Ask Liz Weston

Get smart with your money

q&a

Q&A: But not for this octogenarian

By

Dear Liz: I am 81 and opened a Roth IRA before retiring 15 years ago, but have not added to that account since. Recently I realized a cash windfall and would like, if possible, to deposit that money in my existing Roth IRA, but I am confused about the limitations and rules on doing so. My current income is from interest, Social Security, a small pension and 401(k) withdrawals. Can you help me with the applicable rules that would govern additions to a Roth IRA in my situation, and can I do so?

Answer: Retirement account rules can be complicated in some respects, but not in this particular case. If you don’t have earned income — such as wages, salaries, bonuses, commissions, tips or net earnings from self-employment — you can’t contribute to an IRA or a Roth IRA.

Q&A: Retirement accounts for teenagers

By

Dear Liz: My 16-year-old grandson has a job stocking shelves at a large grocery chain. His parents opened a low-cost minors investment account, which he has now funded to the max of $6,000. Is there anywhere else he can invest his earnings?

Answer: It sounds like what your grandson funded was an IRA or a Roth IRA. These retirement accounts have an annual $6,000 contribution limit for people under 50. (People 50 and older can make an additional $1,000 “catch up” contribution.) The Roth IRA has income limits, but your grandson won’t have to worry about those until he earns more than six figures.

Starting to save so young for retirement is a marvelous idea, since all those decades of compounded returns will really add up. Let’s assume two people save $6,000 a year and earn a 7% average annual return. The person who starts saving at age 36 would accumulate about $650,000 at age 66. The person who starts at age 16, by contrast, would have about $2.5 million.

Your grandson’s parents were smart to open a low-cost account, presumably at a discount brokerage. Next to starting early and investing as much as possible, keeping fees low is the best way to maximize how much he ultimately accumulates.

The simplest way to start investing would be to choose a low-cost target date mutual fund. He would choose one with a date closest to his likely retirement age, so one that’s labeled something like “Target Date 2070.” If you want to encourage him to learn more, consider buying him a book about investing, such as “O.M.G.: Official Money Guide for Teenagers” by Susan and Michael Beacham.

Q&A: The case for filing a tax return

By

Dear Liz: A couple on Social Security who hadn’t received their stimulus payments wrote that they “do not make enough income to file tax returns.” It might be worthwhile to let your readers know that, even if one’s income is below the amount where they must file a tax return, they nevertheless may file a tax return. I volunteer at a site where we do free tax preparation, and we encourage filing even when not required. It can help identify or potentially prevent identity theft, and it provides documentation of tax status that may be helpful in the future.

Answer: Thanks for that tip. People receiving Social Security weren’t required to file tax returns to receive their stimulus payments of up to $1,200 each, but as you noted there can be other advantages to filing even when it’s not necessary.

Most stimulus payments have been delivered at this point, although a congressional committee estimated 30 million to 35 million had not been sent. If you got a letter saying your payment had been sent, but you haven’t received the money, you can ask the IRS to trace your payment by calling (800) 919-9835.

Q&A: Coronavirus stimulus checks, tax refunds and the IRS’ backlog hell

By

Dear Liz: I’m a CPA. I sent out your recent column about IRS backlogs to two clients just this morning. It’s nice to have a published article backing up what I’ve unfortunately been having to tell clients for a few weeks now.

Answer: Pandemic-related shutdowns, years of congressional budget cuts and the effort required to push out more than 159 million stimulus checks have left the IRS facing a massive backlog. National Taxpayer Advocate Erin Collins estimated that 4.7 million unopened paper tax returns had accumulated as of mid-May. Taxpayers who filed paper returns and are due a refund may be in for “a long wait,” Collins told Congress last month. Many lower-income people and those who lost jobs are in dire need of the money, but it is unclear when they will get it.

Q&A: Arizona mom doesn’t want a trust

By

Dear Liz: My mom is 93 and lives in Arizona. I’m in California. She refuses to complete a revocable living trust, and after several years, I have given up with the request. She states she has added my name to the deed to the house and her bank account. She believes she has done enough. She states she completed a will that she got at Office Max. What would be my first steps if she precedes me in death?

Answer: She may be stubborn, but she’s making mistakes that could impair her quality of life and saddle you with a big, unnecessary tax bill. Consider trying to persuade her to fix these errors before it’s too late.

Not having a living trust isn’t necessarily a crisis. Yes, a living trust would allow your mother’s estate to avoid probate, the court process that typically follows death. But probate in Arizona typically isn’t as long or expensive as it is in California.

What’s more important is having documents in place that allow you (or someone else) to handle her finances and make healthcare decisions should she become incapacitated. Without that, you might have to go to court, which could be a long and expensive process (especially now, with the backlog created by COVID-19-related shutdowns).

A living trust also would make it relatively easy for a trusted person to step in and handle her affairs if necessary. In the absence of a living trust, you should insist she fill out an advanced care directive that would allow a trusted person to make healthcare decisions for her. There are free versions for each state at PrepareForYourCare.org, along with instructions about how to make it valid. If she doesn’t have a computer, you can print out Arizona’s version and send it to her.

She also needs to create a power of attorney for finances. Offer to hire an estate planning attorney to do this, since it’s a relatively simple form and not likely to be expensive. There are online forms and software that can do this if she absolutely refuses to consult an attorney.

An estate planning attorney might also be able to help you get off the deed. When she added you to the deed, your mom signed you up to pay capital gains taxes you wouldn’t owe otherwise. All the appreciation in the home that happened during her lifetime would be taxable, when it doesn’t need to be.

Let’s say she bought the home for $25,000 and it was worth $250,000 when she died. If you inherited the home and sold it for $250,000, you would owe no capital gains taxes.

If she gives you the home before her death — which she essentially did by adding you to the deed — you don’t get the valuable step-up in tax basis that keeps you from having to pay capital gains taxes on the appreciation that happened during her lifetime. Instead, you would owe capital gains taxes on the $225,000 appreciation. (This is a simplified example meant to help you and her understand the magnitude of the blunder.)

Arizona is one of the many states that has “transfer on death” deeds for real estate. These deeds would allow the house to avoid probate and come directly to you. That’s almost certainly a better solution than the one she chose.

Q&A: Still no coronavirus stimulus check? You’re not alone

By

Dear Liz: Both my wife and I are on Social Security retirement benefits. We were told we had to do nothing to get our stimulus payment even though we don’t file tax returns. We’ve made two calls to the IRS and gotten no suggestions from them.

Answer: If your Social Security payments are direct deposited, your relief payments should have been sent to that bank account. If you don’t have direct deposit, your payments should have been mailed. You (or a computer-savvy friend) can check to see the status of your payment at the “Get My Payment” section of the IRS.gov website.

If your payment isn’t on the way or there’s another problem, you should reach out to the IRS. It’s not clear from your statement — “no suggestions from them” — if in your previous attempts you actually reached a human being or just a recording. Please make sure you’re calling the right number because the stimulus payment number — (800) 919-9835 — is different from the general taxpayer hotline. You may have to be patient because hold times can be long.