June 29, 2015 By

Q&A: Debt collection

Dear Liz: I am trying to help my daughter deal with enormous student loans.

She is a doctor and very busy and simply cannot deal with the stress of almost $350,000 of education debt. I want to help her refinance, but to get the best rate I would like to help her improve her credit score (even if it is already 712).

She had three small debts turned over to a collection agency after a visit to an emergency room a couple of years ago. We plan to pay them off. Do I have to ask the collection agency to erase them or contact the original creditor?

Answer: You mention that your daughter has a 712 score, but she actually has many credit scores that change all the time. Small medical collections can have an outsize impact on those scores — or they can have no effect at all. It depends on what credit scoring formula the lender happens to use.

The latest version of the leading credit score, FICO 9, ignores paid collections and treats unpaid medical debt less harshly than other types of collection accounts. The most commonly used version, though, is FICO 8, which ignores only those collections under $100 and doesn’t differentiate medical from other collections.

Some lenders still use older versions of the formula that punish people for even small collections.

FICO also has a rival, the VantageScore. The latest and most-used version of that formula, VantageScore 3.0, also ignores paid collections.

You can contact the lenders you may use to refinance the debt to find out which scores they use, and which versions. That could help you decide how hard to push to get these collections erased.

If paid collections aren’t counted, you can just pay them off and be done with it. (You’ll of course want to keep the paperwork showing the debts have been paid and have your daughter check her credit reports to make sure the accounts reflect a zero balance.)

If the accounts could hurt her even if they’re paid, you have a couple of options.

One is to ask the hospital to take back the accounts, since medical bills are often placed with collection agencies on consignment rather than being sold to them outright. Then you can pay the hospital, and the collections should disappear. (Although, again, your daughter will need to follow up to make sure.)

Another option is to try to negotiate a “pay for deletion” — which means the collection agency promises to stop reporting the account in return for payment. You’ll want this agreement, if you can win it, to be in advance and in writing.

Filed Under: Credit & Debt, Q&A Tagged With: ,
June 29, 2015 By

Q&A: IRS direct pay

Dear Liz: Regarding the reader whose tax payment never made it to the IRS: I agree that electronic payments are the best and safest, but you might want to emphasize that the payments should be done directly through the IRS website.

I made the mistake of scheduling a couple of payments through my online banking, and a month later I received a notification from the IRS that I was in arrears, although the bank statement indicated that the payment has been debited.

It took several months of correspondence before the IRS acknowledged that the money was received. Luckily, the penalties and interest were only about $20, so I didn’t have to go through the additional hassle and filling out forms to reclaim it. The IRS website is very easy to use, and I haven’t experienced any problems since.

Answer: The IRS’ Electronic Tax Payment System, which was designed primarily for businesses, has been around for nearly two decades, but the agency only recently added a “Direct Pay” option expressly for individuals to make estimated tax payments and pay bills.

These methods and others, including electronic funds withdrawal when you e-file your return, are explained at http://www.irs.gov/payments.

Filed Under: Q&A, Taxes Tagged With: , ,
June 29, 2015 By

Q&A: Electronic Federal Tax Payment System

Dear Liz: I’m often required to make estimated quarterly payments and was always concerned I would miss one of them.

A few years ago, I came across the Electronic Federal Tax Payment System (EFTPS) that is offered by the U.S. Treasury. The beauty of the system is that once it is set up, there is nothing more for me to do. I set up all the payments I need to make and the system takes care of it.

I just have to set it up each year at the time I file my tax return. I have been using the system for several years and have had no issues whatsoever with it.

Answer: Thanks for sharing your experience with EFTPS. While that system allows you to schedule payments up to 365 days in advance, the Direct Pay option for individuals allows scheduling only up to 30 days in advance.

Filed Under: Q&A, Taxes Tagged With: ,
June 22, 2015 By

Q&A: Retirement savings for freelancers

Dear Liz: I am a freelancer. I don’t consider myself a small-business owner, just someone who gets the work done on time and gets paid. I max out my IRA every year, but would like to save more in a tax-advantaged account.

I checked out SEP and SIMPLE IRAs, but they don’t have a Roth option. Am I eligible to start an Individual 401(k)? What administrative duties would be involved? I pay self-employment tax and my clients send me 1099s, not W2s.

Answer: You may not consider yourself a small-business owner, but that’s essentially what you are. And small-business owners should have tax pros to help them answer questions like this, since you have so many options.

As a sole proprietor, you should be able to set up a solo or individual 401(k) account. That would allow you to make either pre- or after-tax “employee” contributions of up to $18,000 in 2015 — plus an additional $6,000 if you’re 50 or older.

As your own employer, you can contribute an additional 25% of your net earnings (a contribution that would be deductible as a business expense). Your total contribution, employee plus employer, can’t exceed $53,000 in 2015.

Individual 401(k)s are somewhat more complicated to set up and administer than Simplified Employee Pensions (SEPs) or Savings Incentive Match Plan for Employees (SIMPLEs). But many discount brokerages are eager to help you with the paperwork and have low or no set-up costs.

You have many other ways as a self-employed person to reduce your taxes, but the rules can be complicated. A certified public accountant or an enrolled agent can help advise you of your options. You can get referrals to tax professionals from the American Assn. of CPAs at http://www.aicpa.org and the National Assn. of Enrolled Agents at http://www.naea.org.

Filed Under: Q&A, Retirement Tagged With: , , , ,
June 22, 2015 By

Q&A: Creating a will

Dear Liz: I’m a 58-year-old man. I want to make a will just in case something happens to me. I have about $500,000 in stock and cash. I have a life partner and her son. I would like to split my assets between her and my sister. Any suggestions on how to go about this?

Answer: Just in case you turn out not to be immortal, having a will is a very good idea. Otherwise, your assets would be distributed according to state law, which means your lady friend probably would get nothing.

You also may want to consider probate, the court process that typically follows death. While probate is fairly simple in most states, in others — including California — it can be expensive and slow, making a living trust a worthwhile option.

You can prepare a will or living trust using do-it-yourself online legal sites and software such as Quicken WillMaker. If your relatives are likely to contest your will or your situation is otherwise complicated, you should consult with an estate planning attorney for help.

You could provide additional protections and advantages to your partner by getting married. As your wife, she could receive spousal and survivor benefits from Social Security based on your work record. You both would have visitation rights if the other were hospitalized and be empowered to make financial and health decisions if the other were incapacitated.

Marriage can have many other legal, financial and tax benefits as well. If you opt to remain unmarried, please talk to an attorney about available ways you can protect each other’s rights.

Filed Under: Estate planning, Q&A Tagged With: , ,
June 15, 2015 By

Q&A: Breaking even with Social Security

Dear Liz: This is in regard to the reader who created a spreadsheet that he thought showed the advantage of taking Social Security early. I retired at age 62 and am now 69 and have not yet started drawing my benefits. I have never done a spreadsheet to determine the relative advantage in waiting to draw on my personal benefits; I’ve simply assumed there is no advantage or disadvantage, actuarially. That is, whether I took benefits beginning at age 62 or waited, as I’m doing, the total amount I would receive would be the same if I lived an average life expectancy. Given the fact that my wife would be drawing my benefit if I die first, however, it’s clear that my waiting to age 70 to draw my benefits works to our joint advantage. Am I right?

Answer: In the past, the Social Security Administration advised people that they would receive roughly the same amount by starting reduced benefits early as they would by waiting to receive larger amounts, assuming they lived an average life expectancy.

These days, though, longer life expectancies at age 65 mean that most people will live past the “break even” point where waiting for enhanced benefits results in more money over a lifetime than starting early. The break-even point is in one’s late 70s. Men have a 60% chance of living to age 80 and women have a 71% chance, according to the Society of Actuaries.

When you’re married, you need to think in terms of two life expectancies, because the chances are even better that one of you will live past the break-even point — perhaps well beyond.

With married couples, there’s an 88% chance at least one of you will live to 80, a 72% chance of at least one spouse living to 85 and a 45% chance one will live to 90.

Because a surviving spouse will have to get by on just one Social Security check — either her own or one equal to what her spouse was getting — maximizing at least one benefit makes a lot of sense.

There’s also the idea that Social Security should be used as a kind of longevity insurance. The longer you live, the more likely you are to use up all your other assets, so a bigger check can mean a much better standard of living.

Filed Under: Q&A, Retirement Tagged With: , ,
June 15, 2015 By

Q&A: Lost tax payment

Dear Liz: I just received a letter from the IRS informing me that I missed a quarterly tax payment last September with several resulting penalties. I made that payment with a check from a securities trust account that I don’t closely monitor, so I didn’t realize the check hadn’t been cashed. The check was placed in a pre-addressed envelope with the IRS payment notice, stamped and deposited at the post office and has never been seen since. Do I have any recourse, and should all payments to the IRS be sent by certified mail with receipt required?

Answer: Electronic payments are typically the best and safest method for getting money to the IRS. Electronic payments generate a digital trail that shows the money leaving your account and landing at the IRS.

If you insist on paying with checks, use certified mail, return receipt requested. This paper trail isn’t a sure way of proving your case — after all, you could have mailed an empty envelope — but at least you’d have something to show the IRS.

Still, you shouldn’t give up hope of getting the penalties waived, said tax pro Eva Rosenberg, an enrolled agent who publishes the Tax Mama site. You can request a penalty abatement based on “reasonable cause,” Rosenberg said. According to the IRS site, “Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations.”

The IRS may say that you didn’t exercise “ordinary business care and prudence” since you didn’t use certified mail. But you can make the counter-argument that you’ve consistently made previous estimated tax payments this way without incident and this is the first time you’ve encountered a problem.

Rosenberg said the key to prevailing is to keep trying. The IRS may reject your first and second attempts to get a penalty waived but acquiesce on the third, she said.

“Don’t give up after the first two rejections,” Rosenberg said.

One more thing: Given the high rates of identity theft and database breaches, closely monitor all your financial accounts. That means checking them at least monthly, if not weekly. If you have more accounts than you can adequately monitor, consider consolidating accounts.

Filed Under: Q&A, Taxes Tagged With: , ,
June 8, 2015 By

Q&A: Investment advice websites

Dear Liz: I invest in real estate and have a secure pension, but I also have a managed stock account worth about $250,000 and would like to get more involved in investing that.

Can you recommend some good books on how the market works and perhaps a couple of good middle-of-the-road websites? Everything I see is either overly bullish or bearish.

Answer: The principles of sound stock market investing aren’t exactly “click bait” (Web speak for catchy links that generate views and advertising income). So you’d be smart to read a few books that have stood up over time.

Legendary stock picker Warren Buffett says “The Intelligent Investor” by Benjamin Graham is “by far the best book about investing ever written.” Graham is considered the father of value investing, which involves focusing on the underlying performance of companies rather than on speculating in their share prices.

Buffett also says, however, that the vast majority of investors are better off taking a passive approach — one that involves buying and holding low-cost index funds that seek to match the market rather than beat it.

To understand why, you should read “A Random Walk Down Wall Street” by Burton G. Malkiel, which discusses how the active approach to investing typically fails and drives up costs that doom a portfolio to underperform.

Although both books have been updated recently, they were first published in 1949 and 1973, respectively. A must-read book published this century is Jason Zweig’s “Your Money and Your Brain,” which uses discoveries in neuroscience, behavioral finance and psychology to explore how we mess up investing and finance and how we can do better.

If you’re looking for a website with solid investing advice, explore Kiplinger, a personal finance publisher in business since 1920.

Filed Under: Investing, Q&A Tagged With: , ,
June 8, 2015 By

Q&A: Filing and Suspending Social Security

Dear Liz: I was told by a staff person at our Social Security office that because I am seven years older than my husband (he is 58, I am 65), the “file and suspend” wouldn’t work for me and that because I am waiting until 70 to claim benefits, it was a non-issue.

Is that correct? How does the “lump sum” option figure into the equation? How quickly would I have to file and suspend not to be penalized for the process?

Answer: The “file and suspend” option allows you to file for your Social Security benefit and then immediately suspend that application.

The suspension means your benefit continues to earn delayed retirement credits that boost the amount of your checks 8% each year until age 70, when your benefit reaches its maximum. The file and suspend option is available only once you’ve reached your full retirement age (which is currently 66 but which is rising to 67 for those born in 1960 or later).

There are two main reasons to file and suspend. The first is to allow your spouse to claim spousal benefits based on your work record. The second is to give you the option to change your mind.

If you file and suspend, then discover you need the money, you can either start benefits at the larger amount you’ve earned with delayed retirement credits, or give up those credits and instead receive a lump sum payment of benefits back to the date you suspended your application.

There’s no reason for you to file and suspend for spousal benefits since your husband would have to be 62 before he could file for those checks. By that time, as the Social Security representative points out, you’ll be close to age 70, when you plan to start your benefit anyway.

You could still file and suspend as an insurance strategy — in case you need the money later. If that’s your plan, then doing so at your full retirement age of 66 would give you the option of requesting the largest possible lump sum if you do change your mind.

Decisions about when to start Social Security benefits and how to coordinate benefits when you’re married (or divorced, or widowed) can be extremely complex.

Please read the information the AARP provides on its site about maximizing Social Security benefits and consider using one of the available calculators to explore your options. AARP and T. Rowe Price have free calculators, and you can find more sophisticated options for $40 at sites including MaximizeMySocialSecurity.com and SocialSecurityChoices.com.

Filed Under: Q&A, Retirement Tagged With: , ,
June 1, 2015 By

Q&A: Living like a student after graduation

Dear Liz: Regarding your recent column advising recent college grads to keep living like students: I helped my three children do just that. I had them live at home rent-free for six months after graduation and told them to save money like crazy.

Then when they rented an apartment, they would have the rental deposit saved as well as money for utilities, food and so on. I taught them to cook simple nutritional meals. We had already given each kid a car senior year and covered the insurance. I took home equity lines of credit to pay college tuitions, room and board, so they had no debts and six months to transition to serious responsibilities.

Answer: You’ve given your children a good head start in life at a time when so many others are starting out deeply in debt. Hopefully you didn’t do so at the expense of your own finances.
Home equity lines of credit may seem like cheap money, but the rates are variable and could spike if interest rates rise. If the debt is relatively small and can be paid off in a few years, that’s one thing.

If the debt is large and you can’t pay it off quickly, though, you may have put your home (and your retirement) at risk.

Filed Under: Kids & Money, Q&A