June 23, 2014 By

Q&A: How to get the maximum in financial aid

Dear Liz: I’m having trouble finding information about how to structure my finances to get the maximum financial aid for my kids when they enter college. For example, will contributing to an IRA instead of a taxable investment account matter? Should I focus on paying off my mortgage or should I buy a bigger house and acquire debt in the process if I want my kids to qualify for more aid? There’s plenty of advice out there about how to minimize taxes — for example, by contributing to 401(k)s or selling losing stocks at year-end. But I’m interested in legally and ethically shielding my assets from the family contribution calculations used by the Free Application for Federal Student Aid. Any idea how I can learn more about the inner workings of the FASFA formula?

Answer: Before you rearrange your finances, you need to understand that most financial aid these days consists of loans, which have to be repaid, rather than scholarships and grants that don’t. Wanting your kids to qualify for more aid could just lead them to qualify for more debt.

Also, the FAFSA formula weighs income more heavily than assets. If you have a six-figure income and only one child in college at a time, you shouldn’t expect much need-based financial aid, regardless of what you do with your assets.

That said, there are some sensible ways to shield assets from the formula, and often they’re things you should be doing anyway: maxing out your retirement contributions, for example, and using any non-retirement savings to pay down credit cards, car loans and other consumer debt.

Using non-retirement savings to pay down mortgage debt helps with the federal formula, but may not help much with private schools that include home equity in their calculations. Either way, taking on a bigger mortgage with college looming is rarely a good idea.

You can get some idea of how much the federal formula expects you to pay for your children’s educations by using the “estimated family contribution” calculator at FinAid.org. Another great source of information is the book “Filing the FAFSA: The Edvisors Guide to Completing the Free Application for Federal Student Aid” by Mark Kantrowitz and David Levy.

Filed Under: College Savings, Q&A, Student Loans Tagged With: , ,
June 15, 2014 By

Q&A: Closing credit cards with annual fees

Dear Liz: When I opened my airline-branded credit card almost 10 years ago, it was well worth the $50 annual fee. I was able to book many flights for free because of the miles I earned and the airline’s generous rewards program. However, I moved a few years ago to a location that is not serviced by the airline. Now the airline’s reward card is my “last ditch emergency” card since I have two other cash-back rewards cards that offer a better return (I pay all my cards in full every month).

I know that annual fees on credit cards are not good, but I’m struggling with the decision on whether to keep it or not. It is the second-oldest credit account I have and about a third of the amount of credit I can use, and I am concerned about my credit score dropping if I close it. My credit score is excellent, but I am concerned about how much of a drop in my score this would cause. I did try to “convert it” to a cash-back credit card with no annual fee, but the bank wouldn’t do it. So now I’m stuck on what to do. Should I continue to pay the $50 annual fee to keep my credit score intact, or should I close it and see if I can increase my credit on my other cards?

Answer: Most good travel rewards cards these days charge annual fees, and those fees aren’t a big deal if you’re getting airline tickets or lodging that more than offset the cost. Your card may pay for itself with a single trip if it waives baggage check fees (as many airline-branded cards do).

If you can’t even wring that much value from the card, consider closing it. Given how much of your available credit the card represents, though, you might want to open another card first. Available credit matters far more to your credit scores than the age of your accounts. And even if you close this account, your history with it will continue to be reported for many years, so you shouldn’t hold off just because it’s your second-oldest card.

Filed Under: Credit Cards, Q&A Tagged With: , ,
June 15, 2014 By

Q&A: When to start Social Security when you don’t need it

Dear Liz: Most of the questions you answer about Social Security come from people who don’t have a lot of money saved. I agree with your advice that those people should delay starting benefits. That way their Social Security checks, which will be the bulk of their income in retirement, will be as large as possible. But what about those of us who won’t need the money? I will receive a good pension and thanks to real estate investments, my retirement income will exceed my current income should I retire at age 62. That means I will never have to touch my capital. I do not have any other debt and am fully insured.

My initial thought is that I should take Social Security as soon as I’m eligible and use it while I’m in good health for travel and other activities. A friend who is in a similar situation says to wait and enjoy the emotional safety that if the need arises, I can turn on the Social Security tap later and let some more money flow. If you don’t need the money now or later, but could have more fun earlier, should you take Social Security sooner?

Answer: The less you’ll need Social Security, the less it matters when you start it.

Starting benefits early locks you into lower payments for life and will result in significantly smaller lifetime benefits for most people. That’s in part because Social Security hasn’t adjusted its payment formulas even as life expectancies have expanded, so most people will live beyond the “break-even” point where delayed benefits exceed the amounts they could have received had they started earlier. Delaying benefits is particularly important for married people, since one partner is likely to outlive the other and will have to get by on a single check. Making sure that check is as large as possible will help make the surviving spouse’s final years more comfortable.

But all that assumes that you, like most people, would receive half or more of your retirement income from Social Security. If your Social Security is truly icing on the cake — you don’t need the money now, you (and your spouse) are unlikely to need it in the future, and you don’t care about maximizing your lifetime benefits — then start it whenever you want.

Filed Under: Estate planning, Q&A Tagged With: , ,
June 9, 2014 By

Q&A: Independent consulting and taxes

Dear Liz: I am a full-time employee who just started independent consulting work on the side. I have submitted my W-9 with the company with which I am a consultant, but I know the onus will be on me to set aside federal tax payments. Here’s my question: Will I pay state taxes on my consulting income? And if so, will those taxes be paid in the state where I live or the state where the company is based?

Answer: If you live in a state that taxes income, and you have income to tax, then yes, you’ll probably have to pay state income taxes on your net income — your gross revenue minus your expenses.

“Since you are in business for yourself, contracting with another company, you will pay taxes in the state where you do the work,” said enrolled agent Eva Rosenberg of the TaxMama.com site. “If you perform the services in your own state, that’s where your taxable responsibilities lie. However, if you frequently go to the client’s location and do work there, you will be liable for taxes in that state as well.”

A good rule of thumb is to set aside half of any money you make to cover the various taxes you’ll owe, Rosenberg said.

“Payroll taxes are 15.3%. If you’re making enough to live on, you’re in the 25% bracket at least. That’s 40%,” she said. “Depending on the state, that could be another 5% to 10%.”

You probably should make quarterly estimated tax payments to avoid a penalty. Business owners, especially newly minted ones, would be smart to hire a tax pro to help them navigate their obligations.

Filed Under: Q&A, Taxes Tagged With: , ,
June 9, 2014 By

Q&A: Using a car loan to establish credit

Dear Liz: Our son is graduating from college and needs a car for his new job. Is this an opportunity to help him establish a good credit rating? His credit union offers loans to first-time auto buyers who don’t have a credit history, but the interest rate is 8.4% (6 percentage points more than standard auto loans). We parents intend to help pay for the car, so we could provide a larger down payment or help with larger payments to pay off the loan sooner as a way to reduce the higher interest costs. Would doing either of these, however, lower the credit rating he might earn? He has no other debt and has two credit cards (co-owned by us) on which he pays monthly in full. Are there better ways to help him establish his own credit rating?

Answer: If your son is a joint account holder on two credit cards, he might not have to bother with a “credit builder” loan. He should already have credit histories and credit scores that would qualify him for better rates.
He should first check his credit reports at http://www.annualcreditreport.com, the federally mandated site where people can check their credit histories annually for free.

If he has credit histories, he can take the additional step of buying at least one of his FICO scores from MyFico.com. (He can buy a total of three, one for each credit bureau.) There are other sources for free scores, but they’re usually not the scores used by most lenders. He then can ask the credit union for a quote on the interest rate he’d be charged, given his score or scores. It probably will be lower than 8.4% if he has a good history with these cards.

If he doesn’t have credit reports in his own name, he probably is an authorized user rather than a joint account holder on your cards. (Some issuers don’t export the primary cardholder’s history with a card into an authorized user’s credit files, although many do.) In that case, the credit-building loan could be a good idea, particularly if you were willing to help him pay off the loan quickly. Although there’s some advantage to paying off a loan according to schedule, your son will get most of the credit-scoring benefit just by having the loan, and he’ll save by paying it off fast.

Another way you could help is by co-signing the loan, but then you’re putting your credit at risk. If he makes a single late payment, your credit scores could suffer. If the credit union is willing to make the loan, that’s usually a better way to go.

Filed Under: Credit & Debt, Q&A Tagged With: , , ,
June 1, 2014 By

Q&A: Medicare premiums

Dear Liz: I wanted to comment on the person who was wondering why her multimillionaire friend receives less Social Security. One reason could be that higher-income people pay more for Medicare, the health insurance program for people 65 and older. Instead of the standard $104 a month that most people pay, my wife and I pay about $375 each per month for Parts B and D. So if the person writing to you is thinking about net Social Security checks, Medicare would make quite a difference.

Answer: That’s a very good possibility. Some people don’t make the distinction between Social Security and Medicare. They’re separate government programs, but Medicare premiums are typically deducted from Social Security payments.

Filed Under: Q&A, Retirement Tagged With: , ,
June 1, 2014 By

Q&A: The best form of money to use while traveling through Europe

Dear Liz: My friend and I are widowed and really not money-wise. What is the best form of money to use in Europe, including Budapest, Vienna and various small towns? I’ve heard small-town merchants (and maybe even those in cities) don’t take credit cards, but even if they do, our bank charges substantial fees. I’ve also heard negative things about using ATMs. We’re going to be in most places only for one night, so getting each area’s currency would be cumbersome.

Answer: Americans accustomed to paying with plastic can be surprised to discover that merchants abroad, including some hotel owners, want to be paid in cash. Even businesses that accept credit cards may balk at processing U.S. cards, since our plastic lacks the more secure chip-and-PIN technology now used by most of the rest of the world.
So you’d be smart while traveling abroad to have multiple ways to pay and to choose methods that don’t ding you with excessive fees.

Let’s start with credit cards. Carry at least one with a Visa or MasterCard logo, because those are the most widely accepted brands in Europe. Call your issuers to see whether they charge foreign transaction fees. Many do, and these fees of up to 3% make every purchase more expensive than it needs to be. If all of your cards charge such fees, consider applying for one that doesn’t. Capital One waives foreign transaction fees on all of its cards, according to financial comparison site NerdWallet. Other cards that waive such fees, and which offer rich travel rewards, include Barclaycard Arrival World MasterCard, Chase Sapphire Preferred and BankAmericard Travel Rewards Credit Card.

Whichever card you use, call the issuer to let it know the dates you’ll be abroad. Otherwise your issuer may shut down your account for suspicious activity. Carry a backup card (and alert its issuer) in case your primary account is compromised or mistakenly blocked.

When you need local currency, the best way to get it is often from a bank ATM. Travel guru Rick Steves, who spends a few months in Europe each year and primarily uses cash, suggests you avoid “independent” ATMs run by companies such as Travelex, Euronet and Forex because of their often-high fees. Bank ATMs in Europe typically don’t charge usage fees, although your home bank may levy a $2 to $5 flat fee plus a foreign transaction fee of 1% or more for every withdrawal.

You can minimize usage fees by making infrequent but large withdrawals. Or you can use a checking account that doesn’t charge fees. Charles Schwab’s high-yield checking account offers unlimited ATM fee rebates worldwide with no foreign transaction fees, according to Brian Kelly of the travel rewards site ThePointsGuy.com. If you have an account with Capital One 360, the online bank, ATM fees are waived and the bank absorbs MasterCard’s 1% foreign transaction fee. USAA Bank charges a 1% foreign transaction fee but doesn’t charge a fee for the first 10 ATM withdrawals.

If you do find yourself carrying a lot of cash abroad, consider bringing a money belt that tucks under your clothes. That’s generally more secure than carrying money in a wallet or purse. And have a great trip!

Filed Under: Q&A, The Basics Tagged With: , , ,
May 26, 2014 By

Q&A: Social Security Benefits and Divorce

Dear Liz: I am 53 and divorced. My ex-husband died at the age of 49 and had contributed significantly to Social Security. I don’t plan to remarry. Would I be able to make any claim on his record as an ex-spouse when I reach age 62, or would he have had to reach retirement age for this to be possible?

Answer: If your marriage lasted at least 10 years, you could get the same benefits as a widow or widower. We’ll assume your ex was “fully insured” under Social Security, which means he paid enough into the system to qualify for benefits.

For the sake of brevity, we’ll also assume that you’re not disabled or caring for his minor or disabled child. (You could still qualify for benefits if any of these were true, but the rules would be somewhat different.)

Your survivors’ checks would be based on what he would have received had he survived until retirement (a sum known as his primary insurance amount). If he had been 62 or older when he died and had started receiving Social Security checks, your benefit would have been based on what he was actually receiving.

You can start survivors’ benefits as early as age 60 if you’re not disabled. If you start benefits before your own full retirement age, however, your benefits will be reduced because of the early start. Another thing to keep in mind is that if you don’t apply until age 62 or later and your own retirement benefits are larger than your widows’ benefit, you’ll get your own benefit instead.

On the other hand, you’re allowed to switch from his benefit to your own at any point between age 62 and age 70. It’s possible that your own benefit, left untouched to grow, eventually could exceed your survivors’ benefit. Obviously, this decision will involve crunching some numbers to see which approach makes the most sense. The Social Security Administration suggests you contact your local office or call (800) 772-1213 to learn how much you could receive on your ex’s work record, since that’s not information you can access online.

One other thing you should know: Since you’d be getting survivors’ rather than spousal benefits, you could remarry after you reach age 60 without endangering your checks. Those whose exes are still alive have to refrain from remarrying if they want their spousal benefits to continue.

Filed Under: Divorce & Money, Estate planning, Q&A Tagged With: , , ,
May 26, 2014 By

Q&A: Regular 401(k) vs Roth 401(k)

Dear Liz: I just turned 50. My company has an option to contribute pretax money to a regular 401(k) or after-tax money into a Roth 401(k). Should I put the maximum contribution ($17,500) plus the catch-up ($5,500) into the Roth? Or should I split my contributions?

Answer: Given that you’re close to retirement, putting most of your contributions into the traditional 401(k) is probably the way to go.

Most people’s tax brackets drop once they retire. That means you can benefit from a bigger tax break now and qualify for a lower rate on your future withdrawals.

If you had a few decades until retirement, the math might be different. Younger people with good prospects may well be in a lower tax bracket currently than they’ll eventually be in retirement. In their case, it can make sense to gamble on making after-tax contributions to a Roth 401(k), betting that their tax-free withdrawals in retirement will be worth much more.

You may want to put some money into the Roth 401(k) so you’ll have flexibility with your tax bill in retirement. Being able to choose between taxable and nontaxable options gives you what financial planners call tax diversification. But the bulk of your contributions should still go to the traditional 401(k).

Filed Under: Investing, Q&A Tagged With: , , ,
May 26, 2014 By

Q&A: An offer of “help”

Dear Liz: My husband and I lost our home because of unemployment and being underwater (the value of the house was less than the mortgage). We now both are working full time and saving to buy another home. My father-in-law offered to help us by selling us a rental he owns and giving us a loan for $150,000. We also would have to get another loan of about $100,000.

In addition to paying him principal and interest, my father-in-law also wants us to pay the $900 rent he was getting for the home. Please advise us if you think this is a good arrangement. Is it fair for him to ask for the rental money too?

Answer: Of course not. He’s essentially asking you to pay for the property twice.

Most parents instinctively want to give their offspring a better deal than they would give a stranger. Your husband’s father is the exception — he’s asking you to agree to a deal that no stranger would consider.

Given this man’s inclination, you probably don’t want him as your banker or your landlord, let alone both. Keep saving your money and improving your credit scores so you can swing a home purchase on your own.

Filed Under: Q&A, Real Estate Tagged With: , ,