Q&A: Early withdrawal penalties on CDs

Dear Liz: You told a reader to be suspicious of a bank’s offer to waive early withdrawal penalties on a certificate of deposit. But several credit unions allow early withdrawals from five-year CDs after the account holder turns 59 1/2. These credit unions will even allow you to get higher-interest CDs at other credit unions with no penalty after 59 1/2 . My husband and I and sister did this for many years until just a few years ago. I even do Roth conversions every year and take money from five-year CDs with no penalty and go to the place with the highest interest rate. There are many rewards and unexpected privileges at credit unions. When my husband passed and I disclaimed his traditional IRAs, the children were allowed to keep the 6% interest on those CDs until they matured, even after they were changed to inherited IRAs.

Answer: Credit unions, which are owned by their members, often have better rates and terms than banks, although some banks also offer to waive early withdrawal penalties after 591/2 on certain CDs.

But no one should rely on a verbal assurance that a fee will be waived. The offer to waive the fee should be in writing and kept with other financial documentation.

Q&A: IRA interest rate terms

Dear Liz: I went to renew my IRA certificate of deposit and the bank officer suggested that I renew at the greater rate being offered for a five-year term (about 1.5% APR) rather than the lower rate for a one-year term (about 1% APR). She explained that since I am over 59 1/2, I can close the account at any time and roll it over to a new IRA should rates rise (for example to 1.75% in 15 months) with no penalty whatsoever. Is this true?

Answer: You don’t have to close and reopen IRAs when a CD matures or you want to change investments. The IRA is the bucket that holds your investment, not the investment itself. You also should be skeptical about claims that you would pay no penalty for early withdrawal. Not only are such penalties the norm, but a Bankrate survey found 9 out of 10 banks won’t just require you to forfeit the interest but will dip into your principal to pay the fees if necessary. The bank may offer a one-time opportunity to lock in a higher rate; if that’s the case, you should get the details in writing as well as the penalties if you have to withdraw the money prematurely.

In fact, any time someone pitches you an investment for your retirement funds, you should ask a lot of questions and get every detail and promise in writing. If the pitch is coming from someone who will profit from your investment — which is often the case — you should consider running it past a neutral third party such as a fee-only planner.

By the way, the Federal Reserve has signaled that it’s considering raising interest rates this year. That’s no guarantee that it will, but locking up your money now is a gamble.

Q&A: Paying a deceased person’s debts

Dear Liz: When I read the letter from the woman about her mother’s debts, it brought back my situation with my brother and mom. My brother was trustee to my mother’s living will and told her she had no money. At 90, she became worried and wanted to cut back on the care she needed. My brother had the same attitude as the woman who wrote you that her mother’s property was not an asset for her to use but something to be hoarded for the heirs.

Answer: That’s not the situation the daughter described. She was asking whether she and her sister were responsible for her mother’s debts. They are not. The mother’s estate would be responsible, and her estate would include her home. If the estate’s assets aren’t sufficient to pay all the bills, however, the creditors wouldn’t be able to come after the daughters. Still, some collection agencies have been known to contact survivors, telling them they have a “moral obligation” to pay the dead person’s debts.

Q&A: Money owed on a lease after death

Dear Liz: I read your answer to the person who returned a car and wanted to be free of that debt. Our situation is somewhat different. My son’s father had a massive stroke and died two weeks after signing a lease for a Camry on which he made a $2,000 down payment. My grown son, who is left to deal with everything, took the car back to the dealership, and they assured him nothing further would be needed. The dealership then sold the car for $18,000 at an auction and said $8,000 is still owed on this car since my son’s father signed a legal contract.

Answer: The money is still owed. Whether the dealership will ever collect is another matter.

This debt is now part of the dead man’s estate, along with any other loans or credit accounts he owed at the time of his death. If the estate has sufficient available assets, the executor is required to pay those bills. If there aren’t sufficient assets, creditors may have to accept less than they’re owed or nothing at all.

If your son is the executor, he should hire an attorney experienced in settling estates to help him deal with these details. Nolo’s book “The Executor’s Guide” also will help him understand his duties and obligations.

Q&A: Social Security spousal benefits

Dear Liz: Can you please explain Social Security spousal benefits? Is there a certain length of time a husband and wife need to have been married that will qualify the spouse to get the spousal benefit after divorce? For example, if a couple has been married for 20 years and then divorces, will the spouse still be entitled to collect the spousal benefit, or is the spousal benefit only for those who stay married?

Answer: Spousal benefits are available to divorced spouses as long as the marriage lasted at least 10 years. But you have to be unmarried to get benefits based on an ex’s work record. If you remarry, those benefits end.

The amount you get as a spouse or divorced spouse can equal up to half of what the primary earner gets. As with other Social Security benefits, however, your checks typically will be reduced if you start benefits before your own full retirement age. Starting spousal benefits early also precludes you from later switching to your own retirement benefit, even if that benefit would be larger.

Q&A: Fraud or forgetfulness?

Dear Liz: I think I’ve been scammed, but my credit union has decided I’m simply forgetful. I noticed a debit to my checking account that I did not recognize from a merchant I cannot identify. The merchant name appears on my statement as simply “Portland Portland OR.” My credit union can tell me only that it is a used-merchandise store or secondhand store. I questioned the charge by email and replaced my card. Then I got a letter from the credit union upholding the charge, saying that my card and PIN were present at the time of the transaction. I never did learn the merchant’s name. Can this merchant really not be identified? The $10.48 in dispute is unimportant compared with the complete opacity of the supposed purchase. No name, no address, only a day and time. Is this mystery the best the banking system can do?

Answer: Your credit union could identify the merchant by contacting the card network that processed the transaction, but has apparently decided it’s not worth the effort, said Odysseas Papadimitriou, chief executive of Evolution Finance, which operates the CardHub.com card comparison site. You can demand the credit union identify the merchant for you, but there’s reason to believe this transaction is legitimate, he said.

It’s not just because a personal identification number was used, however, since PINs certainly can be stolen. Hackers have compromised keypads at Michael’s stores and Barnes & Noble, among other retail chains, while Target said encrypted PIN data were stolen in its massive database breach.
But the use of a PIN combined with the small amount of the transaction indicates the culprit here likely is forgetfulness rather than an identity thief, Papadimitriou said. ID thieves are unlikely to make one small transaction and then wait, he said.

“They try to extract the max they can before they get shut down,” Papadimitriou said.
Still, your experience should make you think twice about using a debit card for a retail transaction. With debit card fraud, you may have to fight with your financial institution to get the money back, since the transaction comes directly out of your checking account. With credit cards, you don’t have to pay a disputed transaction until the card company investigates.

Q&A: Loose change and the ‘Big One’

Dear Liz: In your column about saving loose change, another reason to keep a couple of coffee cans full of coins is for when we have the “Big One.” ATMs and banks and stores that rely on computers will be down, but loose change and small bills will be spendable.

Answer: Every disaster preparedness kit — which every home should have — should include some cash for emergency spending. But the cash should be in the form of bills, not change, which will add unnecessary weight to your kit if you have to evacuate. A few hundred dollars in bills are easily carried — not so the 20 or 30 pounds of change that make up an equivalent amount of spendable money.

Q&A: The benefits of loose change

Dear Liz: I just had to giggle at the husband who wanted to save his coin change for an emergency. Yes, this seems so silly now, but back in the day prior to debit cards my mom started saving all her loose change in a coffee can when my husband and I got engaged. Ten months later, she had saved enough for my wedding dress! When we had our first child, we started saving all our loose change, and 10 years later, we had saved enough for a trip to Disneyland. Obviously, we are saving less and less change since we so seldom use cash anymore, but we still keep a coffee cup to collect the loose change and still manage to turn in about $100 a year to the bank.

Answer: The key is to regularly deposit the coins, rather than letting them pile up. But a few readers cautioned that it might be worth carefully sorting through older stashes of coins:

Dear Liz: You gave a good answer to the question about cans of coins. You also should advise the party that if the cans have older coins — pre-1965 — the value of those dimes, quarters and half-dollar coins is tied directly to the price of silver. At $20 per ounce, 90% silver coins are worth about fourteen times their face value. A dime would be worth about $1.40, a quarter about $3.50, and a half-dollar about $6. At the same silver price of $20, 40% silver half-dollars are worth about $2.50 each. If you use a commercial sorting service you will lose the value of these coins. If you sort them while watching TV as I do, you will recover it. Lastly, if you do roll the coins, return them to the bank immediately. If your house is burglarized, as mine was, the rolls of coins on your desk will be gone in an instant.

Answer: Ouch. Sorry for your loss. You aren’t the only one to find gold (or rather silver) in your coins:

Dear Liz: I inherited much loose change. I started going through it and found a nice can of Buffalo nickels (each worth more than a nickel) and 22 pounds of silver quarters (made before the sandwich coins) worth $7,744 less handling and processing fees. It still came to a tidy sum. Let your letter writer know that it may pay to sort through that mountain of loose change.

Q&A: Saving loose change

Dear Liz: My husband recently told me that he has saved many coffee cans full of loose change over the years. When I suggested we might at least roll the change to make it easier to count should we ever need it, he was not interested! I understand he just wants it available in an emergency, but just the transportation of these things to a coin counter (that may or may not be available) makes me want to find a better way to honor his idea of saving change in a more realistic way. Perhaps roll while watching TV, then ask a bank to convert to dollar coins as a way to reduce the bulk?

Answer: It’s hard to imagine how your husband expects to deploy those coins in an emergency. Does he envision lugging them to the grocery store or gas station? Does he imagine any retailer would accept a coffee can of change as payment? Many retailers won’t even accept rolled coins, since they don’t know what’s inside those wrappers.

Converting the coins into bills, or better yet to savings in a bank, is a far more practical option. You can use commercial coin sorters, but they typically take a hefty cut. Coinstar, for example, charges a 10.9% service fee, although that is waived if you choose to be paid with a retailer’s gift card or voucher.

Another place to check is your bank. Some have coin sorters available to customers, although you may have to deposit the result rather than take it immediately in cash.

Alternatively, your bank may supply you with wrappers — or it may not accept change at all. The only way to know is to call and ask.

If you do decide to roll the change, consider making a small investment in a coin sorter. You can spend $200 or more on a commercial version, but there are well-reviewed versions on Amazon that cost around $25.

Q&A: Keeping financial records

Dear Liz:I have a garage full of old financial records. I believe I need to keep only seven years of information for tax purposes. Is that correct? However, I have decades of receipts on house repairs and improvements since I believe there is some cumulative tax credit that might someday be important. Also, I have kept receipts on personal and household purchases in case of a loss that required an insurance claim. Am I keeping too much paper?

Answer: Yes. Here’s what you need to know.

Many tax experts recommend hanging on to your tax returns indefinitely, but you can shred most supporting documents after seven years when the risk of audit ends (unless you’re significantly underreporting income or committing fraud).

When it comes to assets such as homes or stocks, you should keep supporting documentation for as long as you own the asset plus seven years.

That includes receipts for home improvements, but not repairs. You can’t take a deduction for either home repairs or improvements, but the cost of improvements may help you reduce any taxable profit should you sell your home. In Publication 530, the IRS defines an improvement as something that “materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses.” Examples include putting an addition on your home, replacing an entire roof, paving your driveway, installing central air conditioning or rewiring your home. You can’t include improvements that are no longer part of your home. If you install carpeting and then rip it out to install hardwood, for example, you can no longer include the carpeting cost as an improvement.

You would have to have a considerable profit for those receipts to come in handy. The first $250,000 of home-sale profit, per person, is tax free. If you’re married, that means you wouldn’t face capital gains taxes on your home sale unless your profit exceeded $500,000.

Keep in mind that the IRS accepts electronic records. If you’re concerned about tossing paperwork you might later need, consider scanning everything first and maintaining a backup copy off site, either in the cloud or in a safe-deposit box.

Chances are good your insurer also accepts electronic records and scans of receipts, but call and ask first. Keeping receipts for insurance purposes is a good idea, as long as you cull the ones for items you no longer own.