Ask Liz Weston

Get smart with your money

Q&A

Q&A: Making sure your free credit report really is free

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Dear Liz: Please tell me again how to get my free credit report each year.

Answer: You can get a free annual look at your credit reports from the three major credit bureaus at www.annualcreditreport.com. If you search for “free credit report,” you may wind up at a look-alike site, rather than the federally mandated one. A good clue that you’re on the wrong site will be if you’re asked for a credit card number.

Your free reports don’t include free scores, which are the three-digit numbers lenders and others use to judge your creditworthiness. Your bank or credit card companies may offer free scores, or you can sign up with one of the many sites that offer them. Keep in mind that there are different types of scores, and the one that you’re seeing may not be the same as the ones your lenders use.

Q&A: How long will a tax lien linger on a credit report?

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Dear Liz: You wrote an article about how the credit bureaus are removing civil judgments and tax liens from people’s credit reports. I’ve been denied credit due to a few tax liens. Creditors won’t negotiate, even though the IRS has already deemed me unable to pay due to my disability. (I’m receiving Social Security disability income.) My question now is, how can I be sure it is being removed? Do I need to call the bureaus? Order another credit report?

Answer: Your unpaid tax liens may disappear, or they may not.

Starting in July, Equifax, Experian and TransUnion began removing liens and judgments when those records lack enough personally identifying information to ensure that the negative marks wind up on the right people’s reports. Another new requirement is that the records be properly updated, so that accounts that have been paid or resolved aren’t still showing as unpaid.

The error rate for these records was high, leading to many complaints, disputes and lawsuits. The bureaus expect to purge virtually all civil judgments but only about half of the tax liens.

If your liens aren’t purged and you can’t pay them, you may have to wait a while for them to fall off your credit reports. Paid liens are subject to the seven-year limit on how long most negative items can appear on credit reports. Unpaid liens can technically remain indefinitely, although the bureaus typically remove them after 10 years.

Q&A: What to consider before giving money for law or medical school

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Dear Liz: Our daughter is in medical school using scholarships and student loans. We are now in a position to help her out, but worry that financial help might work against her sources of aid. Would it be better to pay some on her outstanding loans, give her money, pay some of her living expenses or put the money into a savings account to give her when she graduates to use towards paying down her debt? The amount we could give her would not be enough to pay for everything each semester, just something to ease her burden. We don’t want to jeopardize her ability to receive aid.

Answer: While nearly all graduate students qualify as independent — which means that parent financial information isn’t required to get aid — some medical and law schools do consider parental assets and income in their calculations.

Your daughter should call her school’s financial aid office anonymously to ask about its policy regarding parental aid, said Lynn O’Shaughnessy, a college financing expert at TheCollegeSolution.com. If your help would hurt, you can use the savings account route but you needn’t wait until she graduates to give her the money. Once she files financial aid forms for her last year, she should be able to accept your largesse without consequence.

Q&A: An Internet search isn’t the best way to find a credit counselor

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Dear Liz: You’ve mentioned finding a nonprofit credit counselor and I was wondering the best way to go about that without feeling like I’ve been scammed. I’m wise enough (in my later years) to know that “nonprofit” does not mean free or even cheap services, so I didn’t want to just search for “nonprofit credit counseling, McKinney Texas.” Suggestions? Or should I do just that?

Answer: You can find a nonprofit credit counseling organization in your area using the National Foundation for Credit Counseling site at www.nfcc.org. NFCC is the oldest and largest credit counseling organization. Member organizations provide a variety of free and low-cost services. Those include financial education, credit report reviews and counseling about credit and debt, bankruptcy, foreclosure prevention, housing and reverse mortgages. If you’re struggling with credit card debt, these agencies provide debt management plans that can allow you to pay off your accounts at lower interest rates.

If you think you may need a debt management plan, you may also want to consult with a bankruptcy attorney. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org. Credit counselors — and their clients — are sometimes too optimistic about people’s ability to pay off debt, so you should understand the advantages and disadvantages of bankruptcy before you commit.

Q&A: Watch out for shady companies promising to help you repay student loans

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Dear Liz: I’m 32 and have a little over $100,000 in student debt from undergraduate and graduate school. I’m trying to get my professional life on track, and I can’t figure out how to pay the loans off. Everything I see online seems shady. What are the questions I need to be asking myself? What are the things I should be searching for on the Internet to help me get control of my financial situation?

Answer: “Shady” is exactly the right word to describe many of the companies promising student loan debt relief. They’re making false promises and charging troubled borrowers fat fees for government help that’s available for free. Many of these outfits get disciplined in one state, only to pop up in another.

If you’re struggling to pay federal student loans, you have several options for making the payments more manageable. You can research income-based repayment programs at StudentLoans.gov. Private student loans don’t have the same consumer protections or numerous repayment options, but you can contact your lenders directly to see what they offer.

The amount of debt you have is large but not insurmountable, especially if it qualified you for a well-paying job.

You don’t have to rush to pay off the federal student loans because those offer low, fixed rates, but you may want to prioritize paying off variable-rate private loans.

Also, don’t let your concern about your debt prevent you from saving for retirement. That, too, will be expensive, and the longer you wait to contribute to a retirement fund, the harder it will be to catch up.

Q&A: Avoid running out of money before you run out of breath

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Dear Liz: I have two questions regarding the required minimum distributions from retirement accounts at 70½ years old. If I started taking 15% per year at 68, would I still be required to follow the IRS tables and take 27.4% at 70½? Also, can I take the required minimum distributions and roll them into a Roth?

Answer: Please, please, please hire a tax pro before you do anything else. Required minimum distributions can get complicated, and the cost of getting it wrong is huge. If you don’t withdraw enough, you’ll pay a whopping 50% federal penalty on the amount you should have withdrawn but didn’t. If you withdraw too much, you’re paying unnecessary taxes and losing years of future tax-deferred growth.

Which is exactly where you were headed. The IRS table to which you refer does not say you need to withdraw 27.4% of your nest egg at 70½. The 27.4 number is the distribution period. You divide your account balances by that figure to get the amount you’re supposed to withdraw the first year. Think about it: otherwise, your retirement accounts would be emptied within four years.

Even withdrawing 15% a year would exhaust your funds relatively quickly. A sustainable withdrawal rate — one that leaves you a reasonable chance of not running out of money before you run out of breath — is closer to 4%.

There are situations where you might want to start distributions early, even if you don’t need the money. Diligent savers might discover that their distributions would push them into a higher tax bracket if they wait until age 70½ to begin. When that’s the case, it can make sense to withdraw just enough to “fill out” their current tax bracket and pay a lower rate now rather than a higher rate later.

Here’s a simplified illustration. Let’s say a couple in their 60s has a large retirement portfolio and waiting until their 70s to start withdrawals would push them from their current 15% bracket to the 25% bracket. Instead, they might begin taking distributions early. If their current taxable income is around $30,000, for example, they could withdraw as much as $45,900 before being kicked into the 25% bracket, which begins at $75,900 for married couples.

These calculations have lots of moving parts, including different tax rates for taxable investments and for Social Security. That’s another reason to have a tax pro help you run the numbers.

Your pro will tell you that you can’t avoid taxes by rolling required minimum distributions into a Roth. You can contribute new money to a Roth, but only if you have earned income and your modified adjusted gross income is under certain limits. Those limits start to phase out at $118,000 for single filers and $186,000 for married couples filing jointly.