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Son signed them up for overwhelming student loan debt

August 14, 2013 By Liz Weston

Dear Liz: Our son went to an expensive private school and ended up with more than $100,000 in federal and private loans by the time he graduated. My wife cosigned a private loan for $25,000 for the first year, and that was the last we heard of any loans until he graduated with a degree in social services. After he was out of school for six months, we started getting phone calls asking for payment. Turns out he electronically signed my wife’s name to the next three years of his student loans.

Just to keep the creditors from harassing us daily, we pay the interest, which is about $1,100 a month and equals two-thirds of my wife’s take-home pay. (I’m disabled and can’t work; she’s 64 and planning to retire soon.) Our son hasn’t paid a dime on any of the debt and seems to think it will disappear if you don’t talk about it. He makes only $15 an hour. He still takes college classes and he thinks that because he is in school, he doesn’t need to pay anything. But the interest is still accruing monthly.

After my wife retires, how much of our Social Security checks can they come after? Can they come after our house? We will be living on Social Security only as we were never fortunate enough to have employers who offered pension plans. I sometimes feel that we will have no real retirement because of this situation. Any suggestions and advice would be appreciated.

Answer: What a mess. If nothing else, your situation can serve as a warning to other families tempted to buy educations they can’t afford. Taking on six-figure debt for an undergraduate degree, let alone one in social services, is nuts. Generally, students shouldn’t borrow more in total than they expect to earn the first year out of school. Also, most people should stick to federal student loans. Using private loans to pay for college is a lot like using credit cards, although unlike credit card debt, these variable-rate loans typically can’t be discharged in bankruptcy.

It’s not clear whether your son committed identity theft in signing your wife up for additional debt. Some private loans include a clause permitting the origination of subsequent years’ loans in addition to the original loan, said Mark Kantrowitz, publisher of Edvisors Network. You’d have to review the promissory note to see if that’s the case. If not and if your son forged your wife’s signature, she potentially could get released from the obligation — but most lenders will require the son to be convicted of identity theft first, Kantrowitz said.

“When given that choice,” he said, “most families choose to handle it internally rather than see the student convicted of fraud.”

The only good news here is that private student lenders have fewer powers to collect, compared with the federal government. There is a time limit on how long collectors can pursue you because private student loans are subject to each state’s statute of limitations on debt. (There is no statute of limitations on federal student loan debt, which means collectors can pursue borrowers indefinitely.) Private student lenders can file lawsuits against you, but they don’t have the power that federal student loan collectors have to withhold tax refunds and take a portion of Social Security checks.

If your only income in retirement is from Social Security and you don’t have any other property a creditor can legally take, you may be “judgment proof.” That doesn’t mean you can’t be sued, but a creditor wouldn’t be able to collect on a judgment against you. To find out whether that’s the case, talk to an experienced bankruptcy attorney familiar with the laws in your state.

None of this reduces your son’s responsibility for his debt. If collectors can’t come after you, they will start to pursue him in earnest for payment and he’ll learn just how wrong he is about student loan debt. But that’s his problem, and he at least has a working lifetime ahead of him to pay back what he borrowed.

Filed Under: Q&A, Student Loans Tagged With: co-signing student loans, private student loans, Student Loans

Divorced retiree entitled to spousal Social Security benefits

August 14, 2013 By Liz Weston

Dear Liz: My daughter, 63, has been recently amicably divorced and receives a small alimony ($1,000). Her ex-husband of 30 years is a doctor who just retired. Is she entitled to part of his Social Security? Neither has remarried.

Answer: Because they were married for more than 10 years, your daughter should qualify for spousal benefits, which can equal up to half of her ex’s benefit at his full retirement age. That amount would be permanently discounted if she applies before her own full retirement age (which is 66).

The ex’s marital status doesn’t matter, although your daughter’s does. If she remarries, she will lose access to spousal benefits as a divorced spouse. This is just one of the ways that spousal benefits differ from survivor’s benefits, which are based on 100% of the earner’s benefit and which widows and widowers can receive even if they remarry after age 60.

Filed Under: Q&A, Retirement Tagged With: divorced spousal benefits, divorced spouse benefits, Social Security, Social Security Administration, Social Security benefits, spousal benefits

Don’t rush to pay taxes

August 5, 2013 By Liz Weston

Dear Liz: I am a CPA and fairly knowledgeable about investing, but I have a question about my IRAs. I am 58 and my husband is in his mid-80s. We both are retired with federal pensions and no debt other than a mortgage. My plan is to start taking money annually from my traditional IRA in two or three years. I want to reduce the required minimum distribution I will need to start taking at age 701/2 and lessen the tax impact at that time. Should I put these annual withdrawals in my regular investment account or should I put them in the Roth IRA? My goal is to lessen the tax impact on my only child when he ultimately inherits this money. Does my plan make sense?

Answer: Your letter is proof that our tax code is too complex if it can stymie even a CPA. Still, it’s hard to imagine any scenario where you’d be better off accelerating withdrawals from an IRA and putting them in a taxable account.

A required minimum distribution “is merely a requirement to take the money out anyway,” said Certified Financial Planner Michael Kitces, an expert in taxation. “All you’re doing by taking money out early to ‘avoid’ an RMD [required minimum distribution] is voluntarily inflicting an even more severe and earlier RMD on yourself.”

In other words, you’d be giving up future tax-advantaged growth of your money for no good reason.

What might make sense, in some circumstances, is moving the money to a Roth. You can’t make contributions to a Roth if you’re not working, because Roths require contributions be made from “earned income.” What you can do is convert your traditional IRA to a Roth, either all at once or over time. You have to pay taxes on amounts you convert, but then the money can grow tax-free inside the Roth and doesn’t have to be withdrawn again during your lifetime, since Roths don’t have required minimum distributions. Whether you should convert depends on a number of factors, including your current and future tax rates and those of your child.

“In other words, if your tax rate is 25% and your child’s is 15%, just let them inherit the [traditional IRA] account and pay the lower tax burden,” said Kitces, who has blogged about the Roth vs. traditional IRA decision at http://www.kitces.com. “In reverse, though, if the parents’ tax rate is lower … then yes, it’s absolutely better to convert at the parents’ rates than the child’s. In either scenario, the fundamental goal remains the same — get the money out when the tax rate is lowest.”

If you do decide to convert, remember that the conversion itself could put you in a higher tax bracket.

“It will be important not to convert so much that it drives up the tax rate to the point where it defeats the value in the first place,” Kitces said. “Which means the optimal strategy, if it’s to convert anything at all, will be to do partial Roth conversions to fill lower tax brackets but avoid being pushed into the upper ones.”

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: Inheritance, Roth conversion, Roth IRA

A credit line can help with cash flow gaps

August 5, 2013 By Liz Weston

Dear Liz: My husband and I are self-employed. As we pay our bills, we are often a few thousand dollars short as we wait to be paid by our clients. Until now, we’ve been using a home equity line of credit to bridge the gap. We are ultra-responsible about paying it back. But our current 10-year draw period ends this month, and our lender has denied us either a new HELOC or a refinance. Is there another product that would help us? It would be sad if the only way to maintain our life is to sell our house, but that might be where we are if we can’t find some small line of credit.

Answer: Talk to the bank that has your business checking and savings accounts about the possibility of opening a line of credit. This is a standard tool for businesses of all sizes, but can be particularly helpful for small-business owners who have cash flow challenges. The interest rates on business credit lines are typically low, and you may be offered higher limits over time as you use the account responsibly.

If your bank isn’t interested in helping you, ask other entrepreneurs to help you find a more business-friendly financial institution. A community bank may be more flexible and more interested in winning your business than bigger, name-brand banks, but the experiences of fellow small-business owners can guide you to the best options in your community.

Filed Under: Credit & Debt, Q&A Tagged With: credit line, line of credit, self-employed, self-employment, small busines

Survivor benefits: what you can expect

July 29, 2013 By Liz Weston

Dear Liz: Two years ago, I elected to start my Social Security benefits early, at age 62. My current benefit is $1,350 per month. My spouse, currently working, will be turning 62 next year and is also planning to take an early retirement benefit because of health issues. Her benefit is expected to be slightly more than my benefit at that time. If she dies before me, what can I expect to collect from Social Security as the spouse of someone who started benefits early?

Answer: If your wife dies before she begins receiving Social Security, your survivor’s benefit would be based on what’s known as her “primary insurance amount.” That’s the amount she would receive at full retirement age (which is 66 for those born between 1943 and 1954; after that, full retirement age increases gradually to age 67 for those born in 1960 or later).

Once she begins benefits, though, your survivor’s benefit is based on what she’s actually getting. So if she receives a reduced benefit, your survivor’s benefit is reduced as well. It would be further reduced if you, as a widower, begin taking survivor’s benefits before your own full retirement age.

You would not be able to get your own benefit plus a survivor’s benefit if your wife should die, by the way. You would get the larger of the two, but not both.

Filed Under: Q&A, Retirement Tagged With: Social Security Administration, Social Security benefits, survivors benefits

Are Roths safer than other IRAs?

July 29, 2013 By Liz Weston

Dear Liz: I found your recent discussion of Roth IRAs informative. But I’ve been told that one of the main advantages of a Roth vs. a traditional IRA is that a Roth is a safer investment when it comes to creditors trying to attack it. How can that be? Is one type of IRA safer than another?

Answer: The short answer is no.

Employer-sponsored retirement plans, including 401(k)s and 403(b)s, typically have unlimited protection from creditors in Bankruptcy Court. The exceptions: The IRS and former spouses can make claims on such plans.

Individual retirement accounts, including IRAs and Roth IRAs, lack the protection afforded by the Employee Retirement Income Security Act, or ERISA. But the bankruptcy reform law that went into effect in 2005 protects IRAs of all kinds up to a certain limit (which in April rose to $1,245,475).

Short of bankruptcy, the amount of your IRAs or Roth IRAs that creditors can access depends on state law.

If there’s any chance you’ll be filing for bankruptcy or the target of a creditor lawsuit, you should talk to an experienced bankruptcy attorney about your options.

Filed Under: Q&A, Retirement Tagged With: 401(k), Bankruptcy, Roth IRA

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