Ask Liz Weston

Get smart with your money

q&a

Q&A: Boosting Credit Scores

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Dear Liz: I’m frustrated with my FICO scores. At one point they were well into the 800s and now they languish in the 720 to 730 range. I have no debt — no mortgage or car loan — and fully pay off two credit cards monthly. I have millions (fact, not bragging) in assets with no liabilities. I don’t anticipate taking any loans but it is so odd to me. Why is this?

Answer: You likely had at least one installment loan, such as a mortgage or car loan, when your scores were near the top of FICO’s typical 300-to-850 scale. You can still have good scores without an installment loan — and you do — but the highest scores require you to have a mix of credit types.

You might be able to add a few points to your scores by paying attention to your credit utilization — the less of your credit limit you use, the better. Adding another card or two may ding your scores in the short run but also could add points long term.

Or you can just be happy as you are. As long as you continue to use your cards responsibly, you’ll continue to have scores that are “pretty enough for all normal purposes” — in other words, that will get you good rates and terms should you decide to apply for additional credit.

Q&A: Here’s a strategy to save for retirement in a rush

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Dear Liz: I’m hoping to retire in three years so I’m saving as much as possible. I’m maxing out my contributions to a 403(b) retirement plan, a 457(b) deferred compensation plan and a Roth IRA. I also contribute $1,000 each month from my paycheck to an after-tax defined contribution plan offered by my employer. A representative from the plan provider told me I should move the after-tax money into a Roth IRA via monthly rollovers as that will be “more tax efficient.” It means a monthly call, which I am happy to do if that is to my advantage. The rep explained it as “a backdoor Roth loophole” that allows one to contribute to a Roth IRA above and beyond the $7,000 limit. Is this advisable?

Answer: If your goal is to stuff more money into a Roth, then this could be a good way to do it.

Roths offer the option of tax-free money in retirement without minimum distribution requirements. That means you can leave the money alone to continue to grow tax free or use it to better manage your tax bill in retirement.

The ability to contribute directly to a Roth phases out with modified adjusted gross incomes of $140,000 for singles and $208,000 for married people filing jointly. People above those income limits can do a “backdoor Roth” by contributing to a traditional IRA and then converting the money to a Roth, since there’s no income limit on conversions. Taxes are owed on the portion of the conversion that represents pre-tax contributions and earnings, so this is usually a technique best used by people who don’t have big pre-tax IRAs.

The “mega backdoor Roth” puts this strategy on steroids. Instead of being held to the usual $6,000 annual IRA contribution limit (or $7,000 for people 50 and older), people make after-tax contributions of up to $58,000 a year to a workplace plan and then convert that money to a Roth IRA. The only tax owed would be on any gains the after-tax money earned between the time you contributed it and the time you converted it. You can have a big pre-tax IRA and still use this technique without that IRA triggering a lot of taxes.

While some plans require you to have left your job before you can make these rollovers, others — like yours — offer “in service” conversions that allow you to convert as you go, which can help minimize your tax bill. People who have to wait until they leave their job to convert will have to pay taxes on any gains the after-tax money has earned. Converting as you go minimizes the taxable gains and instead gets the money into the Roth so it can start growing tax free for you sooner. A monthly call seems like a small price to pay for this benefit, although sometimes the process can be automated. You might ask your employer if they could make that option available.

The $58,000, by the way, is the limit for all contributions to qualified plans. The money you contribute to your 403(b) and 457(a) is deducted from that limit, as are any matches your employer gives you. It’s typically a good idea to max out those pre-tax options, the way you’re doing, before you make any after-tax contributions.

Q&A: They paid off the mortgage rather than save for retirement. Now what?

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Dear Liz: My wife and I aggressively paid down our mortgage and now have it paid off, but we don’t have much saved for retirement. I make about $90,000 a year and will receive a teacher’s pension that will replace between 30% and 60% of that (depending on what option we choose) when I retire in about 10 years. It probably won’t be enough to live on. We will receive no Social Security benefits. We have no other debts, and we would like to make up for lost time as best we can on retirement preparation. What is your best advice for people like us who have diligently paid off their mortgage but have not diligently put money away for retirement?

Answer: The older you get, the harder it is to make up for lost time with retirement savings. You probably can’t do it if retirement is just a few years away.

This is not to make you feel bad, but to serve as a warning for others tempted to prioritize paying off a mortgage over saving for retirement.

If you’re in your 50s, you’d typically need to save nearly half your income to equal what you could have accumulated had you put aside just 10% of your pay starting in your 20s. The miracle of compounding means even small contributions have decades to grow into considerable sums. Without the benefit of time, your contributions can’t grow as much so you have to put aside more.

But you can certainly save aggressively and consider a few alternatives for your later years.

Once you hit 50, you can benefit from the ability to make “catch up” contributions. For example, if you have a workplace retirement plan such as a 403(b), you can contribute as much as $26,000 — the $19,500 regular limit plus a $6,500 additional contribution for those 50 and older.

You and your spouse also can contribute as much as $7,000 each to an IRA; whether those contributions are deductible depends on your income and whether you’re covered by a workplace plan. If you’re covered, your ability to deduct your contribution phases out with a modified adjusted gross income of $105,000 to $125,000 for married couples filing jointly. If your spouse isn’t covered by a workplace plan but you are, her ability to deduct her contribution phases out with a modified adjusted gross income of $198,000 to $208,000. (All figures are for 2021.)

If you can’t deduct the contribution, consider putting the money into a Roth IRA instead because withdrawals from a Roth are tax free in retirement. The ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $198,000 and $208,000 for married couples filing jointly.

If possible, a part-time job in retirement could be extremely helpful in making ends meet. So could downsizing or tapping your home equity with a reverse mortgage. A fee-only financial planner could help you sort through your options, as well as help you figure out the best way to take your pension when the time comes.

Q&A: When credit scores are fine

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Dear Liz: I was once told that the reason my credit score wasn’t higher was an insufficient credit history. Now I am doing what you have recommended by charging a monthly security alarm service to one credit card, a weekly church donation to another and satellite TV to a third. All are paid off each month. I checked my credit score recently and read that the reason my score isn’t higher is that I now have too many cards with balances. My score is around 860 but the comment concerns me. Should it?

Answer: Most credit scores are on a 300 to 850 scale. If your score is at or near the top of that range, you’re doing fine. Scores over 760 or so generally get the best rates and terms from lenders (the cutoff is often 740 for mortgage lenders). Higher scores just get you bragging rights.

The services that provide you with credit scores often give you automated reasons why your scores aren’t higher. Those messages can be helpful when you’re trying to build or rebuild credit. The higher your scores, though, the less helpful those messages seem to be. Even if you could fix the “problem” they’re pointing out, there’s no guarantee your scores would increase.

Q&A: Retirement saving after layoff

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Dear Liz: My husband and I are both in our early 50s and have been contributing the full amount to each of our 401(k) plans, plus the catch-up amounts since we turned 50. I was laid off in February 2020 and had only contributed $3,000. I had assumed I’d get a new job quickly, but as of now, I still have not. Fortunately, my husband still has a good job and has been able to make his full contribution plus the catch-up. Is there any way we can increase my contribution to retirement savings at this point? Can I fund an IRA if I already contributed to a 401(k)? We don’t want to lose any more ground.

Answer: The fact that you were both contributing the maximum amount — $26,000 each, or $52,000 total — is impressive. That, plus the fact that you’re still able to contribute given your unemployment, indicates your household income could affect your ability to deduct your IRA contributions.

You can still make the contributions, however. Anyone with earned income can contribute as much as $6,000 to an IRA (or $7,000 if you’re 50 or older) even if they’re covered by a workplace plan such as a 401(k). There used to be an age limit for IRA contributions, but that’s been eliminated. You have to earn at least as much as you contribute in the form of wages, salary or self-employment income. If you only earned $4,000 in 2020, for example, that’s the maximum you could contribute to an IRA.

Unemployment insurance doesn’t count as compensation, so you can’t use that — or interest, dividends, pension payments and other such nonwage income — to determine your contributions.

If you were covered by a workplace plan at any point in 2020, the ability to deduct your contribution phases out for modified adjusted gross incomes between $104,000 and $124,000 for married couples filing jointly for 2020. (The phaseout range rises to $105,000 to $125,000 for 2021.)

If you can’t deduct your contribution, consider putting the money instead into a Roth IRA if possible. You don’t get an upfront tax deduction, but withdrawals are tax-free in retirement. The ability to contribute to a Roth IRA starts to phase out with a modified gross income of $196,000 in 2020 (and $198,000 in 2021).

If your income is too high and you don’t already have a large IRA, you could use the “back door Roth” maneuver by contributing to a regular IRA and then converting it to a Roth, since there are no income limits on conversions. (You have to pay taxes on any pretax money that’s converted this way, which is why this might not be an ideal approach for those with big IRAs.)

You also can open up a taxable brokerage account and invest an unlimited amount of money. Again, there’s no upfront deduction, but investments held for at least a year can qualify for favorable capital gains tax rates.

Investing in accounts with different tax treatments is a good idea in general, since it can help you better control your tax bill in retirement.

Q&A: How to keep your lightly used credit cards from closing

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Dear Liz: I had a credit card that didn’t expire until 2024 but the issuer closed my account because it hadn’t been used in a few years. During these difficult times, I didn’t want to get into a lot of debt by using too many cards. The issuer should have let me know this could happen so that I could have used it at least once a year.

Answer: You’re smart not to want to charge your way into debt. If you want to keep a credit card from being closed for inactivity, though, you need to use it — and probably more than once a year.

One way to do so is to charge a recurring cost, such as a streaming video subscription, to the card. You can set up the payment to be automatic as well. You should still review the account’s transactions every month to ensure everything is working as planned and no fraudulent charges have been made. But otherwise, this approach is a low-effort way to keep open your access to credit.