Ask Liz Weston

Get smart with your money

Q&A

Q&A: Cashing out an IRA to pay off credit card debt

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Dear Liz: I owe about $49,000 on my credit cards and now have the money to pay them off in full. Should I? Or should I slowly pay them in large amounts?

Answer: There’s typically no reason to delay paying off credit card debt. Carrying balances costs you money and doesn’t help your credit scores. You’ll see the fastest improvement if you pay them off in one fell swoop.

The only excuse for delaying would be if this windfall comes from a retirement fund. Cashing out a 401(k) account or IRA to pay off debt is not wise, since you’ll trigger huge taxes and penalties. Add in the future tax-deferred compounding you lose and the total cost is far more than you’ll save in interest.

Q&A: Tax break for helping out son

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Dear Liz: Our son bought a house and lost his job two months after the purchase. We have helped him stay afloat. Thankfully he has a new job. We don’t expect to get the money back — he is still trying to get out from under — but we have given him close to $10,000. Can we claim this as a “gift” to him on our income taxes?

Answer: The IRS doesn’t view money given to family members as a charitable donation. In other words, there’s no tax break for bailing out your kids.

If you’re so wealthy that estate taxes might be an issue — which means estates worth more than $5.45 million a person in 2016 — then you might be concerned about gift tax rules. You’re allowed to give a certain amount to any person annually without having to file a gift tax return. In 2015 and 2016, that amount is $14,000, so you and your wife together could give up to $28,000 to your son without needing to file a gift tax return. It’s only when the total value of gifts over this annual exclusion hit $5.45 million that you’d have to worry about paying gift taxes. Clearly, this isn’t an issue for most families.

Q&A: Taking Social Security at 70

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Dear Liz: My husband will be turning 70 in August. Must he start taking Social Security at 70 or can he wait a little longer? He will still be earning money and if I understand correctly that will lower the amount he will receive. Does he have to do anything like apply for it or do they know he is turning 70?

Answer: He should apply for retirement benefits — online at www.ssa.gov, in person at a local office or by calling 800-772-1213 — three months before he turns 70. Benefits max out at that age, so there’s no reason to delay any longer.

The earnings test you fear only affects people who start benefits before their full retirement ages, which for your husband was 66. When you start benefits early, Social Security deducts $1 for every $2 you earn over a certain amount ($15,720 in 2016). After full retirement age, that penalty disappears.

Q&A: Financial benefits of marriage

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Dear Liz: My registered domestic partner and I are both 64. We have similar incomes, similar 401(k) accounts and own a home together. We plan on retiring at 66, at which time we will also get similar Social Security benefits. We are each other’s beneficiary on all insurance, accounts, etc. My question: Now that the Supreme Court has made it legal, would it benefit us financially to get married? We’ve never felt an emotional need for that validation but are questioning whether it would make sense for other practical reasons.

Answer: When incomes are dissimilar, there’s a strong argument to be made for marriage. The lower earner may get more from a Social Security spousal benefit than from his or her own retirement benefit. In addition, the lower earner could get a much bigger survivor benefit, since a survivor gets the larger of the couple’s two Social Security checks.

If either of you had a traditional pension, a spouse would be entitled to survivor benefits that an unmarried partner can’t claim. And if you were of dramatically different ages, marriage would allow a younger survivor to put off starting mandatory withdrawals from inherited accounts.

Marriage also has estate planning advantages, but those primarily benefit wealthy couples (see above). If you do remain unmarried, you’ll want to make sure you both have powers of attorney for healthcare and finances so you can make decisions if the other becomes incapacitated.

There are many other benefits to marriage, which the self-help legal publisher Nolo has summarized at http://bit.ly/1mOmpZA. You also might want to talk to a fee-only financial planner who has experience with same-sex couples to make sure that your assets and rights are adequately protected if you remain unmarried.

Q&A: Auto loan GAP coverage

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Dear Liz: In 2012, I financed a 2008 Honda at my credit union. The car was priced at $16,500. With a trade-in, the loan came to $22,000. GAP coverage was factored into the loan payments, which were $464 a month. Last year, the car was wrecked and deemed a total loss by the insurance company. They paid the “book value” of $8,860 to the credit union. However, $6,000 remained on the loan. The GAP coverage paid $3,000 and now the credit union is saying I owe the remaining $3,000. They said the GAP would only pay a percentage of the balance because the car was “over financed” back in 2012. This seems to be unfair, and I feel like the lender should get the money from the GAP provider (per the contract that was signed when the car was financed). Is it possible for the GAP provider to refuse to cover the whole balance left on the loan? I will be meeting with the loan officer next week to discuss payment options.

Answer: You’ve discovered one of the many reasons why you don’t want to roll debt from a previous vehicle into a car loan to purchase its replacement.

Many people do exactly that, though. When trading in a car for a new vehicle, nearly 1 in 3 people roll debt from the old loan into the new one, figures from car comparison site Edmunds.com show. The average amount of negative equity in January was $4,814.50. With used cars, 1 in 4 people with a trade-in roll debt from their old car into the replacement loan, with an average negative equity of $3,595.30.

GAP (Guaranteed Auto Protection) coverage would seem to be the solution, since it’s designed to pay the lender the difference between the loan on the car and what the car is worth. Most GAP policies, though, won’t cover the debt you brought over from the previous vehicle. That leaves you in exactly the position you thought you would avoid, which is having no car but a pile of debt to pay off.

A better approach to car buying is to make a significant down payment, such as 20% of the purchase price, and keep loan terms to no more than four years. You can’t buy as much car that way, but you won’t end up owing far more than the car is worth.

Q&A: Loaning money to family

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Dear Liz: My cousin borrowed some money from us because he said they were behind on their house payments. It was only a small amount, but we said we wanted to sit down with him and his wife to discuss this. He agreed to meet with us in the evening of the day he received our check, but of course he called and said they couldn’t make it. We see them every week at church, and she doesn’t act as if anything was happened, while he avoids eye contact. It’s been three months and they haven’t made a single payment. I can’t imagine how I would feel if I found out that my husband was hiding something like this from me, and I don’t know if we should press the issue or just consider it a personal loss and lesson for the future. Any suggestions?

Answer: Loans to family and friends often become inadvertent gifts, so you were smart not to hand out more than you could afford to lose.

You already know everything you need to know about your cousin, which is that he lacks integrity as well as financial management skills. It’s possible that either or both of these facts would be news to his wife, but chances are good that she already knows. So there doesn’t seem to be much point in embarrassing her if you’ve already decided not to pursue the debt.