Ask Liz Weston

Get smart with your money

Q&A

Q&A: Giving away your relief funds

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Dear Liz: My wife and I are retired. We are comfortable financially, with a generous pension, maximum Social Security benefits due to start in a few months, and three years’ worth of ready cash in the bank. We don’t anticipate touching our investments until mandatory distributions from our IRAs kick in. Now we’re apparently going to get $2,400 tax-free as part of the coronavirus stimulus package. We don’t need the money, nor do we particularly want it. We’d welcome your thoughts on how we can give it away to generate the greatest good, on the individual and societal levels. Where is the “multiplier” effect the greatest?

Answer: Thank you for thinking of others. Donating money to a food bank is always a good choice. These charities often have deals with food suppliers that allow them to create far more meals using donated money than they would be able to produce with donated food. Cash also allows food banks to offer perishables. In some cases, food banks work directly with farmers to supply fruits and vegetables that are too imperfect to sell, which reduces food waste.

One option is to give through Feeding America, which represents a network of 200 food banks nationwide that feed more than 40 million people. Meals on Wheels is another option that helps 5,000 community-based programs.

There are many other ways, of course, to help people hard hit by the coronavirus pandemic. Before you give to a charity, check it out at one of the watchdog organizations such as Charity Navigator or CharityWatch. You’ll want to make sure the bulk of your money supports the cause, rather than fundraising efforts or overhead.

You also can use the checks to directly help people or businesses in need. Buying gift cards from local restaurants and small businesses offers a potential two-for-one benefit: You can give the cards to people who need the assistance while you help keep the businesses afloat. Or you can subscribe to newspapers and public radio stations that are working hard to bring you accurate and timely information about staying safe in the pandemic.

Q&A: How to figure out if your student loan qualifies for coronavirus relief

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Dear Liz: I’m confused about what help is being offered to people with student loans. At first I heard interest was waived but payments had to be made. Then supposedly the stimulus package made payments optional. Is there something I have to do to get relief or is it automatic?

Answer: If your student loans are held by the federal government, relief should be automatic. You won’t have to make a payment until after Sept. 30, and interest will be waived during that time. In addition, federal collection efforts on defaulted student loans have been paused.

These provisions of the Coronavirus Aid, Relief and Economic Security Act apply to federal student loans made through the direct loan program, including undergraduate, graduate and parent loans. You can log on to studentaid.gov to see if your loan qualifies.

If you have Perkins loans or Federal Family Education loans that don’t qualify, you can consolidate those loans into a direct consolidation loan, which would qualify. The provisions also don’t apply to private student loans, although your lender may offer other hardship options.

Q&A: Inheriting an IRA can get messy

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Dear Liz: My brother passed away at age 47. My mother was named beneficiary of his retirement account. We opened an inherited IRA under her name. Sadly, my mother recently passed away, and my father is the beneficiary of the account. Does my father open a regular IRA or inherited IRA? How would the title on the account be listed with my mother and brother deceased? Are they both listed?

Answer: Inheriting an inherited IRA complicates an already complex set of rules.

The regulations are different depending on whether the person inheriting is a spouse. Spouses can treat the inherited account as their own. They can leave the money where it is, make new contributions or transfer the funds to another retirement account they own. They also have more flexibility in how to take required minimum distributions from the account.

Non-spouse beneficiaries, like your mother, don’t have the option of treating the IRA as their own. They must set up a new inherited IRA and start distributions. Until this year, non-spouse beneficiaries could take distributions over their lifetimes. Now non-spouse beneficiaries are required to drain their inherited IRAs within 10 years.

How the account is titled is important, because improper titling can cause it to lose tax deferral and accelerate the tax bill. Let’s say your brother’s name was Tom Johnson and he died in March 2019, leaving his IRA to your mother, Mabel Johnson. A correct title for the new inherited IRA would be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Mabel Johnson.”

Your family’s situation creates a hybrid of the two situations. Your dad would have an inherited spousal IRA, but his mandatory withdrawals would be based on your mother’s required minimum distributions, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Your dad should open a new inherited IRA, Luscombe says. Assuming his name is Bill Johnson, the title of the inherited IRA should be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Bill Johnson, successor beneficiary of Mabel Johnson.”

Q&A: Car repo is a nonstarter

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Dear Liz: I had to move to assisted living due to a stroke. I no longer need my car — or the car payment. Can I simply stop paying and let it be repossessed? There are about 18 months to go before it’s paid off. I don’t need great credit anymore and our current expenses exceed our income.

Answer: If you’re that close to paying off the loan, then you probably have a good chunk of equity. It would be a shame to lose any of that value to the costs of repossession.

Typically repossessed cars are sold at auction, often for less than their resale value. The proceeds, minus the expenses of repossessing and preparing the car, are applied to your loan. You’d only get what’s left over. (If what’s left over is less than what you owe, the amount is added to your debt.)

This bad financial outcome is on top of the damage done to your credit, which can be substantial. Even if you think it unlikely you’ll need credit again, you don’t know for sure that you won’t.

If you have the option of selling the car to a private party or dealer — or asking a trusted friend or relative to help you do so — that’s usually a much better way to go than letting the vehicle be repossessed.

Q&A: Those IRS coronavirus-extended deadlines apply to more than just taxes

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Dear Liz: Now that we’re not required to file our taxes until July 15 this year, has anything been said about pushing back the 2019 contribution deadline for IRAs and Roth IRAs?

Answer: The IRS recently confirmed that the deadline for making contributions to IRAs has also been extended to July 15. The deadlines were pushed back from April 15 because of stay-at-home orders and other disruptions stemming from the coronavirus outbreak.

You can contribute up to $6,000 to IRAs for 2019 if you’re under 50, or $7,000 if you’re 50 or older. The limits are the same for 2020.

You didn’t ask, but the deadline for contributing to a health savings account also has been extended.

HSAs allow people with qualifying high-deductible health insurance plans to put away money that can be used tax-free for eligible medical expenses. The maximum amount individuals can contribute to an HSA is $3,500 for individual coverage and $7,000 for family coverage. The “catch up” provision for people 55 and older allows an additional $1,000 contribution.

Q&A: Reducing taxes in retirement

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Dear Liz: I agree with this concept of delaying Social Security to lessen overall taxes and have a further suggestion. My spouse and I are gradually converting our traditional IRA account funds to Roth IRAs. The converted funds are immediately taxable but could continue to gain in value and future distributions would not be taxable. Also, Roth accounts don’t have required minimum distributions.

Answer: Conversions make the most sense when you expect to be in the same or higher tax bracket in retirement.

That’s not the case for most people because they’re in a lower tax bracket when they stop working. Some older people, however, do face higher tax rates in retirement — typically because they’ve been good savers, and required minimum distributions from their retirement accounts will push their tax rates higher.

When that’s the case, they may be able to take advantage of their current lower tax rate to do a series of Roth conversions.

The math can be tricky, though, so it’s advisable to get help from a tax pro or financial planner. You don’t want to convert too much and push yourself into a higher tax bracket, or trigger higher Medicare premiums.

If your intention is to leave retirement money to your heirs, Roth conversions may also make sense now that Congress has eliminated the stretch IRA.

Stretch IRAs used to allow non-spouse beneficiaries — often children and grandchildren — to take money out of an inherited IRA gradually over their lifetimes. This spread out the tax bill and allowed the funds to continue growing. Now inherited IRAs typically have to be drained within 10 years if the inheritor is not a spouse.

To compensate, some people are converting IRAs to Roths — essentially paying the tax bill now, so their heirs won’t have to do so later. Heirs would still have to withdraw all the money in an inherited Roth IRA within 10 years, but taxes would not be owed.