Ask Liz Weston

Get smart with your money

Q&A

Q&A: Why tapping retirement cash early shouldn’t be done lightly

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Dear Liz: I’m reaching out on behalf of my father, who does not know how to write emails. He was wondering if he pulls his money out of his IRA, how much will he get charged? Also, how much would he be able to give to his granddaughters without being charged?

Answer: Withdrawals from IRAs and most other retirement accounts are taxable. The tax bill will depend on his tax bracket and whether his contributions were pre-tax (deductible) or after-tax (non-deductible). If he withdraws money before age 59 1/2, he also may face tax penalties. A premature withdrawal can easily trigger a tax bill of 25% to 50%. Once the money is withdrawn, it also loses all the future tax-deferred returns it could have earned.

If he gives the money to his granddaughters, it’s unlikely he would face an additional tax bill. He would be required to file a gift tax return if the amount exceeded $14,000 per recipient in a year, but he would only have to pay gift taxes if the total amount he gives away in his lifetime over that limit exceeds $5.49 million.

Clearly, taking money out of a retirement account is a big deal and something that shouldn’t be done lightly. At the very least, your dad should consult a tax pro who can estimate the bill he’s likely to face. He’d be smart to consult a fee-only financial planner as well so he understands the potential effect this withdrawal could have on his future standard of living.

Q&A: Making sure your free credit report really is free

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Dear Liz: Please tell me again how to get my free credit report each year.

Answer: You can get a free annual look at your credit reports from the three major credit bureaus at www.annualcreditreport.com. If you search for “free credit report,” you may wind up at a look-alike site, rather than the federally mandated one. A good clue that you’re on the wrong site will be if you’re asked for a credit card number.

Your free reports don’t include free scores, which are the three-digit numbers lenders and others use to judge your creditworthiness. Your bank or credit card companies may offer free scores, or you can sign up with one of the many sites that offer them. Keep in mind that there are different types of scores, and the one that you’re seeing may not be the same as the ones your lenders use.

Q&A: How long will a tax lien linger on a credit report?

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Dear Liz: You wrote an article about how the credit bureaus are removing civil judgments and tax liens from people’s credit reports. I’ve been denied credit due to a few tax liens. Creditors won’t negotiate, even though the IRS has already deemed me unable to pay due to my disability. (I’m receiving Social Security disability income.) My question now is, how can I be sure it is being removed? Do I need to call the bureaus? Order another credit report?

Answer: Your unpaid tax liens may disappear, or they may not.

Starting in July, Equifax, Experian and TransUnion began removing liens and judgments when those records lack enough personally identifying information to ensure that the negative marks wind up on the right people’s reports. Another new requirement is that the records be properly updated, so that accounts that have been paid or resolved aren’t still showing as unpaid.

The error rate for these records was high, leading to many complaints, disputes and lawsuits. The bureaus expect to purge virtually all civil judgments but only about half of the tax liens.

If your liens aren’t purged and you can’t pay them, you may have to wait a while for them to fall off your credit reports. Paid liens are subject to the seven-year limit on how long most negative items can appear on credit reports. Unpaid liens can technically remain indefinitely, although the bureaus typically remove them after 10 years.

Q&A: What to consider before giving money for law or medical school

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Dear Liz: Our daughter is in medical school using scholarships and student loans. We are now in a position to help her out, but worry that financial help might work against her sources of aid. Would it be better to pay some on her outstanding loans, give her money, pay some of her living expenses or put the money into a savings account to give her when she graduates to use towards paying down her debt? The amount we could give her would not be enough to pay for everything each semester, just something to ease her burden. We don’t want to jeopardize her ability to receive aid.

Answer: While nearly all graduate students qualify as independent — which means that parent financial information isn’t required to get aid — some medical and law schools do consider parental assets and income in their calculations.

Your daughter should call her school’s financial aid office anonymously to ask about its policy regarding parental aid, said Lynn O’Shaughnessy, a college financing expert at TheCollegeSolution.com. If your help would hurt, you can use the savings account route but you needn’t wait until she graduates to give her the money. Once she files financial aid forms for her last year, she should be able to accept your largesse without consequence.

Q&A: An Internet search isn’t the best way to find a credit counselor

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Dear Liz: You’ve mentioned finding a nonprofit credit counselor and I was wondering the best way to go about that without feeling like I’ve been scammed. I’m wise enough (in my later years) to know that “nonprofit” does not mean free or even cheap services, so I didn’t want to just search for “nonprofit credit counseling, McKinney Texas.” Suggestions? Or should I do just that?

Answer: You can find a nonprofit credit counseling organization in your area using the National Foundation for Credit Counseling site at www.nfcc.org. NFCC is the oldest and largest credit counseling organization. Member organizations provide a variety of free and low-cost services. Those include financial education, credit report reviews and counseling about credit and debt, bankruptcy, foreclosure prevention, housing and reverse mortgages. If you’re struggling with credit card debt, these agencies provide debt management plans that can allow you to pay off your accounts at lower interest rates.

If you think you may need a debt management plan, you may also want to consult with a bankruptcy attorney. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org. Credit counselors — and their clients — are sometimes too optimistic about people’s ability to pay off debt, so you should understand the advantages and disadvantages of bankruptcy before you commit.

Q&A: Watch out for shady companies promising to help you repay student loans

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Dear Liz: I’m 32 and have a little over $100,000 in student debt from undergraduate and graduate school. I’m trying to get my professional life on track, and I can’t figure out how to pay the loans off. Everything I see online seems shady. What are the questions I need to be asking myself? What are the things I should be searching for on the Internet to help me get control of my financial situation?

Answer: “Shady” is exactly the right word to describe many of the companies promising student loan debt relief. They’re making false promises and charging troubled borrowers fat fees for government help that’s available for free. Many of these outfits get disciplined in one state, only to pop up in another.

If you’re struggling to pay federal student loans, you have several options for making the payments more manageable. You can research income-based repayment programs at StudentLoans.gov. Private student loans don’t have the same consumer protections or numerous repayment options, but you can contact your lenders directly to see what they offer.

The amount of debt you have is large but not insurmountable, especially if it qualified you for a well-paying job.

You don’t have to rush to pay off the federal student loans because those offer low, fixed rates, but you may want to prioritize paying off variable-rate private loans.

Also, don’t let your concern about your debt prevent you from saving for retirement. That, too, will be expensive, and the longer you wait to contribute to a retirement fund, the harder it will be to catch up.