Ask Liz Weston

Get smart with your money

Q&A

Q&A: Should parents help adult children buy a home?

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Dear Liz: In all the back and forth over the best way to help adult children buy a home, you neglected the obvious answer, which is not to do it at all. Adults shouldn’t expect handouts from their parents.

Answer: That’s certainly one perspective, but one that ignores the soaring cost of buying a first home and the benefits of transferring wealth between generations.

Many younger people could afford a mortgage payment but struggle to save a down payment while juggling high rents, rising living costs and student loan debt. As home prices climb, homeownership moves further and further out of reach. Help from parents can allow adult children to buy sooner, start building equity and potentially accumulate more wealth over time. A “handout,” as you call it, early in adulthood can make a much bigger difference than an inheritance received decades later.

Of course, many parents aren’t in a fortunate financial position to help their adult children. Others help at the expense of their own finances, or in ways that keep their kids financially dependent.

If the parents are willing and financially able, though, assistance with a down payment can give their children a huge head start toward building wealth in an increasingly tough housing market.

Q&A: Does a retiree without dependents need life insurance?

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Dear Liz: I am a retired, debt-free veteran who is 68. I am grappling with whether I should continue to pay premiums of $25,000 annually for the next seven years on an indexed universal life policy. I bought it based on advice from a local financial advisor who is not a certified financial planner but who is supposedly acting as a fiduciary on my behalf.

I am single (divorced for some 30 years) and have no dependents. I receive pensions from the military and the federal government. I currently have a broad-based index fund investment portfolio through a discount brokerage and in seven years I expect to receive annuity payments for the remaining years of my life from an insurance company.

I think it would be more in my best interest to take those premiums and put them into my federal Thrift Savings (TSP) account’s Roth option and just wait until my RMD comes up in four years. What do you think, ma’am?

Answer: The phrase “supposedly acting as a fiduciary” is worrisome. Advisors are either obligated to act in your best interests or they’re not. The ones who are not fiduciaries could recommend expensive or underperforming investments because those investments pay higher commissions, not because they’re the best fit for the client.

Indexed universal life policies are expensive, complex and too often pushed on people who don’t have a need for permanent insurance. That sounds like you, since you don’t have anyone who is financially dependent on you. It’s hard to see how spending another $175,000 on premiums makes sense.

There could be tax and other financial consequences from simply stopping your payments, however. Please find a CFP who is familiar with permanent insurance to help you review this policy and your options, which could include surrendering or modifying the policy. (CFPs are required to be fiduciaries when they’re giving financial advice.)

You can find fee-only financial planners who work on an hourly or project basis through the Garrett Planning Network. Other resources include the National Assn. of Personal Financial Advisors and the CFP Board’s consumer website, LetsMakeAPlan.org.

You won’t, by the way, be able to contribute anything to your TSP retirement plan now that you’re retired. But you can work with your CFP to find other ways to invest or spend the money you save.

Q&A: What’s the most tax efficient way to donate your RMD?

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Dear Liz: My wife and I are in our 70s and receive required minimum distributions from IRAs. We make our charitable contributions out of our RMDs. We have considered a donor advised fund. Which vehicle provides the best tax savings?

Answer: You would typically get the most tax benefit from qualified charitable distributions, which allow people 70½ and older to contribute money to charities directly from their IRAs. QCDs can satisfy required minimum distributions without increasing your adjusted gross income. That, in turn, can mean less taxation of your Social Security benefits and may help you avoid or reduce income-related surcharges on your Medicare premiums.

QCDs must go directly from your IRA custodian to the charity. A check issued by the custodian and payable to the charity can qualify even if you deliver it. It’s not a QCD if you receive the distribution and then pay the charity yourself.

Donor-advised funds work differently. You contribute cash or securities to the fund and may qualify for a tax deduction if you itemize. The contributions can grow tax-free until you direct the fund to make grants to eligible charities, potentially years later.

You can’t make QCDs to donor-advised funds, but these can be useful if you want to make several years’ worth of charitable contributions at once or donate appreciated securities. Donating those investments rather than selling them can avoid capital gains taxes.

For annual charitable giving from your IRAs, however, QCDs are likely the better choice. Talk to your tax pro about how to make sure your donations meet the QCD rules.

Q&A: Why your credit score keeps dropping despite autopay

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Dear Liz: My credit scores have gone down every few months for about a year. The credit bureau says this is due to a late payment of a credit card balance. My card is on an automatic monthly payment that pays the balance in full every month. Somebody explained to me that if the credit card’s monthly due date is on the weekend or a holiday long weekend and the bank is closed, the balance is paid one or two days later and the credit agency records that as a late payment, which is a major negative and lowers my credit score. My banker suggested I formally arrange credit card payment three days earlier than the due date. Will that work?

Answer: Let’s hope your banker wasn’t the one telling you that nutty story about weekend due dates tanking your credit scores.

If you set up autopay with the credit card issuer, your payment will simply process on the next business day when the due date lands on a weekend or holiday. Such payments aren’t considered late. If you instead used your bank’s bill payment system to send monthly recurring payments, the payment typically shifts to the closest business day before the weekend or holiday.

Even if there were some glitch and your payment landed well after the due date, the credit card company wouldn’t report you as late to the credit bureaus until you were 30 days or more overdue. A payment that’s a few days late could trigger a late fee, but wouldn’t affect your credit scores.

The fact that your scores have been dropping continually for a year indicates you have a more serious ongoing problem that might be due to identity theft. If a criminal opened a credit card in your name and then failed to pay it, the missing payments over many months would lead to continually dropping scores.

Your banker should have told you to get copies of all three of your credit reports for free from AnnualCreditReport.com. (Type that name directly into your browser bar and beware of sites that are trying to sell you credit monitoring or other products. If the site asks for a credit card, you’re on the wrong site.)

Look for bogus accounts. If you find any, you’ll need to file a report with the Federal Trade Commission and get an identity theft affidavit. You can use that affidavit to file a police report. You’ll also need to dispute the account with the three main credit bureaus. While you’re on their sites, you also should put a freeze on your credit.

You can find more information on the FTC’s IdentityTheft.gov site and at Identity Theft Resource Center, www.idtheftcenter.org.

Q&A: Can you tap your equity without triggering capital gains?

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Dear Liz: I know from personal experience after selling a longtime residence that tax return information is shared with the Social Security Administration. If the two-year look-back shows high enough modified adjusted gross income, Medicare premiums can increase significantly. There are appeal options, but a one-time home sale doesn’t necessarily qualify.

Should the couple consider a home equity line of credit to generate funds without triggering taxes?

Answer: That’s one option a financial planner might suggest, although HELOCs typically have variable interest rates and require monthly payments, which can burden retirees.

Another possibility is a reverse mortgage, which generally costs more but doesn’t require monthly loan payments. Interest and fees increase the loan balance, reducing equity available for future needs. Borrowers must continue paying property taxes, insurance and maintenance, and the loan generally comes due when they sell or permanently leave the home.

But again, taxes are just one factor. The planner can help them sort through all their options to find one that best fits their goals and needs.

Q&A: Why selling a valuable home can cost more than you think

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Dear Liz: Why do you seem to discourage older people living in homes that have appreciated over the years from selling because of the tax consequence? Recently, someone complained they could not move out of their family home because they would owe $400,000 in taxes. Why don’t you show the math: If they owe $400,000, even at the maximum (20% capital gains), that means they received $2,000,000. So even after taxes, they net $1,600,000. People who are asking the question you answered today need to either recognize they are swimming in money after taxes, or that they incorrectly think their net profit is taxed 100%.

Answer: If you’re referring to the couple who wanted to use their home sale proceeds to give down payments to their children, your math is a bit wonky.

The couple said selling their paid-off home would generate more than $1 million in proceeds. Proceeds aren’t the same as taxable gains, and the tax bill depends on the home’s original cost, qualifying improvements, selling expenses and the $500,000 home-sale exclusion for eligible married couples.

Taxable home sale gains can have the same impact as Roth conversions, in that they can raise Medicare premiums, make more Social Security benefits taxable and push other income into higher tax brackets. Some taxpayers also face the 3.8% net investment income tax.

Furthermore, the couple weren’t complaining that they couldn’t sell their home — they wanted to. My response was to remind them that their generosity could have big financial consequences.

Your ultimate point is a good one, though. Taxes matter, but they should never be the only consideration in a major financial decision.