q&a Archives - Page 95 of 106

February 9, 2015 By Liz Weston

Q&A: Maxing out retirement savings

Dear Liz: My husband and I are in our late 40s. We’re in a good financial position and trying to max out our retirement savings. We have small traditional IRAs and are now above the income limit to deduct contributions to it. We have Roth IRAs that we converted from traditional IRAs several years ago (our income is borderline for being able to contribute directly to a Roth). We also recently got a Health Savings Account that we are maxing out and saving for retirement. But the bulk of our retirement savings is in our 401(k)s, which we max out every year. I hear I should have a mix of pre-tax and after-tax sources of income in retirement. Can I wait until the first year we retire and roll some of my 401(k) into a traditional IRA and then convert it to a Roth, at presumably a lower tax rate due to lower income? Or would it be better to contribute now to a Roth 401(k) at work instead of a regular 401(k), even knowing that our tax rate will probably be lower in retirement?

Answer: You already have a mix of pre- and after-tax sources of income in retirement. Withdrawals from your Roth IRAs will be tax free in retirement, as will your HSA withdrawals if they’re used for medical expenses.

Roth conversions and contributions to Roth 401(k)s make the most sense when you expect to be in a higher tax bracket in retirement, rather than a lower one. Otherwise, you’re giving up a tax break now (your deductible contributions) for what’s likely to be a lesser tax benefit later. Conversions at retirement are particularly tricky, since you may not have decades of tax-free compounding ahead of you to make up for the fact that you accelerated the tax bill.

Talk to a tax pro, but it’s likely that maxing out your regular 401(k)s is the best move.

Filed Under: Investing, Q&A, Retirement Tagged With: IRA, q&a, Retirement, Savings

February 9, 2015 By Liz Weston

Q&A: Unsolicited financial advice

Dear Liz: Your answer to the financially savvy brother whose advice is lost on his sisters was a bit harsh and shortsighted, so my guess is that you may not know anyone who has siblings who will continue for the next few decades to need help. It is hard to deny a sibling help while enjoying the benefits of prudent saving. It is harder to watch a sibling suffer, even if they should have avoided it. Seems to me completely different from giving advice about child rearing, which I might add is sometimes simply a statement of the obvious and one that should not even have to be mentioned, like don’t let your kids scream in public. This young man is almost certainly going to live with either guilt over not supporting his sisters when the mother dies or the frustration of having to give up hard-earned funds to avoid the guilt. You should have said he needs to write them a letter citing the guidance given and making it clear not to come to him when they get in trouble.

Answer: Thank you for providing a perfect example of why people find unsolicited advice so annoying.

The brother asked what he could say to his sisters to make them more financially responsible and to his mother to make her realize she should stop supporting them. The answer, of course, is nothing. There are no words that can make other people change unless they want to change. Since his family has made clear they’re not interested in his advice, continuing to offer it would be pointless.

The brother didn’t express concern that he would wind up supporting either his mother or his sisters. Even if he has such concerns, writing such a letter would be churlish, at best. If he’s asked for help, he can make his position known then.

Filed Under: Q&A Tagged With: financial advice, follow up, q&a

February 2, 2015 By Liz Weston

Q&A: Financial aid and divorce

Dear Liz: My ex-wife and I are about to start the financial aid process for our eldest child, who goes to college in the fall. My ex happens to have a higher income than me, and has asked me if I’d be willing to have different aid scenarios calculated based on our different incomes and assets. From all the research I’ve done, though, it seems she is the one who needs to file the Free Application for Federal Student Aid, since she’s the custodial parent. It’s not possible to choose who the custodial parent is for the purposes of financial aid, right?

Answer: It may be possible, but you have to make the choice well before you file the FAFSA form.

For federal financial aid purposes, the custodial parent whose information is used to calculate financial need is the parent with whom the child lived the most during the 12 months before the FAFSA is filed. With joint custody, the custodial parent is typically the one who provided the most cash support.

Some divorced parents opt to revise their children’s living arrangements so that the lower earner becomes the custodial parent. That may require a trip to court to revise a custody agreement. Also, the financial situation of any stepparents would have to be part of the equation, since the income and assets of the custodial parent’s spouse (the stepparent) are factored into the federal formula.

Filed Under: Divorce & Money, Q&A, Student Loans Tagged With: Divorce, q&a, Student Loans

February 2, 2015 By Liz Weston

Q&A: Brokerage follow-up

Dear Liz: You recently explained the insurance limits for brokerage accounts covered by the Securities Investor Protection Corp. I recently retired from the brokerage industry and wanted to add that many firms have additional insurance coverage beyond the SIPC limits.

Answer: Good point. Brokerages often purchase additional coverage from private insurers on top of what’s provided by the SIPC. To find out how much coverage may be available, ask your brokerage or conduct a search with the brokerage name and “how are my accounts protected” as a search phrase.

Filed Under: Investing, Q&A Tagged With: brokerage, follow up, Investing, q&a

January 26, 2015 By Liz Weston

Q&A: Keeping investments in one brokerage

Dear Liz: I recently retired at 56 and am receiving a pension. My wife is set to retire next year at 56 and will also receive a pension. I chose to leave my 401(k) in my employer’s plan but am planning to consolidate it with my wife’s 457 and four 403(b) accounts once she retires. We also have a portfolio of stock and bond mutual funds. I’d like to consolidate everything at one brokerage firm to simplify record keeping, but what’s the level of risk of having all our investments with one company? We have about $3 million in assets total.

Answer: You can’t combine your retirement accounts with your wife’s, but you certainly can move everything to a single brokerage firm to reduce fees and make it easier to coordinate your investment strategy.

Whether you should is another matter. The chances of a well-established brokerage firm going bankrupt or suffering massive fraud are slim, but it does happen: Lehman Bros. and Bernard L. Madoff Investment Securities are two examples from the 2008 economic meltdown.

Investors have some protection against bankruptcy and fraud when their accounts are covered by the Securities Investor Protection Corp. Protected accounts are insured for up to $500,000 in securities and cash, with a $250,000 limit on the cash.

SIPC uses a concept called “separate capacity” to determine coverage when investors have multiple accounts. You can learn more about coverage limits on its website.
You can expand your total protection by using different types of accounts. Accounts held in your name alone are covered up to $500,000, and you can get another $500,000 in coverage for joint accounts. Your individual retirement accounts and Roth IRAs are also treated separately, and each type of account gets another $500,000 of coverage. (You don’t get $500,000 on each IRA if you have multiple accounts, though. SIPC combines all your traditional IRAs and treats them as one.)
Let’s say you and your wife have individual brokerage accounts as well as a joint account. Then we’ll suppose you each have IRAs as well as Roth IRAs, for a total of seven eligible accounts. That could give you a total of $3.5 million of SIPC coverage.

Of course, the amounts in your accounts may not line up so neatly with the coverage limits. You might not have any Roth IRAs, for example, but have more than $500,000 in that 401(k) you were hoping to roll over to an IRA, or your wife may have more than $500,000 in her retirement accounts (which, if rolled over into one or more IRAs, would be treated as one account). If you leave your 401(k) with your employer, on the other hand, you would be covered under federal employee benefit laws that require defined contribution accounts to be held in trust, separate from the company’s own funds, which would protect your account regardless of its size.

There’s a chance you could be made whole even if your accounts exceed SIPC limits. That was the case with Lehman, where individual retail customers got all their money back. With Madoff, everyone with claims under $925,000 is expected to be made whole, while the remaining claimants have gotten about half their money back in addition to the $500,000 advance SIPC paid out.

But you’ll have to assess your risk tolerance. If you have none, then use more than one brokerage firm.

Filed Under: Estate planning, Investing, Q&A, Retirement Tagged With: Estate Planning, Investing, q&a, Retirement

January 26, 2015 By Liz Weston

Q&A: Could reducing your credit limit hurt your credit score?

Dear Liz: I asked one of my credit card issuers to increase my credit line from $2,000 to $5,000 but was turned down. The reason given was that I have too high credit limits from my other cards. Combined, I have about $100,000 in available credit, although I’ve never used more than $15,000 at any time and always paid promptly. If I ask these credit card companies to reduce my available credit, will I damage my FICO credit scores, which are around 785?

Answer: Your credit scores may well take a hit if you reduce your available credit, and there’s no guarantee that doing so will induce the issuer you’re courting to raise your limit. If this card is relatively recent, you may find that simply waiting a few months and asking again will get you the credit line increase.

If not, you have plenty of other options. Credit card companies are falling all over themselves to attract creditworthy customers like yourself. Check out some of the offers you’ll find at credit card comparison sites such as NerdWallet, CreditCards.com, CardRatings, LowCards.com and others.

Filed Under: Credit Cards, Q&A Tagged With: Credit Cards, Credit Scores, q&a

January 19, 2015 By Liz Weston

Q&A: When is the right time to buy?

Dear Liz: My wife and I are young (25 and 22). We owe no one money and have built up an emergency fund with six months of expenses. We both contribute enough to our 401(k)s to get the maximum match, and I contribute the maximum to my company’s stock purchase plan. Currently we are saving $2,500 to $3,000 a month for a future home purchase. My question is will we be able to buy a decent house without getting a mortgage in three to four years at this rate? Is this something we should do? Or should we have a large down payment and pay the mortgage off quickly? We both have below average credit and mostly use cash for everything.

Answer: Since you two are so good at saving, you presumably can do the math required to determine how much you’ll have in three or four years. So what you’re asking is whether home prices will accelerate so fast in your area that what may seem like enough to buy a decent house now won’t actually buy one in the future.
The answer is: Nobody knows for sure.
The best approach is to keep your options open — and that means you’ll need to work on improving those credit scores. A year or two of using credit cards lightly but regularly, and paying off your balances in full each month, should help pull up your numbers. You could speed up the rehabilitation process by getting an installment loan such as a car loan or personal loan. Managing different types of credit responsibly is typically good for your scores.
If you wind up getting a mortgage, you may decide to pay it off quickly, or you may have better things to do with that money such as boosting your retirement accounts or saving for college educations.

Filed Under: Q&A Tagged With: mortgage, q&a, real estate

January 19, 2015 By Liz Weston

Q&A: Taking a mortgage for the tax deduction

Dear Liz: My wife and I are both 66 and in good health. Currently we have about $1.2 million in IRAs. We’re receiving about $80,000 a year from a pension and $110,000 in salary. We have been aggressive about reducing any lingering debt. So we think we are in good shape for me to retire within the next year or so. If we decide to stay in our home rather than move, we will need to make some significant repairs and improvements. We were thinking of taking out a $200,000 mortgage to pay off our last remaining debt ($50,000 on a home equity line of credit) and fund the renovations. This would give us a better tax deduction and not incur the high taxes we would pay by making an IRA withdrawal. Our grown children have expressed no interest in the home after we die, so it probably would be put up for sale at that time. Does this seem like a reasonable approach if we choose to go that route? Anything we haven’t considered?

Answer: Considering the tax implications of financial moves is smart, but you shouldn’t make decisions solely on that basis. You especially shouldn’t take on mortgage debt just for the tax deduction. The tax benefit is limited to your bracket, so for every dollar in mortgage interest you pay you would get at best a federal tax benefit worth 39.6 cents. State income tax deductions might boost that amount, but you’d still be paying out more than you get back in tax benefits. You also would be locking yourself into debt payments at a time in life when most people prefer the flexibility of being debt-free.

If you’re comfortable having a mortgage in retirement, though, you might want to consider a reverse mortgage. Although once considered expensive loans of last resort for people who were running out of money in retirement, changes in the federal reverse mortgage program caused financial planners to reassess the no-payment loans as a potential wealth management tool. The idea is that homeowners could tap the reverse mortgage for funds, especially in bad markets, instead of depleting their retirement accounts.
Reverse mortgages are complex, though. The upfront and ongoing costs can be significant. Because you don’t make payments on the money you borrow, your debt grows over time and reduces the amount your heirs might get once the home is sold. You’d be smart to find a savvy, fee-only financial advisor to assess your situation and walk you through your options.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: Estate Planning, IRA, mortgage, q&a, tax deduction

January 12, 2015 By Liz Weston

Q&A: Battling over mother’s estate

Dear Liz: Our mom did a wonderful job of preparing her estate, but she made a mistake in that she started giving away her real estate holdings to her two children a few months before her untimely death. She died before she had the chance to equalize these transactions. As her son and executor, I equalized the real estate after her death. My sister is now protesting this because she said “legally” what was given away before death is not part of the estate, but I say that our mom would have wanted this equalized because she was very firm in her belief that her assets be divided equally. What’s your experience?

Answer: You just provided an excellent example of why it can be problematic to have an executor who has a personal stake in how an estate is settled.

You wouldn’t be the first executor to decide that what Mom really wanted was for you to reap a larger benefit than your sibling, despite the explicit terms of a will or trust. Even if the estate documents gave you some discretion, you should have consulted an estate-planning attorney before deciding to help yourself to a bigger portion of your mother’s assets.

This is more than an ethical issue. Executors have a legal responsibility known as a fiduciary duty to the estate and all its beneficiaries. Basically, that means acting with the utmost integrity and putting the interests of the estate and beneficiaries ahead of your own.

Your sister may be able to file a lawsuit against you or ask a court to remove you as executor. You shouldn’t let it come to that. Talk to an attorney now about the best way to resolve this situation amicably.

Filed Under: Estate planning, Q&A Tagged With: Estate Planning, q&a, will

Search