Ask Liz Weston

Get smart with your money

Q&A

Q&A: Taxes on home sales

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Dear Liz: I thought that if you occupied a home as your principal residence for two of the last five years that you could exclude capital gains of up to $250,000 if single or $500,000 if married. Someone recently told me that this has been changed to a pro-rata calculation.

Answer: That someone was wrong. The pro-rata calculation applies to people who have not owned and lived in the home for at least two years but who meet other criteria for a partial exemption. The percentage of gains you can exclude from your income is based on the percentage of the two-year requirement you fulfilled.

Let’s say you had to sell the home after a year because your place of employment changed to one at least 50 miles away. You could exclude capital gains of up to 50% of the exemption amount — $125,000 if single or $250,000 if married — from your income.

Q&A: Roth IRA withdrawal rules

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Dear Liz: In a recent column you mentioned that you can take money out of a Roth IRA at age 59½ without a penalty. I believe a Roth IRA must be in force for at least five years before you can take money out, regardless of age. Is this correct?

Answer: At any time and at any age, you can withdraw an amount equal to what you contributed to a Roth IRA. So if you’ve contributed $5,000 a year for four years to a Roth, you can withdraw $20,000 without worrying about taxes or penalties.

The five-year rule kicks in when you start to withdraw earnings. You can avoid both taxes and penalties on these withdrawals if the account was established at least five years ago and you’re 59½ or older. If the account isn’t at least 5 years old, you must pay taxes on the earnings withdrawn but don’t have to pay the usual 10% penalty if you’re 59½ or older.

A five-year rule also applies to Roth conversions. Each conversion or rollover you make is subject to a separate five-year waiting period.

Q&A: The thought of ending up old and alone can be terrifying. It doesn’t have to be that way

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Dear Liz: My wife and I have no children to take care of us in our old age, and I am scared to death regarding what will happen to the surviving spouse when one of us dies or we become incapacitated. We are 69 and 67 respectively and I think a lot of “boomers” are facing this issue. Any thoughts?

Answer: Consider getting a copy of the book “Essential Retirement Planning for Solo Agers: A Retirement and Aging Roadmap for Single and Childless Adults” by certified retirement coach Sara Zeff Geber. The NextAvenue site also has a wealth of information on how to prepare for aging and incapacity if you don’t have kids or don’t have ones you can rely on.

Geber provides far too much valuable information to summarize here, but one important strategy is to create a strong social network. Not only can this combat social isolation and loneliness — which are as dangerous to your health as smoking — but these folks can help look out for you and vice versa.

If your social circle is small or you’re out of the habit of making new friends, consider activities that put you in contact with others such as volunteering, taking classes or joining exercise groups. Also check out the Village to Village Network, a nonprofit that helps people age in place by encouraging groups of neighbors to help one another with rides, services and activities.

Living in close proximity to others and in areas with robust social services also can make a huge difference for solo agers. Another option, if you have the means, is to consider a continuing care retirement community that allows independent living to start, with assisted living and sometimes nursing home care as needed.

Every adult needs an advance healthcare directive, such as the free ones at Prepare for Your Care. These documents allow someone you trust to make health decisions if you should become incapacitated. It’s OK to name your spouse, but you also should have at least one and preferably two or more backups. Filling one out can help you think deeply about the people currently in your life you can trust with this task, and may encourage you to deepen those ranks if they’ve gotten a little thin.

Q&A: Finding a fiduciary

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Dear Liz: I am 55 and a single mom of three teenagers. My money has been sitting at a discount brokerage firm unmanaged … ugh!! I need help, but I am afraid to hire someone who will lose my money. Plus, two of my kids are old enough now to open a retirement account. We need help!

Answer: There’s actually no age minimum on contributing to a retirement fund; your kids just need to be earning at least as much money as they’re putting into the account. If they want to contribute the maximum $6,500 to an IRA, for example — or you want to contribute that much on their behalf — they have to earn at least $6,500.

The word you’ll want to keep in mind when seeking help with your money is “fiduciary.” Your advisor should be willing to put in writing that they will put your interests ahead of their own.

Many advisors are held to a lower “suitability” standard, which means they can recommend investments that are more expensive or perform worse than available alternatives, simply because the recommended investment pays the advisor more.

You don’t actually need a human being for investment management, though. Your investing firm probably offers target date mutual funds, which adjust the mix of investments to be more conservative as your retirement date nears. Another option is a robo-advisor, which handles the investing according to a computer algorithm.

Where a human can come in handy is if you have broader financial questions, such as whether you’re saving enough, when you can safely retire and whether your family is adequately insured, among other issues. Your discount brokerage may offer access to fiduciary advisors for a fee or in exchange for investing a certain amount of money.

You can also find fiduciary advisors through the Assn. for Financial Counseling and Planning Education, the XY Planning Network, the Garrett Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners, among others.

Q&A: How to get a debt collector to stop calling about a bogus bill

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Dear Liz: I’m getting daily robocalls from a debt collection agency, even though a check of our current credit reports shows that we owe no one anything. (My husband and I both have stellar credit.) Google tells me that this collection agency is known for shadiness and that the Consumer Financial Protection Bureau has fined it for illegal debt collection practices and repeated violations of consumer reporting rules. I want to make these annoying daily calls stop (I never answer) but I worry that engaging with this company at all, for instance with a letter telling them to go away, will just cause more problems. What’s the best way to handle this kind of situation?

Answer: Debt experts sometimes advise against contacting collection agencies if you owe money, can’t afford to pay it back and are worried about being sued. The concern is that any response from you will trigger increased efforts to collect the money.

Since you don’t owe anything, though, there’s nothing to stop you from trying to end these annoying calls.

The CFPB recommends sending a letter to the collection agency demanding to know more about the alleged debt, including why the collector thinks you owe it, how old the debt is, how much is owed and details establishing the collector’s right to collect. The CFPB has a sample letter on its site you can use. Ideally, this letter would be sent within 30 days of the first phone call to preserve your rights under federal law, but there’s nothing stopping you from sending it at any point.

Once you have information about the supposed debt — or if the calls continue and the agency hasn’t responded — you can send a second letter telling the agency you don’t owe the money and to stop contacting you.

Q&A: Annuities can come with a tax surprise

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Dear Liz: I made a one-time purchase of a variable deferred annuity with a $10,000 inheritance I received about 25 years ago, based on a co-worker’s advice. Over the years I have not made any additional payments or withdrawn any funds. It matures in about a year with an option of withdrawing the lump sum, which was nearly $60,000 this year, or receiving monthly payments. Would I be subject to capital gains taxes for the entire $50,000 increase if I take the lump sum? Are there any special tax exemptions or rules I should be aware of?

Answer: The increase in your annuity’s value isn’t subject to capital gains taxes. Instead, the gain will be subject to higher — perhaps much higher — income tax rates, regardless of whether you choose the lump sum or monthly payments.

Variable annuities are insurance products that allow you to invest money tax-deferred for retirement. Like other retirement accounts, you could face penalties for early withdrawal in addition to income taxes if you take money out before you’re 59½.

Taking the lump sum could push you into a higher tax bracket and possibly cause a temporary increase in your Medicare premiums if you’re 65 or older. If you opt for monthly payments instead, you’re likely giving up access to the money in an emergency. (Annuitization means you’re giving up the lump sum you could have accepted in exchange for a stream of monthly payments that typically lasts for life.)

A tax pro can help you weigh the effects of the different withdrawal options on your finances.