Ask Liz Weston

Get smart with your money

Q&A

Q&A: Tapping IRA creates a taxing problem

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Dear Liz: I took $250,000 out of my retirement account in 2019 to set up five 529 accounts for my young grandchildren. As a result, my federal and state tax bills are $80,000. I’ll need to take that money out of my IRA. Will I keep having to pay large tax bills in order to pay for that one-time large withdrawal?

Answer: While your heart was in the right place, your money wasn’t. Withdrawals from IRAs are taxable, and such a large withdrawal almost certainly pushed you into a much higher tax bracket. If you had consulted a financial planner or a tax pro, they would have advised you to either fund the 529s from a non-retirement account or to make smaller withdrawals over several years to avoid such a big tax hit.

If you continue to tap your IRA, you will continue to owe taxes on the money you withdraw. The $80,000 will incur state and federal taxes. If you again pay the tax bill on the $80,000 using your IRA, you’ll owe taxes on that money as well, and so on.

You may not think that’s fair, but the reason your IRA is taxable now is because you got a tax deduction when you made the original contributions, and the money has been growing tax deferred in the meantime. Eventually, the government wants to get paid back for those tax breaks.

Q&A: Once is enough for tax returns

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Dear Liz: You’ve covered the fact that 2019 tax refunds, especially for those of us who filed paper returns, are delayed. After days of trying to get through to someone at the IRS, I actually connected with an agent. After he told me there are massive problems in their mailroom, I said I was going to file again except this time I would do it electronically. His response, “Don’t do that because it will be a mess.” Can you check with your IRS contacts and see if they are adamant against refiling electronically?

Answer: Adamantly and emphatically, the IRS does not want people to file duplicate returns. Not only will that add to the agency’s already massive backlog, but duplicate returns can trigger identity theft protocols that could make it harder for you to file your returns in the future.

“The only time you would really want to file a duplicate return is when the IRS sends you a notice that the return you previously filed was never received,” said Henry Grzes, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants. In the past, those notices were sent out 12 to 18 months after the return was due.

Many people have been waiting months for their refunds because of pandemic-related shutdowns. The IRS is slowly reopening the processing centers that were closed, but the backlog is tremendous. Although the agency was able to send out more than 150 million stimulus checks and to process most electronically filed returns, more than 10 million unopened paper returns and other mail had accumulated by mid-May.

The agency has been bringing back its workforce in stages, and the last of the IRS’ processing centers is scheduled to open June 29. In addition to the backlog, they’ll be dealing with even more filings as the extended July 15 tax deadline looms. In short, it’s unclear how much longer you’ll have to wait to get your refund.

The fact that you got through to a human being at all means you beat the odds. As mentioned in the previous column, the IRS was struggling even before the pandemic because of congressional budget cuts. Last year the agency was able to answer fewer than 1 in 4 phone calls, according to the Taxpayer Advocate Service.

Q&A: How the COVID-19 pandemic is delaying inheritances

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Dear Liz: My mother passed away in March due to old age. She lived in California. I live out of state and couldn’t travel because of the pandemic. My siblings took care of her burial. Her will named me executor. I’d like to know how long I have to settle her estate and whether I will need an attorney. Her house was her major asset and was assessed at $400,000. There’s no mortgage. The house goes to an older brother and me, and two grandsons each get $10,000. I want to make sure the grandsons get their inheritances as soon as possible.

Answer: Your grandsons will have to wait awhile. California probate is slow at the best of times, with a typical case taking eight to 12 months or more. Pandemic-related court closures are adding many months to the process. Courts are slowly reopening but dealing with a significant backlog of filings.

Your mother’s will should be filed with the appropriate county within 30 days of her death and the county tax assessor should be notified within 150 days because she was a property owner, said Jennifer Sawday, an estate planning attorney in Long Beach. Though most counties allow electronic filing for probate matters, it’s typically not the most user-friendly process and you may want to consult a probate attorney. The initial consultation is usually free. Hiring an attorney to handle the whole process probably won’t be cheap: By law, probate attorneys can charge 4% of the first $100,000 of the estate, 3% of the next $100,000, 2% of the next $800,000, 1% of the next $9 million, and 0.5% of the next $15 million.

Your mom could have avoided probate entirely if she’d created a revocable living trust, or if she had taken other probate-avoidance measures. In California and many other states, real estate can be passed on with a “transfer on death” deed that avoids probate. She also could have set up bank accounts and designated your grandsons as beneficiaries to avoid probate.

It’s too late now, obviously. But whatever you do, don’t jump the gun by making distributions, Sawday warned.

“If there is a will, under no circumstances should he make the cash gifts to the grandsons until the court admits the will, appoints him as executor and probate actually commences,” Sawday said.

Q&A: Why tax refunds are taking so long to arrive

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Dear Liz: You mentioned that people who file electronically and use direct deposit generally get their refunds much more quickly than those who file paper returns. That has always been true for me, but this year I filed in February and got a message that there was a problem but not to contact the IRS for 60 days. Then COVID-19 happened and the IRS basically shut down. Can you tell me when they will release my money?

Answer: No one knows. The IRS is still in the process of calling employees back to work and some operations centers won’t reopen until later this month.

As employees return, they’re confronting an almost incomprehensible backlog of paperwork and requests for help. Millions of paper returns are sitting in trailers, waiting to be input into the IRS’ computers, and no one has been available to process electronically filed returns that were flagged because of problems.

People who have already been waiting months may still have to wait several weeks more before they see their money or can even access someone who knows what’s happened to their returns. As a reminder, the IRS extended the tax filing deadline to July 15.

Q&A: Refinancing reverse mortgage

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Dear Liz: I am a senior citizen who fell for the hype about reverse mortgages during a really hard time in my life. To this date I regret profoundly having sold my home to the devil! I never imagined that my debt would grow such as it has. My home is currently valued at $120,000 and my debt is $189,000. I was paid just $40,000 when I initiated the loan. Plus, the loan was sold to a company I don’t like. They charge fees for everything, which just adds to the debt, and I am totally unable to do anything about what they charge. Can I refinance this loan with another company?

Answer: A reverse mortgage technically can be refinanced, but you would need to have substantial equity in your home. Since that’s not the case, you’re stuck.

Many people don’t understand how a reverse mortgage balance can grow over time. Although reverse mortgages allow people 62 and older to convert home equity to cash, without requiring payments, any amount borrowed grows at the interest rate specified in the loan contract. People who tap their home equity early in retirement may find they don’t have any equity left later.

Although your debt exceeds your home’s value, neither you nor your heirs will be on the hook for the difference. The lender will have to accept the proceeds of the home’s sale when you die, sell or move out as payment in full.

Q&A: Roth IRA penalties

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Dear Liz: I read your column in which you talked about the Roth IRA and how withdrawals can be penalized if you’re younger than 59½ or the account is not 5 years old. But are there any exceptions? Can we withdraw from our Roth IRA and not pay any tax or penalty if we use the money to pay for our children’s college?

Answer: You can avoid the early withdrawal penalty, but you’ll owe taxes on any earnings you withdraw from a Roth IRA when you use the money for qualified higher education expenses.

To recap, you can always withdraw an amount equal to your total contributions to a Roth IRA without owing any taxes or penalties. You don’t even have to wait five years.

When you withdraw earnings, however, you can avoid taxes and penalties only if the account is at least 5 years old and you’re 59½ or older, or you’re taking the distribution because you’re totally and permanently disabled, you inherited the Roth IRA from the account owner or you’re using as much as $10,000 for a first-time home purchase.

If you don’t meet those qualifications, there are still ways to avoid the penalty if not the taxes.

Withdrawing money to pay qualified education expenses is one of those exceptions, as is paying medical expenses that exceed 7.5% of your adjusted gross income, withdrawing as much as $5,000 after the birth or adoption of a child, paying an IRS levy, taking a qualified reservist distribution if you’re a military reservist called to active duty or taking a series of substantially equal periodic payments.

Let’s say you’ve contributed $20,000 to a Roth that’s now worth $30,000. The first $20,000 you withdraw is tax- and penalty-free. The final $10,000 you withdraw would be taxable, but it would not face the 10% early withdrawal penalty if you used it for your children’s college tuition, fees, books, supplies or other qualified expenses.