Ask Liz Weston

Get smart with your money

Q&A

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.

Q&A: Care planning for ‘solo agers’

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Dear Liz: My wife and I don’t have children or any relatives nearby. So far, we’re healthy and completely independent, but that won’t always be the case. Do you know of any fee-based agencies or organizations that might provide assistance with such things as arranging a caregiver if needed, or helping our executor clean out our home?

Answer: A geriatric care manager can help assess your needs as you age and come up with a plan to meet them, including arranging for caregivers or finding an assisted living facility. You can get referrals from the Aging Life Care Assn.

An estate liquidator or a professional organizer can help with clearing your home. You (or your executor) can get referrals from the American Society of Estate Liquidators and from the National Assn. of Productivity & Organizing Professionals.

Also consider building a community of friends and neighbors who can help you as you age, and vice versa. You might be able to get some help from the nonprofit Village to Village Network, which is a group of community-based membership organizations helping people to age in place. The books “Who Will Take Care of Me When I’m Old?” by Joy Loverde and “Essential Retirement Planning for Solo Agers” by Sara Zeff Geber would be helpful reading.

Q&A: Taxes and inherited IRAs

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Dear Liz: Thanks for the recent column concerning children getting an inherited IRA, because I’m in that situation. Is the attorney for the estate required to include tax information with the distribution, or is it up to my accountant to sort things out? And since I don’t really need the money right now, would I have options as to how I receive the funds to avoid a tax hit?

Answer: You can’t avoid a tax hit with an inherited traditional IRA. The money has to come out and the withdrawals are taxable. For beneficiaries who aren’t the surviving spouse, the account typically must be drained within 10 years. (There are exceptions for beneficiaries who are minors, disabled or chronically ill.)

You have some flexibility about how rapidly you take the money out, however. If the account owner hadn’t started required minimum distributions before dying, you can withdraw money at any rate you want, provided you empty the account by Dec. 31 of the 10th year following the year of the owner’s death.

If the account owner had started required minimum distributions, you must take a minimum distribution each year. These are typically based on your own life expectancy. In addition to those annual withdrawals, you’ll need to take out the remaining money by the end of the 10th year following the year of death.

There was initially some confusion about whether beneficiaries had to take yearly required minimum distributions or could wait until the 10th year to withdraw the funds, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Because of that confusion, the IRS has waived the penalties for failing to take required minimum distributions when the IRA owner died in 2020, 2021 or 2022. The waiver of penalties would not be available if the IRA owner died in 2023, Luscombe said.

Leaving money in the account as long as possible means the balance has longer to grow tax deferred. But you also could face a whopping tax bill in that 10th year. Definitely discuss your options with your tax pro. While the attorney for the estate may help with some details — such as arranging to get the money transferred from the deceased owner’s account — it will be up to you to set up your own inherited IRA and to arrange for distributions.

Q&A: Where should you put your extra cash? Here are some ideas

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Dear Liz: At 82, I am selling my house and moving to a senior community. For the first time in my life, I will have a substantial amount of cash. Given my age and the fact that certificates of deposit and savings accounts are currently paying more than 5% interest, does it pay for me to start investing in other ways?

Answer: How you figure out what to do with your money is mostly the same whether you’re 28 or 82.

You start with your goal and your time horizon, or how long you have until you need the money.

For example, you may have to put aside some of the home sale proceeds to pay capital gains taxes if your home has appreciated more than the $250,000 that’s normally exempted from tax. Since the tax bill will be due within months of the sale, you shouldn’t take unnecessary risks with this cash. A high-yield savings account would be a good solution for any money you need to keep safe and liquid.

You also may want to earmark some money for long-term care. This goal is much more ambiguous, because it’s impossible to predict how much you’ll need or when. You may want to consult an elder law attorney, who can discuss your options.

Once you settle on a figure, you’ll want that money to be somewhere safe and readily accessible. Certificates of deposit that mature at different times could be an option, as could the high-yield savings account mentioned above.

If you have a goal that’s many years in the future, you could consider a mix of stocks and bonds. Stocks in particular offer long-term returns that historically beat inflation.

Most working people who want to retire will need to invest in stocks to accumulate and maintain a sufficient nest egg. They can take the risk of losing money in the short term because they have many years ahead for their investments to recover.

And that’s where your situation differs from that of a 28-year-old. The average life expectancy for an 82-year-old male is about eight more years, while the average life expectancy for an 82-year-old female is around nine more years, according to the Social Security Administration.

You may have enough time left to ride out a bad market. But if you don’t have to take such risks to achieve your goals, consider playing it a bit safer.

Q&A: Tax issues and trusts

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Dear Liz: You recently responded to a reader’s question about protecting an intended bequest. In the answer you wrote, “Assets in the trust get a step-up in tax basis when the first spouse dies, but not when the surviving spouse dies.” My understanding is that, in California and other states with community property laws, the basis of eligible inherited community property gets stepped up twice: once for the surviving spouse and then again for the person who becomes the final beneficiary of the asset. I thought that using a revocable trust does not affect this “double step-up.” A married couple whose principal estate asset at death is their jointly owned (and substantially appreciated) home may never explore the benefits of a trust if they believe that one-half of the anticipated step-up in basis will be lost. Might you clarify what the sentence in your column means?

Answer: The double step-up works somewhat differently from what you’re describing, and the trust in question is quite different.

A step-up in basis happens when someone dies and an inherited asset gets a new value for tax purposes. The asset is “stepped up” to the current market value, which means any appreciation that happened during the deceased owner’s lifetime is never taxed. (Basis also can be stepped down for assets that have declined in value.)

In most states, when one spouse dies, only half of a couple’s jointly owned assets gets a favorable step-up in tax basis to the current market value. The surviving spouse’s half doesn’t get a step up in value until he or she dies.

In community property states, however, both halves of the couple’s community property get the step up with the first death, said Los Angeles estate planning attorney Burton Mitchell. That’s what is known as the double step-up in basis. If the survivor dies owning the property, it gets yet another step-up in tax basis.

Now let’s move on to trusts. The double step-up in basis is not affected if you own property in a kind of revocable trust known as a living trust. Living trusts are designed to avoid the court process known as probate, and they can be changed during the creator’s lifetime (hence the term “revocable”).

The trust in question, however, was a bypass trust. The original letter writer asked how to make sure her son from her first marriage would receive an inheritance if she died before her current husband.

One of the options would be to create a bypass trust that gave the spouse income from her assets during his lifetime, with the assets transferring to the son at the spouse’s death. Such trusts can help ensure the assets actually get to the son someday and aren’t spent by the surviving spouse, or the surviving spouse’s next spouse. Among the disadvantages is the fact that assets placed in the bypass trust don’t get a step-up in tax basis when the surviving spouse dies.

Another type of trust to consider in this situation would be a qualified terminable interest property (QTIP) trust. Unlike the assets in a bypass trust, assets in a QTIP would be included in the deceased spouse’s estate, which means they would get a step up in basis when the survivor dies.

Clearly, this is a complex topic, so you’d be wise to get an experienced estate planning attorney’s advice.