Ask Liz Weston

Get smart with your money

Q&A

Q&A: When a HELOC rate is too good to be true

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Dear Liz: My current home mortgage rate is 5%. I owe about $340,000 on the house and have about $300,000 in equity. My credit union is offering a home equity line of credit with a rate of 3%. Would it be a good idea to take out a HELOC at that rate and use those funds to pay down or pay off my mortgage?

Answer: Prevailing HELOC rates are closer to 9%, so what you saw is likely a teaser rate that would eventually expire. After that, you’d pay the regular variable rate, which would rise and fall with prevailing interest rates up to a predetermined cap, which is usually 18%.

So no, it’s not a good idea to give up your current relatively low rate. HELOCs and other variable-rate loans are a better fit for short-term borrowing that you can pay off relatively quickly.

Q&A: Inherited IRAs and taxes

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Dear Liz: After reading your recent response on the taxability of inherited IRAs, I have a question. I am 53, divorced with no children, and have an IRA worth more than $1 million. I’ve always listed the beneficiary of the account as my estate, for no reason other than administrative ease (if I ever change my will, the IRA will follow along). However, from a tax perspective, is this unwise? In your recent response you state that non-spouse beneficiaries typically have up to 10 years to drain an inherited IRA. If these individuals don’t directly inherit the IRA, and instead it must first filter through my estate, do the payouts occur immediately and therefore create a greater tax burden that cannot be spread out for as many years?

Answer: If you die before starting to take required minimum distributions and the estate is your beneficiary, the IRA assets must be completely distributed by Dec. 31 of the fifth year following the year of your death, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Designating individuals as IRA beneficiaries rather than the estate would allow them to spread the distributions over 10 years rather than five years. If you die after starting required minimum distributions, the remaining distributions would be made according to the single life expectancy tables for someone your age, Luscombe said.

The account also could be more vulnerable to creditors, depending on state law, and could be subject to the delays and costs of probate. In other words, choosing “ease” now can create a lot of discomfort later for your heirs.

“IRAs are very difficult in probate situations, and it’s better to name individuals to be beneficiaries directly on those accounts in almost all situations,” said Jennifer Sawday, an estate planning attorney in Long Beach.

Q&A: Capital gains taxes on a house sale

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Dear Liz: We purchased our home for $220,000 in 1986 and are selling it for $1 million. We own it free and clear. The proceeds from the sale will be going toward the purchase of another property, to be owner-occupied, for $1.4 million. We will be coming in with additional cash to cover the difference. Our question is whether we will be subject to capital gains tax on the proceeds from the sale of our current home.

Answer: Most likely the answer is yes.

Each owner can exclude up to $250,000 of gain from the sale of their primary residence as long as they owned and lived in the home at least two of the previous five years. Whether they have a mortgage and what they do with the money afterward isn’t relevant for calculating this tax.

You may be able to reduce the capital gains tax bill if you paid for home improvements over the years and kept good records. According to the IRS, improvements or additions that “add to the value of your home, prolong its useful life, or adapt it to new uses” can be added to your tax basis, which is usually the amount you spent to buy the home. IRS Publication 523, Selling Your Home, has details.

Q&A: A health crisis brings high medical bills. Here are tips for dealing with the costs

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Dear Liz: I have been diagnosed with Stage 4 cancer which has metastasized into at least two areas. Surgery, chemo, perhaps a stay in rehab and possibly radiation therapy will be prescribed by my oncologist. In order not to deplete my retirement savings (the oncologist estimates that I will live longer — years — if the treatment goes well), what resources can be identified to help financially with co-pay, medical and prescription costs? I already know about hospital benevolence programs. I am going to revert to my monthly “austerity” budget, watching every penny of my expenditures and trying to avoid or reduce them. I will be unable to work part time, as I have been doing, for at least this year. I am 70. I have Medicare and a Medicare supplement plan as well as a Part D prescription plan. Thank you for any suggestions.

Answer: You’ve just received a shocking diagnosis and it’s understandable that you’re worried about the costs you’ll face.

Your Medicare supplement plan — also known as a Medigap plan — is designed to cover some or all of the costs not paid by traditional Medicare, including co-payments, co-insurance and deductibles. The plans with lower premiums typically have skimpier coverage. You’ll want to carefully review your plan to see what coverage you have.

You probably will have questions, so consider connecting with your State Health Insurance Assistance Program. This program can refer you to a government-funded counselor who can provide free Medicare counseling. You can find your regional SHIP using the online locator or by calling (877) 839-2675 and say “Medicare” when prompted.

Ask your oncologist about lower-cost treatment options and any charitable programs they have or are aware of. Benefits.gov can show you what government programs might be available to help with costs, while 211.org can help you check if there are any local programs. You may be able to seek out cheaper prescriptions through online pharmacies, GoodRx, NeedyMeds, manufacturer discount programs or Medicare’s Extra Help program, which helps Medicare recipients with limited means to afford their medications.

Another option for people with catastrophic medical bills is to file for bankruptcy. Your retirement accounts would be protected, but you’d want to discuss your options with a bankruptcy attorney long before you file.

While you’re researching, keep in mind that the U.S. medical system is set up to push treatment, often regardless of the cost, efficacy or toll on quality of life. Physician and certified financial planner Carolyn McClanahan warns that people can find themselves on a “medical treadmill” that continues pushing painful, debilitating and costly treatments with little or no real benefit to the patient.

Consider having a frank talk with your oncologist about how much more time each treatment will likely get you — not just in a best-case scenario, but in an average-case scenario — and how you are likely to feel during the treatment. A second opinion may also be a good idea. These discussions can help you decide if you want to pour all your available resources into paying for treatment or if there are other options that would allow you to better enjoy whatever time remains.

McClanahan recommends picking up a copy of Katy Butler’s excellent book, “The Art of Dying Well: A Practical Guide to a Good End of Life.” Despite its title, the book doesn’t just focus on the very end of life, but also provides essential information about how to best navigate the healthcare system as an older person.

Q&A: IRAs, pensions and taxes

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Dear Liz: I contributed to an IRA during my working years. I’m now retired. Both my and my spouse’s IRAs are Roths, so we have no required minimum distributions. I’d like to continue contributing to an IRA, but neither I nor my spouse have W-2 or self-employment income anymore. We do, however, both collect pensions, which are taxed as ordinary income. Shouldn’t we be able to make IRA contributions, as we earned these pensions by working, and they are taxed exactly the same as our paychecks were taxed?

Answer: Nice try! There’s no longer an age limit for contributing to an IRA or a Roth IRA, but the IRS insists that those who contribute have earned income — which means wages, salary, tips, bonuses, commissions or net self-employment income. Payments from pensions and retirement funds don’t count as earned income.

Q&A: Wondering why your credit score is bad? Here’s how to make it better

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Dear Liz: I am trying to get my credit score figured out and was wondering if you have any recommendations for a credit report guru in my area? I need someone to walk me through why my score isn’t higher and to help me resolve that issue.

Answer: Unfortunately, many credit repair companies are scams. Even those that are legitimate are essentially selling you something you can do on your own, for free.

Understand first that you don’t have just one credit score: You have many, and they change all the time based on the information in your credit reports. Consider signing up for a service that provides you a free score that you can monitor over time. That can help you understand what behaviors help and hurt your credit. These services also typically give you reasons why your score isn’t higher. (You may be able to get a free credit score from your bank or a credit card issuer. If not, many sites online provide free scores.)

Next, get all three of your credit reports for free from AnnualCreditReport.com. (Type the address into your browser rather than using a search engine, since there are many look-alike sites. If you’re asked for a credit card, you’re on the wrong site.)

Look for obvious problems, such as accounts you don’t recognize or late payments being reported when you paid on time. Dispute incorrect information, using the links provided. Negative information that is correct can typically stay on your credit reports for seven years, although the impact on your scores should diminish over time.

In general, you can improve your scores by paying bills on time, using 10% or less of your available credit limits and having a mix of credit types (credit cards and installment loans). If you’re starting from scratch or trying to improve bad scores, consider a credit-builder loan from a local credit union or an online lender.