March 30, 2015 By

Q&A: Credit freezes

Dear Liz: Is there a way to lock my credit history and access to prevent the unscrupulous from opening accounts in my name? Maybe I’m rare, but I have enough existing credit cards, don’t have a mortgage and essentially have no debt, and I want to keep it that way. I suspect businesses that make their living issuing credit reports will resist this ability, but I want to do all I can to make it tough for anyone to steal my identity.

Answer: You can lock up your credit reports with what’s known as a credit freeze (also called a security freeze). The three major credit bureaus — Equifax, Experian and TransUnion — have information about how to do this on their websites. You also can find general information about credit freezes on Consumer Reports’ site.

Credit freezes can prevent new account identity theft — someone opening new credit accounts in your name. Lenders typically check credit reports when they get new credit applications. If they can’t access your reports thanks to a credit freeze, they’re unlikely to approve the application.

Of course, the freeze applies to you as well. If you change your mind and want to apply for a new account, you’ll need to temporarily thaw the freeze.

Other entities also check credit reports, so you may need to lift the freeze if you apply for a job, insurance, new utilities or cellphone service. You typically have to pay fees (which range from $2 to $15, depending on your state) to each bureau to lock up your credit and another set of fees to thaw it.

Credit freezes won’t interfere with your ability to use your credit cards or prevent your current lenders from accessing your reports.

Credit freezes also won’t prevent other types of identity theft, including tax refund fraud, medical identity theft and criminal identity theft (which occurs when criminals give law enforcement your information when they get arrested, rather than their own).

Still, credit freezes are a good solution if your identity has already been stolen or you’re at high risk because your Social Security number has been swiped or exposed in a data breach.

Credit bureaus may suggest you put a temporary fraud alert on your reports instead, or pay for credit monitoring or identity theft “protection” (which actually doesn’t protect you against anything but simply offers an early warning if your reports are compromised). A credit freeze is a more secure solution, but you have to weigh the potential hassle and cost against the benefit.

Filed Under: Credit Cards, Credit Scoring, Q&A Tagged With: , ,
March 23, 2015 By

Q&A: How to help family while on a limited budget

Dear Liz: My son, who is almost 50, is mentally and emotionally challenged. He has been unemployed and homeless for years. Although not a criminal, he’s been in jail a few times because of his explosive, combative nature. There seems to be no help for him in the state where he lives. I do send a few dollars for his basic needs when I can, but must be careful with my budget. Do you have any tips that might be helpful in this situation?

Answer: You’re living with a heartbreaking situation. You want to help, but given your age and financial circumstances your ability to do so is limited. Unless you set some boundaries, you could run through your savings and possibly wind up homeless yourself.

You’ll find some helpful resources at the National Alliance on Mental Illness (www.nami.org), which offers information and, in many locations, support groups for families. Another place to find comfort, insights and suggestions would be a 12-step group for co-dependency, such as Co-Dependents Anonymous (www.coda.org), Al-Anon (www.al-anon.org) and Nar-Anon (www.nar-anon.org). Substance abuse often accompanies mental illness, so you may find it helpful to talk to others who have dealt with problem drinkers (Al-Anon) or addicts (Nar-Anon).

Every state has at least some resources for the mentally ill. You can start your search at MentalHealth.gov to see what might be available where your son lives and let him know the options. But as the members of any support group will tell you, you cannot fix another human being or force him to change. What you can do is to take care of yourself.

Filed Under: Q&A, The Basics Tagged With: , ,
March 23, 2015 By

Q&A: Rolling traditional IRA to a 403(b)

Dear Liz: My husband and I both have employer-sponsored 403(b) retirement plans. We each also have a Roth IRA, and I have a traditional IRA that I started in the 1980s before I started work with my current employer. I do not actively contribute to this traditional IRA as I am contributing the maximum amount allowed into both my Roth IRA and my 403(b) plan. My husband is also maxing out on his Roth and 403(b). We are both in our 50s. Should I contribute anything into my traditional IRA? Should I see if I can roll it into my 403(b)? Or roll it into my Roth? Our adjusted gross income is high enough where I would not be able to take the deduction if I did start contributing. Your thoughts would be greatly appreciated.

Answer: If you can’t get a tax deduction for your contributions, then putting the money in a Roth IRA is usually the better option — assuming, of course, that your income is under the Roth limits (which it sounds like it is). Nondeductible contributions reduce the income taxes owed on any withdrawals from a traditional IRA, but withdrawals from a Roth can be entirely tax-free.

If you have a good, low-cost 403(b), rolling your traditional IRA into it could be a good choice. It would be one less account for you to have to monitor and coordinate with your other savings.

You won’t be able to roll your traditional IRA into a Roth without triggering a (possibly hefty) tax bill. The older you are, the harder it is to make a good argumen

Filed Under: Investing, Q&A, Retirement Tagged With: , ,
March 23, 2015 By

Q&A: Social Security solvency

Dear Liz: Can you tell us what the status is of the Social Security system? Will the money that I and my employers have paid into the system be there for me when I need it in 15 or 20 years?

Answer: The money you pay into the system provides benefits for current retirees. When you’re retired, other workers will provide the money for your benefits. It isn’t a retirement plan where you contribute money that you later withdraw. It’s an insurance fund to protect you against poverty in old age.

The Social Security system isn’t about to disappear. The depletion of its trust funds is expected in 2033, but that doesn’t mean Social Security will go out of business. The system will continue to receive enough in payroll taxes from current workers to pay 77% of promised benefits. So even if Congress doesn’t get its act together to make necessary and sensible reforms, you’ll still get a check. If Congress does get its act together, the reforms probably will affect younger workers more than those close to retirement.

For more on how Social Security works and its benefits, read “Get What’s Yours: The Secrets to Maxing Out Your Social Security” by Laurence Kotlikoff, Philip Moeller and Paul Solman.

Filed Under: Q&A, Retirement Tagged With: , , ,
March 16, 2015 By

Q&A: IRA interest rate terms

Dear Liz: I went to renew my IRA certificate of deposit and the bank officer suggested that I renew at the greater rate being offered for a five-year term (about 1.5% APR) rather than the lower rate for a one-year term (about 1% APR). She explained that since I am over 59 1/2, I can close the account at any time and roll it over to a new IRA should rates rise (for example to 1.75% in 15 months) with no penalty whatsoever. Is this true?

Answer: You don’t have to close and reopen IRAs when a CD matures or you want to change investments. The IRA is the bucket that holds your investment, not the investment itself. You also should be skeptical about claims that you would pay no penalty for early withdrawal. Not only are such penalties the norm, but a Bankrate survey found 9 out of 10 banks won’t just require you to forfeit the interest but will dip into your principal to pay the fees if necessary. The bank may offer a one-time opportunity to lock in a higher rate; if that’s the case, you should get the details in writing as well as the penalties if you have to withdraw the money prematurely.

In fact, any time someone pitches you an investment for your retirement funds, you should ask a lot of questions and get every detail and promise in writing. If the pitch is coming from someone who will profit from your investment — which is often the case — you should consider running it past a neutral third party such as a fee-only planner.

By the way, the Federal Reserve has signaled that it’s considering raising interest rates this year. That’s no guarantee that it will, but locking up your money now is a gamble.

Filed Under: Banking, Q&A, Retirement Tagged With: , ,
March 10, 2015 By

Q&A: Social Security survivor benefits

Dear Liz: I earned more than my wife, who died at age 57 after 18 years of marriage. When I turn 60, can I take survivor Social Security benefits based on her work record and then request my benefit at age 70?

Answer: In a word, yes, and doing so may be smart.

Survivor benefits are different from spousal benefits, which inflict some severe penalties for starting checks early. When you start spousal benefits before your own full retirement age, you’re locked into a permanently smaller check and you can’t later switch to your own benefit, even if it’s larger. The only way to preserve the ability to switch is to file a restricted application for just the spousal benefit at your own full retirement age (which is 66 for people born from 1943 to 1954 and gradually increases to age 67 for people born in 1955 and later). Then you preserve the right to change to your own benefit when it maxes out at age 70.
With survivor benefits, starting early means a reduced check — your widower benefit at 60 would be 30% smaller than if you waited until your full retirement age — but you can switch to your own benefit later. And if you don’t work, starting survivor benefits at 60 is the better course, said economist Laurence Kotlikoff, coauthor of “Getting What’s Yours: The Secrets to Maxing Out Social Security.”

“Getting a reduced benefit for 10 years, from 60 to 70, is better than getting an unreduced benefit for fewer years,” Kotlikoff said.
If you work, however, the math becomes less clear. When you start benefits early, your check is reduced $1 for every $2 you earn over a certain limit, which in 2015 is $15,720. That penalty disappears once you hit your full retirement age.

Online calculators can help you determine the best Social Security claiming strategy. AARP and T. Rowe Price are among the sites that provide free calculators, but they don’t factor in survivor benefits. Consider spending about $40 for one of the more sophisticated calculators, such as Kotlikoff’s MaximizeMySocialSecurity.com, that can include this important benefit.

Filed Under: Q&A, Retirement Tagged With: , , , ,
March 9, 2015 By

Q&A: Balancing savings vehicles and tax benefits

Dear Liz: I’m 26 and make $45,000 per year. I currently have about $60,000 saved with no debt. Roughly half of my assets are in retirement accounts, and the other half are in non-retirement accounts. I strive to save 30% of my income (about 15% in pre-tax retirement accounts and 15% in taxable accounts). I hope that my savings habits will provide me the option to retire early. But I am concerned that I am locking up too much of my money in retirement accounts and that a couple decades down the road, I will not be able to access my money when I would like to. How should I balance various savings vehicles and tax benefits, so that I have most options down the road?

Answer: Your savings habits are admirable, but you shouldn’t worry too much about “locking up” your money. There are a number of ways to tap retirement funds if you really need the cash. Ideally, you’d leave the money alone to grow tax-deferred until you’re ready to retire, but you’re not required to do so.

One way to save for retirement with plenty of flexibility is to fund a Roth IRA each year. You don’t get a tax deduction upfront, but you can withdraw your contributions at any time without penalty. If you don’t tap the money until you’re 59 1/2 or older, your contributions and your earnings are tax free if you’ve had the account at least five years. Another advantage of a Roth is that you’re not required to start distributions after age 70 1/2, as you are with other retirement accounts.

Filed Under: Investing, Q&A, Retirement Tagged With: , ,
March 2, 2015 By

Q&A: Investment property

Dear Liz: Eight years ago, we bought a fixer-upper in an up-and-coming neighborhood. Now it’s mostly fixed up, and property values have soared. We would like to borrow against the equity to buy a beach house we could use and also rent out. This would be a long-term investment. We already own one rental property that is turning a small profit. Managing it allows me to bring in much-needed extra income while staying home with my children. I want to increase that income with a beach house we can also enjoy. Is this a smart use of home equity?

Answer: It may be. You’ve got some experience as a landlord, so you understand what’s involved in maintaining and repairing a rental property and dealing with tenants. A property that’s split between personal use and rental is somewhat different, since you won’t be able to deduct all the expenses as you could with a full-time rental. The expenses have to be divided proportionately, and you can’t deduct rental expenses in excess of the rental income you get. IRS Publication 527, Residential Rental Property, offers more details, or you can talk to a tax pro (which you should have, given that landlords can face some complicated tax situations).

Your first task is to ensure the beach house is in an area that allows short-term rentals on the scale you’re anticipating. Not all communities do. Some don’t allow “vacation rentals” at all, while others limit the amount of time that the property can be rented. Those that allow short-term use may require annual licenses and assess taxes or fees on the rentals, which are costs you’ll want to factor in before you buy.

Your next step, if your goal is to generate income, is to find a property that is “cash flow positive” from the start, with expected rents more than covering expected costs. Obviously, though, you can’t predict everything, which is why it’s essential to have a fat emergency fund for unexpected repairs or greater-than-anticipated vacancies.

Another smart move would be to lock in your interest rate if you don’t expect to pay back what you borrowed against your house within a few years. That means a home equity loan with fixed rates rather than a line of credit with variable rates. You put your home at risk when you borrow against it, so be conservative and lock in predictable payments.

Filed Under: Q&A, Real Estate Tagged With: , ,
March 2, 2015 By

Q&A: Tax credit for Roth IRA contributions

Dear Liz: You told a reader that “contributions to a Roth are never deductible.” This statement is a common misconception and is not correct. You can get a tax credit for Roth IRA contributions as long as you fall under the income limits and itemize on your taxes. The credit phases out at $30,000 for singles and $60,000 for married couples.

Answer: A credit is different from a deduction, but thank you for pointing out a tax benefit that many people don’t know exists.

This non-refundable credit, sometimes called a Saver’s Credit, can slice up to $1,000 per person off the tax bill of eligible taxpayers. The credit is available to people 18 and older who aren’t students or claimed as a dependent on someone else’s return. The lowest income taxpayers — those with adjusted gross incomes under $36,000 for marrieds filing jointly or $18,000 for singles in 2014 — can get a tax credit of 50% of up to $2,000 per person ($4,000 for married couples) contributed to retirement plans. Those plans can include traditional or Roth IRAs, 401(k)s or 403(b)s, 457(b)s and SIMPLE IRAs, among others. The credit drops to 20% and then 10% before phasing out. The average amount saved isn’t spectacular: The IRS said credits averaged $205 for joint filers in 2012 and $127 for single filers, but every bit helps.

One of the problems with this tax break, besides so few people knowing about it, is that many low-income people don’t owe income taxes, so they have nothing to offset with this credit. Another issue is that taxpayers need to file a 1040 or 1040A and use Form 8880 to claim it. Low-income taxpayers often use the 1040EZ form, which doesn’t allow them to claim the credit or alert them that it exists.

Filed Under: Investing, Q&A, Taxes Tagged With: , , ,
February 23, 2015 By

Q&A: Surviving on Social Security Disability

Dear Liz: I’ve been on disability for over 10 years, and I currently receive $1,527 a month in Social Security Disability Insurance. My rent starting in March will be $1,400. I’m not opposed to moving, but after checking literally thousands of listings, I found that what I’m paying is not unusual for my area. I’m living on savings now. I’d like to have a job but am hard-pressed to find work. What should I do?

Answer: You don’t have to do anything if you have enough savings to last the rest of your life. Assuming that’s not the case, you need to do something to dramatically lower your cost of living.

You may qualify for housing assistance. You can use federal government sites such as Benefits.gov or HUD.gov to explore your options, or search for the name of your community and “rental assistance programs.”

You may discover that your low income is still too high for the available programs or that there’s a massive waiting list. If that’s the case, you still have options.
If your disabilities allow, you could earn low or even free rent by working as an apartment manager, a companion to an elderly person, a babysitter for a family with young children or a caretaker for a home or estate.

If your apartment is in a desirable area, you may be able to rent it out a few days a month on Airbnb, Homeaway or another vacation rental site to offset your cost. (Check with your landlord first.)

You could look for a roommate or other shared housing in your community, or consider moving to a less expensive area. You may need to move only a few miles to find a more affordable place, or you may have to consider transferring to a different city or state.

If you’re willing to be truly mobile, you could do what some retirees on limited incomes do and live full-time in a recreational vehicle. Some get jobs as camp hosts or other campground workers in exchange for a free site.

In general, you shouldn’t pay more than about 30% of your gross income for housing. Limiting your rent to 25% is even better, since it will give you more wiggle room to afford the rest of your life.

Filed Under: Budgeting, Insurance, Q&A Tagged With: , ,