Q&A

Q&A: Remodel the house or sell it?

September 21, 2020 By Liz Weston

Dear Liz: Should we take out a home equity loan so we can do some improvements on our house and make it work better for us, or should we sell it and upgrade to a bigger house? We are not in a rush to move, so we are content to take our time to find the right new home at the right price. We are also considering staying and doing work on our current home. But we have a lot of equity and are wondering: Would it be smarter to cash that in? We both remember the housing crash and are very nervous about getting in over our heads.

Answer: People are spending a lot of time at home these days, and many are longing for a little extra space. Interest rates are low, which makes borrowing for improvements or a bigger home more affordable for many.

You’re smart to be cautious about taking on too much debt, though. Lenders are much more cautious than they were before the Great Recession of 2007 to 2009, but it’s still possible to borrow more than you can comfortably repay. Big mortgage payments could prevent you from saving for important goals such as retirement or your children’s college education.

If you like your current neighborhood, remodeling is often the more economical route. You spend roughly 10% of your home’s value when you sell it and buy another. Real estate commissions take a big chunk, as do moving costs. Bigger houses — whether through remodeling or moving — also can mean higher tax, insurance and utility bills. That’s not to say you should never upgrade, but you’re smart to consider all your options because the cost of exchanging homes is pretty high.

By the way, you aren’t really cashing in equity when you use it to buy another home or borrow against it to make improvements. Some people would say that’s “putting your equity to work,” but the idea that equity needs employment is what led many people to borrow excessively against their homes before the last recession. It’s perfectly fine, and often desirable, to have lots of equity just sitting around. That way, it’s there for you when you really need it. You can tap it in an emergency, for example, or to help fund your retirement.

Q&A: Managing retirement savings

September 21, 2020 By Liz Weston

Dear Liz: I’m considering converting an old 401(k) to a Roth IRA. Will the gains from the 401(k) account be treated as capital gains? And can you only convert 401(k) plans you no longer participate in, or can you convert both current and former 401(k) plans?

Answer: You’ll pay income taxes on the conversion. Retirement plans, including 401(k)s and IRAs, don’t qualify for capital gains tax rates. You may be able to convert your current 401(k) as well. Ask your plan administrator if “in plan Roth conversions” are allowed.

Q&A: Here’s why you shouldn’t put that huge hospital bill on a credit card

September 21, 2020 By Liz Weston

Dear Liz: Because of COVID, my 27-year-old son lost his job and health insurance. He was unable to afford continued health insurance and did not qualify for Medicaid. He contracted spinal meningitis and was hospitalized 12 days. The hospital reduced his bill to $28,000 from the original $80,000, but he is still unable to pay. He remains unemployed and without any savings. What would you suggest he do?

Answer: Your son should first call the hospital and ask about applying for financial assistance. Federal law requires nonprofit hospitals to offer this help to low-income patients, and many for-profit hospitals also offer programs that can reduce or even eliminate the charges.

He also should ask about a payment plan geared to what’s left of his income. He should resist any hospital pressure to put the bill on a credit card, because hospital payment plans typically don’t charge interest while credit cards do.

If he’s still left with a bill he can’t pay, he should consult a bankruptcy attorney, and do so as soon as possible. Bankruptcy experts are predicting a big uptick in filings as people and businesses struggle with fallout from the pandemic.

Q&A: Finding affordable financial planning

September 14, 2020 By Liz Weston

Dear Liz: I’ve read your advice and that of many others to only use a fee-only financial planner. However, we’ve never felt like we could afford that expense, and many of the planners I’ve found wouldn’t take accounts as small as ours anyway. We’re in our mid-40s and feel like we’ve wasted many years waiting to be “ready” for a fee-only planner. Is it really better to have zero financial planning advice, rather than just using a free planner?

Answer: A “free” planner is typically an advisor who is paid by commission. You may not pay for the advice directly, but you could wind up with underperforming, overpriced investments because the advisor is not required to put your best interests first.

You can find certified financial planners who charge by the hour at Garrett Planning Network, and the XY Planning Network represents planners willing to charge monthly retainers. Many discount brokerages and robo-advisors offer access to certified financial planners, as well. You might also consider an accredited financial counselor or financial fitness coach, which you can find through the Assn. for Financial Counseling & Planning Education. Whereas many certified financial planners cater to higher income people, coaches and counselors handle issues relevant to middle- and lower-income Americans, including budgeting, debt management and retirement planning.

Q&A: Death, taxes and home sales: How to handle the mixture

September 14, 2020 By Liz Weston

Dear Liz: My wife and I bought our house 61 years ago in Southern California. The wife passed away seven years ago, and I became the sole owner. If I should die owning the house, I know my daughter will inherit and her tax basis will be the value of the house on that date. But if I sell the house, I’m not sure what my basis will be. Do I pick up the 50% of what the house was worth on the day my wife died and add to that the 50% of the original purchase price that would be mine? Or is my basis the original price of the house?

Answer: In most states, only your wife’s half of the home would get a new value for tax purposes at her death. In community property states such as California, though, both her half and yours get this step up in tax basis.

Tax basis determines how much taxable profit there might be when property and other assets are sold. For those who aren’t sure how tax basis works, a simplified example might help.

Let’s say Raul and Ramona bought their home for $40,000 in 1959. In 2013, when Ramona died, the home was worth $800,000. Today, it’s worth $1 million.

At her death, Ramona’s half of the home got a new tax basis. Instead of $20,000 (half of the purchase price), her half of the home now has a tax basis of $400,000 (half of its $800,000 value at the time).

In most states, Raul would keep the $20,000 tax basis on his half, so his combined basis in the home would be $420,000. If he should sell the home for $1 million, the profit for tax purposes would be $580,000.

In California and other community property states, the entire house gets a step up in basis to $800,000 when Ramona dies. If Raul sells the house for $1 million, the profit (or capital gain, in tax parlance) would be $200,000.

Of course, there would be no tax owed on this home sale, since Raul can exempt up to $250,000 of home sale profits. Raul could use Ramona’s home sale exclusion, and avoid tax on up to $500,000 of home sale profit, if he sells the home within two years of her death.

If Raul keeps the home until his death, on the other hand, it will get a further step up in tax basis equal to whatever the home’s fair market value is at the time (let’s say $1.2 million). If the daughter sells it for that amount, no capital gain tax would be owed.