Ask Liz Weston

Get smart with your money

Investing

Q&A: Here’s why timeshares are a bad investment

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Dear Liz: About two years ago, I lost my timeshare because of financial hardship. I paid off the mortgage but after my divorce I missed paying the annual fees. Is there any way I can regain it, or can the company just take it like they did? Also, is it worth it to try to get it back? I think so because it is the only thing I own.

Answer: Please consider investing your money in an asset that can gain value over time. Timeshares don’t.

Timeshares give you the right to use a vacation property for one week each year. They aren’t an investment. In most cases, timeshare owners are lucky to get 10 cents on the dollar when they try to sell their interests.

Sites such as Timeshare Users Group and RedWeek are filled with ads from people trying to sell their timeshares for $1, and some will even pay others to take timeshares off their hands, perhaps by prepaying a year or two of maintenance fees. Those fees average about $900 a year but can top $3,000 on high-end properties. Resorts damaged by natural disasters or older properties that are being improved also may charge “special assessments” that can be hundreds or thousands of dollars more.

As you discovered, timeshare resorts can take back your interest if you don’t keep up with those fees. You also could have lost your timeshare if you hadn’t been able to pay the mortgage. (In general, it’s not a good idea to borrow money to pay for vacations or other luxuries, and that includes timeshares. The high interest rates charged by most timeshare resort developers make borrowing an even worse idea.)

In addition to taking your timeshare, the developers may have sold your delinquent account to a collection agency that reports to the credit bureaus. Those collections could damage your credit scores.

You could ask the resort developer if you can get the timeshare back, but you could just face the same problem again down the road. One of the biggest problems with timeshares is that there typically is no easy exit. Those annual fees and special assessments are due as long as you own the timeshare. You may not be able to find a buyer if money is tight or you’re no longer able to use it.

If you really loved vacationing at that particular resort, you probably still can. Owners who can’t use or trade their timeshare weeks often rent them out on the sites mentioned above, sometimes for less than the annual maintenance fee. Renting could be a much better deal than tying yourself to a timeshare that could become unaffordable.

Q&A: Rebalancing your portfolio can trigger tax bills

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Dear Liz: Is there a tax aspect to rebalancing your portfolio? You’ve mentioned the importance of rebalancing regularly to reduce risk.

Answer: Rebalancing is basically the process of adjusting your portfolio back to a target asset allocation, or mix of stocks, bonds and cash. When stocks have been climbing, you can wind up with too high an exposure to the stock market, which means any downturn can hurt you disproportionately.

There definitely can be tax consequences to rebalancing, depending on whether the money is invested in retirement plans.

Rebalancing inside an IRA, 401(k) or other tax-deferred account won’t trigger a tax bill. Rebalancing in a regular account could. Investments held longer than a year may qualify for lower capital gains tax rates, but those held less than a year are typically taxed at regular income tax rates when they’re sold.

Tax experts often recommend selling some losers to offset winners’ gains, and “robo advisor” services that invest according to computer algorithms may offer automated “tax loss harvesting” to reduce tax bills.

Q&A: If you’re putting money in a 401(k) and an IRA at the same time, be ready for the taxes

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Dear Liz: I recently returned to a regular 9-to-5 job after freelancing for several years. I contributed the maximum amount to an IRA while self-employed and continued to do so after starting my new job. I was surprised to learn when doing my taxes this year that I could not deduct my IRA contributions because I was also contributing to my company’s 401(k) plan.

Other than increase my 401(k) contributions at the expense of future IRA funding, are there any actions I can take?

Answer: The ability to deduct IRA contributions when contributing to a workplace retirement plan phases out once your modified adjusted gross income reaches certain limits. For single filers, the deduction starts to phase out at $63,000 and disappears at $73,000. For married couples filing jointly, the phase-out is from $101,000 to $121,000.

Your next move depends on your goals and situation. If you’re primarily concerned with reducing your current tax bill and you’re likely to be in a lower tax bracket in retirement, as most people will, then you should funnel more money into your 401(k) rather than funding your IRA.

If, however, you expect to be in the same or higher bracket in retirement, or if you want more flexibility to control your tax bill in your later years, consider contributing to a Roth IRA in addition to your 401(k). Roths don’t offer an up-front deduction, but withdrawals in retirement are tax free. Also, unlike 401(k)s and traditional IRAs, there are no minimum required withdrawals in retirement.

There are income limits on the ability to contribute to a Roth IRA. For single people, the ability to contribute phases out between modified adjusted gross incomes of $120,000 to $135,000 in 2018. For married couples filing jointly, the phase-out is between $189,000 and $199,000.

Q&A: There’s a big difference in various kinds of bonds

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Dear Liz: My mutual funds and IRA are mostly in stocks with very little in bonds. I’m thinking I should have more in bonds, but just don’t know how much I should transfer from the stock funds and which bond fund to pick. Are they all the same?

Answer: Just as with stock funds, bond funds have different compositions, fees and investment philosophies. There’s a fairly big difference, for example, between a rock-solid U.S. Treasury bond and a “junk” or low-rated bond.

There’s also a difference in fees between funds that are trying to beat the market (active management, which is more expensive) versus merely matching the market (passive management, which is less expensive and typically offers better results).

The ideal asset allocation, or mix of stocks, bonds and cash, also varies depending on your age and risk tolerance. There are a variety of asset allocation calculators on the web you can try, or you can consult a fee-only planner.

Another option is turn the task over to a target date retirement fund, which manages the mix for you, or a robo-advisor, which invests according to computer algorithms.

Whatever you do, keep a sharp eye on the fees you’re charged. The average bond fund had an expense ratio of 0.51% in 2016, according to the Investment Company Institute. There’s little reason to pay much more than that, and ideally you’d try to pay less.

Q&A: Deferred compensation plans

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Dear Liz: I’m 54 and plan on retiring at 55 with a government pension. I have about $450,000 in a 457(b) deferred compensation plan. I owe about $220,000 on my home. I would like to pay off my 15-year, 2.5% interest mortgage. This would free up $1,900 a month and leave us debt-free. Everyone I’ve spoken to says this is a bad idea since I’d lose my mortgage interest deduction and I’d be “investing” in a low-interest vehicle (my mortgage). My only other obligation is my daughter’s college education, and I’m paying that in cash. Am I crazy to pay off this mortgage?

Answer: You’re not crazy, but you probably haven’t thought this all the way through.

The money in your deferred compensation plan hasn’t been taxed. Withdrawing enough to pay off your mortgage in one lump sum would shove you into a higher tax bracket and require you to take out considerably more than $220,000 to pay the tax bill. You could easily end up paying a marginal federal tax rate of 33% plus any applicable state tax — all to pay off a 2.5% loan.

There are a few scenarios where using tax-deferred money to pay off a mortgage can make sense. Some people have so much saved in retirement plans that the required minimum distributions at age 70½ would push them into high tax brackets and cause more of their Social Security to be taxed. They also may have paid down their mortgage to the point where they’re no longer getting a tax break.

In those instances, it may be worth withdrawing some money earlier than required to ease the later tax bill. The math involved can be complex, though, and the decisions are irreversible, so anyone contemplating such a move should have it reviewed by a fee-only financial advisor who is familiar with these calculations.

In fact, it’s a good idea to get an objective second opinion from a fiduciary any time you’re considering tapping a retirement fund. (Fiduciaries are advisors who pledge to put your interests ahead of your own.)

During your meeting, you also should review the other aspects of your retirement plan. How will you pay for health insurance in the decade before you qualify for Medicare? If you’re a federal employee, you should be eligible for retiree health insurance but your premiums may rise once you quit work. If you’re planning to buy individual coverage through a healthcare exchange, what will you do if that’s yanked away or becomes unaffordable? How will you pay for long-term care if you need it, since that’s not covered by health insurance or Medicare?

You can get referrals to fee-only financial planners from the National Assn. of Personal Financial Advisors at napfa.org. You can find fee-only planners who charge by the hour at Garrett Planning Network, garrettplanningnetwork.com.

Q&A: Money in the bank isn’t safe from inflation

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Dear Liz: I am 68 and not in very good health due to heart disease. I’m not sure what do with my savings of over $1 million, which sits in online bank accounts, earning 1.25% to 1.35% in 18-month certificates of deposit. (No account contains more than $250,000 to remain under the FDIC insurance limits.) The money will eventually go to my daughter, though I could use it for my retirement. I don’t have the appetite for market swings. What should I do with my money?

Answer: Your money currently is safe from just about everything except inflation. If you want to keep your nest egg away from market swings, you’ll have to accept that its buying power will shrink. There is no investment that can keep your principal safe while still offering inflation-beating growth.

If you do want a shot at some growth, you could keep most of your savings in cash but also invest a portion in stocks — preferably using low-cost index mutual funds or ultra-low-cost exchange-traded funds.

Before you know how to invest, though, you’ll need to think about your goals for this money. A fee-only financial planner could help you discuss the possibilities and come up with a plan. You can find fee-only planners who charge by the hour through the Garrett Planning Network, www.garrettplanningnetwork.com.