Ask Liz Weston

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Q&A

Q&A: What to do when coronavirus brings job loss, debt and a housing dilemma

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Dear Liz: I was employed as a tour guide for seniors but because of COVID-19, all our trips are canceled. I depended on the income because I have no other, besides Social Security, which I started at age 62. I now have credit card debt. I also needed a new car (mine was 24 years old and dying) so I’m leasing a car. The lease is up early next year and I would love to keep the car, if possible. My question is what to do with my home, where I have lived for more than 65 years. It was our parents’ home and now it’s owned equally with my brother, although because I live here, I pay everything: mortgage, taxes, insurance and so on. Should I sell my house and get an apartment? Rent it out? Get a roommate? Getting a roommate would not be my first choice, but I really want to stay in my home that I love so much.

Answer: If getting a roommate would give you enough income, then that may be the best solution — particularly since staying in your home is a top priority. Ideally, the rent you could charge would be enough to allow you to make ends meet, pay off your debt and save to buy your car.

If you’d still be running a deficit, however, then consider other solutions. If you can’t rent the home for enough to keep your head above water, then you probably should consider a sale.

One option, if your brother is amenable, is to sell some or all of your equity to him with the understanding that you could remain in the home. Make sure to get a written agreement; a lawyer could help with this. If your brother is not willing or able to buy your equity, you may have to put the house up for sale.

These are difficult changes, but your job isn’t likely to come back anytime soon. Finding a new gig, at your age and in this economy, may not be possible. Selling the house could free up some money for the future and allow you to reduce expenses rather than going deeper into debt.

Q&A: The bottom line on getting your credit scores in better shape

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Dear Liz: I want to write a letter of explanation to be included on my credit reports to explain a negative posting. How much impact will the letter have on my credit scores?

Answer: Credit scoring formulas can’t read, so letters of explanation won’t help your scores.

You do have a federal right to demand the credit bureaus include your explanation, which is also known as a consumer statement, in your credit reports. Theoretically, the statement could help a lender understand why you have the negative mark — but only if a human being actually examines your credit report and uses the information in evaluating your creditworthiness.

Because lending is largely automated, however, there’s no guarantee your statement will be read, let alone factored into a lending decision. Many of the other details of your credit report are converted to standardized codes used to calculate credit scores, but not consumer statements.

If the negative information in your reports isn’t accurate, you can dispute it with the credit bureaus. If the information is accurate, you can work to offset the effect on your scores.

Paying your credit accounts on time, all the time, will help rebuild credit. So will using less than 10% of your limits on credit cards.

If you don’t have a credit card, consider getting a secured card — where the credit limit typically is equal to the amount you deposit with the issuing bank. Credit builder loans, available at many credit unions, also can help add positive information to your credit reports.

Don’t close accounts, because that could hurt your scores and won’t get rid of any associated negative information.

People with only a few credit accounts also can help their scores by being added as an authorized user to a responsible person’s credit card. The responsible person doesn’t need to grant access to the actual card. Before taking this step, though, ask the credit card issuer whether authorized user information will be imported to your credit reports because issuers’ policies vary.

Q&A: Side effects of IRA conversions

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Dear Liz: I thought your readers would benefit from additional knowledge about Roth conversions. I started converting our IRAs to Roth IRAs when my wife and I turned 60 years old. Years later, I realized that our premiums for Medicare Part B and D were higher because our income in those years exceeded $174,000.

Answer: Triggering Medicare’s income-related monthly adjustment amount (IRMAA) is just one of the potential side effects of a later-in-life Roth conversion.

That’s not to say these conversions are a bad idea.

People with substantial amounts in traditional retirement accounts might benefit from transferring some of that money to Roth IRAs, particularly if the required minimum withdrawals that start at age 72 would push them into a higher tax bracket. They may have a window after they retire, when their tax bracket dips, to convert money and pay the tax bill at a lower rate.

Roths also don’t have the required minimum distributions that apply to other retirement accounts, so people have more control over their future tax bills.

Converting too much, however, can push people into higher tax brackets. Many financial advisors suggest their clients convert just enough to “fill out” their current bracket.

For example, the 12% bracket for married people filing jointly was $19,401 to $78,950 in 2019. A couple with income in the $50,000 range might convert $28,000 or so, because a larger conversion would push them into the 22% tax bracket.

But there are other considerations, as you discovered.

People with modified adjusted incomes above certain levels pay IRMAA adjustments that can add $144.60 to $491.60 each month to their Medicare Part B premiums for doctor visits and $12.20 to $76.40 to their monthly Part D drug coverage premiums. Higher income could reduce or eliminate tax breaks that are subject to income phaseouts, and conversions can subject more of your Social Security benefits to taxation.

At the very least, you should consult a tax pro before any Roth conversions to make sure you understand the ramifications. Ideally, you’d also be talking with a fee-only, fiduciary financial planner to make sure conversions, and your retirement plan in general, make sense.

Q&A: Helping a son with horrible credit scores

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Dear Liz: My 33-year-old son has horrible credit scores. If I added his name to my credit card, would it have a positive effect on his score without any negative ramifications to mine? Could any of his creditors come after me?

Answer: Adding someone to your credit card as an authorized user can have a positive effect on their credit scores without negatively affecting your own or obligating you to pay their other debts. You would be responsible for any debt your authorized user incurred on the card.

In your son’s case, though, being added as an authorized user probably won’t help much.

When someone has fallen behind on their bills, the effect on their scores depends on three main factors: recency (how recently did a late payment occur?), severity (how far behind are they — 30 days, 60 days, 90 days or more?) and frequency (how many accounts have late payments?).

One skipped payment can knock 100 points or more off good scores but won’t result in “horrible” credit. Truly bad credit typically requires someone to be well behind on a number of accounts in the recent past. The fact that you’re worried about his creditors indicates that he may not have resolved his financial problems enough to start rebuilding his credit.

What he should do now depends on his circumstances.

If he still has a job, he may be able to arrange a payment plan or settle debts with collectors. If his income has dropped or he’s otherwise unable to pay, he may need to consider bankruptcy.

Once his past debts are resolved — either paid, settled or legally erased — he can take steps to improve his credit, one of which could include being added to your card. A credit builder loan, offered by many credit unions, also could help, as could a secured credit card, which requires a deposit.

It’s crucial that he be able to make all his payments on time, however. If he falls behind again, he’ll offset any progress that’s been made.

Q&A: IRS pays interest on late refunds

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Dear Liz: I filed my return electronically with direct deposit. I have yet to receive my refund or that stimulus relief check. We have to pay interest on any late tax payment. Will the IRS pay interest on late refunds?

Answer: The IRS has said it will pay interest on late refunds if the return was filed by July 15, the extended tax deadline. The interest “will generally be paid from April 15, 2020, until the date of the refund,” the IRS says on its site. Don’t expect to get rich: The interest rate for the second quarter, which ended June 30, is 5% a year, while the interest rate for the third quarter, which ends Sept. 30, is 3% a year.

Q&A: IRA conversions and taxes

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Dear Liz: You recently advised a reader that if their income was too high to contribute to a Roth IRA, they could still contribute to an IRA or any after-tax options in their 401(k). You didn’t mention a two-step Roth IRA — first making a nondeductible contribution to an IRA and then immediately converting that amount to a Roth. That way those people whose income is too high to contribute to a direct Roth IRA can still have a Roth IRA using the two-step process.

Answer: This is known as a backdoor Roth contribution, which takes advantage of the fact that the income limits that apply to Roth contributions don’t apply to Roth conversions. Conversions, however, typically incur tax bills and don’t make sense for everyone. If you have a substantial amount of pretax money in IRAs, the tax bill can be considerable. (The tax bill is figured using all your IRAs, by the way. You can’t get around it just by contributing to a separate IRA that you then convert.)

Incurring that tax bill could make sense if you expect to be in the same tax bracket in retirement, or in a higher one. If you’re young and a good saver, it’s a good bet that will be the case. Roth conversions also can be advisable later in life if your tax bracket could jump when you reach age 72 and have to start taking required minimum distributions from your retirement accounts.

If you expect to be in a lower tax bracket in retirement, however, you probably should forgo Roth conversions because you’ll pay more now in taxes than you would later.

Of course, if you have little or no pretax money in your IRA, then backdoor conversions get a lot more attractive because the tax bill would be minimal. Otherwise, you should seek out a Roth conversion calculator to get a better idea of whether a conversion might be the right choice.