Ask Liz Weston

Get smart with your money

Q&A

Q&A: I get different credit scores from my bank and card companies. What gives?

By

Dear Liz: I have three financial providers that supply regular, free credit scores: my bank and two credit card issuers. My credit score from the bank is always a “perfect score” while the two card companies are consistently 17 points lower, both exactly the same for two years now. I always pay off most or all of the outstanding balance on time or early. Any clue as to why there is this consistent difference?

Answer: The companies probably are using different credit scoring formulas or different credit bureaus, or both.

You don’t have one credit score. You have many. FICO is the dominant scoring formula, but lenders also use VantageScores and the credit bureaus sometimes provide their own, proprietary scores.

The formulas have been updated over the years. The FICO 8 is the most commonly used score, but the FICO 9 is the latest version and FICO 10 will be introduced this summer. Some scoring formulas are modified to suit different industries, such as auto lending or credit cards, plus each score is calculated from data at one of the three credit bureaus.

So one institution may provide its customers a FICO Score 9 from Experian, another might offer a FICO 8 Bankcard score from Equifax and a third might give you a VantageScore 3.0 from TransUnion. Even if all three were using the same type of score, they probably would use different credit bureaus, or vice versa. To make things even more confusing, your credit scores are constantly changing as your credit bureau information changes.

Furthermore, you typically can’t predict which score or scores a lender will use to evaluate your application for credit. Rather than worry about which number is “right” — they all are — use the free scores as a general indicator of your credit health.

Q&A: Retirement accounts and taxes

By

Dear Liz: I am 41 and have had a traditional IRA for about two decades. I funded it for the first 10 years, taking a tax deduction for the contributions. Since I’ve had a 401(k) with my employer for the past several years, I obviously cannot take a deduction for the IRA amount, but I could still put money in. My 401(k) is fully funded, as is my husband’s. Does it make sense to also fund our IRAs with post-tax, nondeductible amounts? I realize any gains we make will be taxed at withdrawal, but I also know that as long as the money stays in the IRA, it can grow tax deferred.

Answer: First, congratulations on taking full advantage of your workplace retirement plans and still being able to contribute more.

You potentially can deduct contributions to IRAs when you have a 401(k) or other workplace retirement plan, but your income must be below certain limits. You can take a full deduction if your modified adjusted gross income is $104,000 or less as a married couple filing jointly. After that, the ability to deduct the contribution starts to phase out and is eliminated entirely if your modified adjusted gross income is $124,000 or more. (If you don’t have a workplace retirement plan but your spouse does, the income limits are higher. The deduction starts to phase out at $196,000 and ends at $206,000.)

If you can’t deduct contributions, you can look into contributing to a Roth IRA — but that too has income limits. For a married couple filing jointly, the ability to contribute to a Roth begins to phase out at modified adjusted gross income of $196,000 and ends at $206,000. If you can contribute, it’s a good deal. Roth IRAs don’t offer an upfront tax break but withdrawals in retirement can be tax free. You also can leave the money alone for as long as you want — there are no required minimum withdrawals starting at age 72, as there typically are for other retirement accounts.

If your income is too high to contribute to a Roth, you could still contribute to your IRA or to any “after tax” options in your 401(k). But you might want to consider simply investing through a regular taxable brokerage account. You don’t get an upfront tax deduction but you could still benefit from favorable capital gains tax rates if you hold investments for a year or more. Furthermore, you aren’t required to take withdrawals. That flexibility can help you better manage your tax bill in retirement.

Q&A: But not for this octogenarian

By

Dear Liz: I am 81 and opened a Roth IRA before retiring 15 years ago, but have not added to that account since. Recently I realized a cash windfall and would like, if possible, to deposit that money in my existing Roth IRA, but I am confused about the limitations and rules on doing so. My current income is from interest, Social Security, a small pension and 401(k) withdrawals. Can you help me with the applicable rules that would govern additions to a Roth IRA in my situation, and can I do so?

Answer: Retirement account rules can be complicated in some respects, but not in this particular case. If you don’t have earned income — such as wages, salaries, bonuses, commissions, tips or net earnings from self-employment — you can’t contribute to an IRA or a Roth IRA.

Q&A: Retirement accounts for teenagers

By

Dear Liz: My 16-year-old grandson has a job stocking shelves at a large grocery chain. His parents opened a low-cost minors investment account, which he has now funded to the max of $6,000. Is there anywhere else he can invest his earnings?

Answer: It sounds like what your grandson funded was an IRA or a Roth IRA. These retirement accounts have an annual $6,000 contribution limit for people under 50. (People 50 and older can make an additional $1,000 “catch up” contribution.) The Roth IRA has income limits, but your grandson won’t have to worry about those until he earns more than six figures.

Starting to save so young for retirement is a marvelous idea, since all those decades of compounded returns will really add up. Let’s assume two people save $6,000 a year and earn a 7% average annual return. The person who starts saving at age 36 would accumulate about $650,000 at age 66. The person who starts at age 16, by contrast, would have about $2.5 million.

Your grandson’s parents were smart to open a low-cost account, presumably at a discount brokerage. Next to starting early and investing as much as possible, keeping fees low is the best way to maximize how much he ultimately accumulates.

The simplest way to start investing would be to choose a low-cost target date mutual fund. He would choose one with a date closest to his likely retirement age, so one that’s labeled something like “Target Date 2070.” If you want to encourage him to learn more, consider buying him a book about investing, such as “O.M.G.: Official Money Guide for Teenagers” by Susan and Michael Beacham.

Q&A: The case for filing a tax return

By

Dear Liz: A couple on Social Security who hadn’t received their stimulus payments wrote that they “do not make enough income to file tax returns.” It might be worthwhile to let your readers know that, even if one’s income is below the amount where they must file a tax return, they nevertheless may file a tax return. I volunteer at a site where we do free tax preparation, and we encourage filing even when not required. It can help identify or potentially prevent identity theft, and it provides documentation of tax status that may be helpful in the future.

Answer: Thanks for that tip. People receiving Social Security weren’t required to file tax returns to receive their stimulus payments of up to $1,200 each, but as you noted there can be other advantages to filing even when it’s not necessary.

Most stimulus payments have been delivered at this point, although a congressional committee estimated 30 million to 35 million had not been sent. If you got a letter saying your payment had been sent, but you haven’t received the money, you can ask the IRS to trace your payment by calling (800) 919-9835.

Q&A: Coronavirus stimulus checks, tax refunds and the IRS’ backlog hell

By

Dear Liz: I’m a CPA. I sent out your recent column about IRS backlogs to two clients just this morning. It’s nice to have a published article backing up what I’ve unfortunately been having to tell clients for a few weeks now.

Answer: Pandemic-related shutdowns, years of congressional budget cuts and the effort required to push out more than 159 million stimulus checks have left the IRS facing a massive backlog. National Taxpayer Advocate Erin Collins estimated that 4.7 million unopened paper tax returns had accumulated as of mid-May. Taxpayers who filed paper returns and are due a refund may be in for “a long wait,” Collins told Congress last month. Many lower-income people and those who lost jobs are in dire need of the money, but it is unclear when they will get it.