Ask Liz Weston

Get smart with your money

Q&A

Q&A: How a Roth IRA rollover can cause unforeseen problems

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Dear Liz: I have been contributing to my young adult children’s Roth IRA accounts for the past few years to get them started on retirement savings. My oldest just left her first job to go back to graduate school. Since her income will be low this year, I advised her to roll her defined contribution plan with her former employer into her Roth IRA to consolidate her retirement savings. Will this conversion affect the maximum amount that I can contribute to her Roth beyond the usual rules on maximum contributions?

Answer: A conversion could do more than affect her ability to contribute to a Roth. It also could inflate her tax bill, reduce her eligibility for financial aid and affect any health insurance subsidies she’s receiving. A conversion could still be a smart move because Roth IRAs offer tax-free withdrawals in retirement, but she should understand all the implications before following your advice.

The amount your daughter converts from her 401(k) or other defined contribution plan would be considered a taxable distribution and treated as income. That could affect her eligibility for tax breaks, such as education tax credits and Affordable Care Act subsidies, as well as her ability to contribute to a Roth. (In 2023, the ability for an individual to contribute to a Roth phases out between modified adjusted gross incomes of $138,000 to $153,000.)

Also, to be eligible to make a contribution, she must have earned income at least equal to the amount she (or you) plan to contribute. Retirement plan distributions aren’t considered earned income so she would need wages, salary, tips, bonuses, commissions or self-employment income to qualify.

The conversion could affect her financial aid in future years. Federal aid calculations are based on tax returns from two years prior, so her 2023 tax return could affect her aid if she’s still in school during the 2025-26 academic year.

Also, she needs to figure out how she would pay the tax bill on the conversion. Converting a regular retirement account to a Roth can make sense if someone expects to be in a higher tax bracket later, but the math starts to fall apart if the retirement account itself has to be raided to pay the tax.

Your daughter should consult a tax pro who can review her situation and provide personalized advice.

Q&A: How to give away your house

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Dear Liz: I want to make sure a close friend of mine gets my house after I pass away. Which is better tax-wise for this friend, adding her to my deed or leaving the house to her in my will? My fear of leaving it to her in my will is that a family member may try to contest the will. While I will leave my family member money in my will, I want to make sure that the house goes to my friend.

Answer: If you add your friend to the deed, you’re making a gift of the home to her during your lifetime. That means if she ever sells the house, she could owe taxes on the appreciation that happened since you purchased the home. If you bequeath the home to her, on the other hand, the gains that occur during your lifetime won’t be taxed. You can leave her the home via a will, a living trust or, in many states, a transfer-on-death deed. (You can read more about this option in the next section.)

If you’re concerned about someone fighting your decision, please get appropriate legal advice. Estate planning can get complicated, and most people would benefit from an attorney’s help, but that’s especially true if you have contentious relatives.

Q&A: How to improve credit card security

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Dear Liz: Can you please explain why a personal identification number is not required when one uses a credit card? I know people who’ve had their card stolen and used quickly and for large amounts. That would immediately protect the credit card company from paying millions to cover losses.

Answer: “Chip and PIN” cards — which combine a microchip with a personal identification number — are the norm in most of the rest of the world. In the U.S., however, credit card issuers are reluctant to require their customers to use PINs.

The issuers are worried people would find the PINs to be a hassle and would opt to use a competitor’s card that didn’t require remembering and entering a number. The massive amount of fraud that results is considered a cost of doing business.

Consumers aren’t on the hook to pay for these bogus transactions as long as the fraud is reported within 60 days of the charges appearing on a statement. But compromised cards are still a hassle.

One of the best ways to protect your credit cards from fraud is to use mobile payment systems such as Apple Pay or Google Pay. These systems don’t expose your credit card number to the merchants and allow you to pay for purchases quickly and securely.

Q&A: Credit use and your scores

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Dear Liz: When my credit utilization decreased to 24%, my credit score rose from 675 to 690. My utilization has since decreased to 17% but my score remains 690. Approximately what does my credit utilization have to be to see a credit score over 700?

Answer: Keep in mind that you have many credit scores, not just one, and the formulas used to create these scores can vary considerably. But in general, the less you use your available credit, the better. People with the highest credit scores tend to use less than 10% of their credit limits.

Q&A: Transfer-on-death deed

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Dear Liz: Having been through the probate process several times in California and Nevada, I can say it stinks. It’s expensive and occurs at a time when family is most stressed and saddened after having lost a loved one. Although estate planning and revocable trusts seem to be all the rage, I’d like to recommend another path: transfer-on-death deeds for real estate. They are available online via the county. It avoids a complicated probate, is far simpler than a living trust and still gives the family the benefit of a stepped-up tax basis on the property.

Answer: Probate isn’t always a nightmare. Some states have adopted reforms that make the process less expensive and protracted. Even in states with notoriously slow and expensive probate, such as California, there are typically rules that allow small estates to bypass most of the red tape.

Because of the rising value of real estate, however, simply owning a home can be enough to trigger probate even when the deceased has few or no other assets. Thus, many states now offer the option of transfer-on-death deeds for real estate, and they can be a good solution for people who don’t own much other than a home.

Q&A: Recourse when the IRS goofs

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Dear Liz: Is there a “court of last resort” when dealing with the IRS and the Treasury Department? I tried to buy an I bond using my tax refund. My tax preparer checked the appropriate box on the 1040 and submitted the form 8888. No bond was sent to me and I have been sent back and forth between the Treasury and the IRS multiple times. Finally the IRS admitted it did not notify the Treasury like it should have to generate the bond and it did apologize.

The Treasury says it can’t issue the bond without the notification from the IRS, and the IRS claims there is nothing it can do to fix the problem now. Is there any recourse whereby I can get my bond? I followed all of the rules, the 1040 was correct and to tell you the truth, I am unhappy that there does not seem to be a way of righting a wrong not of my making.

Answer: Start by contacting the Taxpayer Advocate Service, which was created in part to help resolve problems like this. You’ll find it at taxpayeradvocate.irs.gov.

Also consider reaching out to your congressional representatives, who have constituent services that may be able to help.