoid awkward misunderstandings.