Ask Liz Weston

Get smart with your money

Q&A

Q&A: A shutdown reality check

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Dear Liz: Recently a reader asked about withdrawing money from an IRA to pay credit card debt. You mentioned the many ways that was a bad idea, including the fact that retirement money is protected in bankruptcy court. Liz, the writer had only $10,000 in credit card debt. Bankruptcy should be a last resort. A lifestyle change or picking up a second job would be a better route to knocking out the debt.

Answer: “Picking up a second job” — really? Most people will be lucky to hang on to the ones they have in the coming months.

No one suggested that this reader should file bankruptcy, but anyone considering taking money from a retirement plan to pay debt should understand this major drawback — especially now. Bankruptcy experts expect business and personal bankruptcy filings to soar because of the pandemic.

You might want to check your other assumptions, as well. People typically don’t wind up in bankruptcy court because they refused to cut out their lattes or didn’t work hard enough. They get sick or disabled, lose their health insurance, get divorced, have a breadwinner die — or get stuck in a pandemic. Those with higher incomes and more savings may be better able to weather financial setbacks, but few of us are truly immune from their effects.

Q&A: How to make ends meet if the coronavirus shutdown has reduced your income

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Dear Liz: My husband’s salary was cut by more than 50%. While we are thrilled he is still employed, this deep cut will make it very challenging to pay all bills for our family of four. We don’t qualify for the $1,200 relief checks based on our 2019 taxes, which have already been filed. He is ineligible for unemployment because he’s salaried and his hours haven’t been cut. Are there other options for financial support or am I misinterpreting the government options?

Answer: You may have a few options for making ends meet during this trying time.

The first is mortgage forbearance. If you have a federally backed mortgage and have been affected by the pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act gives you the right to forbearance for nearly a year if you request it. You can ask for 180 days initially as well as an additional 180-day extension.

Most mortgages are federally backed, including those lent or guaranteed by Fannie Mae, Freddie Mac, the Veterans Administration, the Federal Housing Administration and U.S. Department of Agriculture. If you have one of these mortgages, you won’t have to pay back the skipped payments all at once. You could spread out the payments or tack them on to the end of your loan.

To find out if you have a federally backed mortgage, and to request forbearance, contact your mortgage servicer — the company that accepts your payments. Be prepared to wait because lenders are overwhelmed with requests right now.

Even if you don’t have a federally backed loan, your mortgage lender is likely to have some forbearance options — as does your credit card issuer, your car loan company and any other lender you owe. Make sure you understand how each program works and how you would repay the skipped payments. In most cases, your balances will continue to accrue interest, but the programs could give you some breathing room while you wait for better times.

Q&A: Taxes when inheriting a home

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Dear Liz: My sister recently passed, and I acquired her home, which I’m selling (it’s now in escrow). I was looking at state tax forms for real estate transactions, and there is nowhere to check for a person who was given a home through death. Does this mean it is taxable? I was told since it was an inheritance that it was not taxable.

Answer: Technically, you weren’t given a home. You inherited it, and you’re correct that inheritances are typically not taxable. (Only six states impose inheritance taxes, and your state, California, is not one of them.) When you inherited the home, the property received what’s known as a step-up in tax basis, so that the appreciation that occurred during your sister’s lifetime is not taxed. You would owe tax only on any appreciation that occurred since you owned the property. A tax pro can help you figure out what you might owe.

Q&A: Withdrawing after-tax retirement funds

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Dear Liz: I have been contributing to retirement accounts for many years, starting back in the early 1980s. Back then, there were no deductions for contributions. I made about $50,000 of after-tax contributions, meaning I’ve already paid taxes on that money. Later I switched to before-tax contributions. Now that I am retired and approaching 65, in my feeble mind, I believe I should be able to withdraw that $50,000 without having to pay any taxes on it. However, things that I’ve read indicate that it may not be that easy. Can you help with this question, or at least point me in the right direction?

Answer: You will escape taxes on a portion of any withdrawal you make from a retirement plan that has after-tax money in it, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. However, only Roth IRAs allow you to make totally tax-free withdrawals of your contributions at any time.

With a Roth IRA, any withdrawals are considered first to be a return of contributions. For example, if you contributed $50,000 to an account that’s now worth $200,000, the first $50,000 you withdraw would be tax- and penalty-free, regardless of your age, Luscombe said. If you were under 59½, additional withdrawals could be subject to taxes and penalties.

With regular IRAs and 401(k)s, the tax treatment is different. Withdrawals are considered to be a proportionate return of your after-tax money, Luscombe said. If you contributed $50,000 after tax and then withdrew the same amount from an account now worth $200,000, only one quarter of the money would escape tax.

Q&A: Coronavirus aid law lets you more easily tap retirement savings. That doesn’t mean you should

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Dear Liz: You recently mentioned that a person can withdraw money from their 401(k) and spread the taxes over three years. If 401(k) is paid back, they can amend their tax returns to get those taxes refunded. Because of some major home repairs, I asked our accountant about this before we proceeded. He said that he hasn’t read anything official about the above. Would you please provide where you obtained your information, so we can decide if that’s an avenue we can use?

Answer: It’s possible you had this conversation before March 27, when the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law.

Otherwise, it’s kind of hard to imagine an accountant anywhere in the U.S. who hasn’t heard of the emergency relief package that created the stimulus checks being sent to most Americans, as well as the Paycheck Protection Program’s forgivable loans for businesses and the new coronavirus hardship withdrawal rules for 401(k)s and IRAs.

Those rules allow people who have been affected financially or physically by COVID-19, the disease caused by the novel coronavirus, to get emergency access to their retirement funds if their employers allow it.

Even if you do have access to such a withdrawal, you should consider other avenues first.

The income taxes on retirement plan withdrawals can be substantial, even when spread over three years. Perhaps more importantly, you probably would lose out on future tax-deferred returns that money could have earned because few people who make such withdrawals will be able to pay the money back.

A home equity loan or line of credit is typically a much better option for home repairs, if you can arrange it.

Q&A: Where’s my stimulus check?

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Dear Liz: My wife and I are retired and don’t have enough income to file tax returns. How can we get our stimulus checks?

Answer: If you get Social Security checks, your stimulus checks will be sent to you automatically, either via direct deposit if that’s how you get your benefits or paper check.

If you don’t collect Social Security yet and didn’t file a tax return for 2018 or 2019 because your income was below the limit to require filing, the IRS.gov website has more information.

The IRS has started sending out stimulus checks via direct deposit for people who filed 2018 or 2019 returns and provided their bank information. Those who filed returns but did not provide their bank information can follow an IRS “Get My Payment” link for assistance.