Thursday’s need-to-know money news

Today’s top story: What Equifax’s credit score miscalculations mean for consumers. Also in the news: 5 ways to feel richer (even if you’re not), mortgage rates to stay high in August, and who should consider a spousal IRA.

What Equifax’s Credit Score Miscalculations Mean for Consumers
Equifax, one of the three major credit bureaus, announced that a computer coding error resulted in the miscalculation of credit scores for consumers in a three-week period between March 17 and April 6.

5 Ways to Feel Richer (Even If You’re Not)
In some ways, feeling “rich” is less about how many zeroes you have in your bank account and more about knowing how to use them to get what you want out of life.

Mortgage Rates Unlikely to Cool in August
Mortgage rates will likely rise in August as the Federal Reserve continues to yank interest rates higher.

Who Should Consider a Spousal IRA, According to a Financial Planner
You should try to find new ways to save for retirement. For some people, a spousal IRA is an option.

Q&A: IRS changes on required withdrawals

Dear Liz: When informing me of my required minimum distribution for 2022, my brokerage has apparently used a distribution period that differs from the one used in past years. This results in a distribution amount that’s noticeably smaller. I recall there was some talk of revising the IRS tables, but has this been done?

Answer: Yes. The IRS has updated the life expectancy tables used to calculate how much people must withdraw from their retirement accounts to reflect longer lifespans. That’s good news for people who withdraw only the minimums each year, since their required distributions will be smaller and the rest of their balances can continue to grow tax deferred.

Q&A: How contribution rules differ for IRA and 401(k) accounts

Dear Liz: I recently changed jobs. Typically I max out my 401(k) contributions each year. I contributed $20,700 to my previous company’s plan before quitting. Eligibility for my new company’s 401(k) doesn’t kick in until after 12 months of continuous employment, so I won’t be able to access this benefit until 2023. Can I set up an IRA or Roth IRA to reach the $27,500 limit for people 50 and older? I am married, filing jointly and our combined income exceeds $214,000.

Answer: Please talk to your company about fixing this outmoded requirement, which is costing its workers enormously in lost matching funds and compounded returns. Most companies have much shorter waiting periods, and the most enlightened employers enroll workers immediately. It’s hard enough to save adequately for retirement without an arbitrary yearlong delay.

The limits for contributing to workplace plans are separate from those for IRAs and Roth IRAs. For 2022, the limits for 401(k)s are $20,500 for people under 50 and $27,500 for people 50 and older. The contribution limits for IRAs (regular or Roth) are $6,000 for people under 50 and $7,000 for people 50 and older.

If you had access to a workplace plan at any point during the year, your ability to deduct your contribution would phase out with modified adjusted gross income between $109,000 and $129,000 if you are married filing jointly, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. The phaseout is between $68,000 and $78,000 for single taxpayers.

Normally when you can’t deduct an IRA contribution, you’re better off contributing to a Roth IRA. Contributions to a Roth aren’t deductible but withdrawals are tax-free in retirement.

However, the ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $204,000 and $214,000 for married joint filers and between $129,000 and $144,000 for single filers.

If you can’t contribute directly to a Roth, you could consider what’s called a “back door” Roth contribution, in which you contribute to a regular IRA and then convert the money to a Roth. Although direct Roth contributions have income limits, Roth conversions do not. However, you are required to pay income taxes on a typical conversion, so this maneuver works best if you don’t already have a large pretax IRA.

Q&A: The rules have changed on inherited IRAs. Here’s what you need to know

Dear Liz: My husband and I have a combination of traditional and Roth IRAs naming our children and grandchildren as beneficiaries. With the passage of the Secure Act requiring distribution of inherited IRAs within 10 years, we want to revise our plan of leaving all of the investments to our children, as such inherited income would affect their tax bracket also. Do you have recommendations to alter the inherited IRAs to avoid this issue? Our annual fixed income puts us at the top of our tax bracket, meaning we usually cannot manage a traditional IRA to Roth conversion.

Answer: The Secure Act dramatically limited “stretch IRAs,” which allowed people to draw down an inherited IRA over their lifetimes. Now most non-spouse inheritors must empty the accounts within 10 years if they inherited the IRA in 2020 or later.

There are some exceptions if an heir is disabled, chronically ill or not more than 10 years younger than the IRA owner, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. These “eligible designated beneficiaries” can use the old stretch rules, as can spouses. Minor children of the IRA owner can put off withdrawals until age 21. At that point, the 10-year rule applies.

If you had a potential heir who qualifies, you could consider naming them as the beneficiary of a traditional IRA and leaving the Roth money to the other heirs. (The IRA withdrawals will be taxable while the Roth withdrawals won’t.) Or you could leave the IRA to the children in lower tax brackets and the Roth to those in higher tax brackets.

If you’re trying to divide your estate equally, though, these approaches could vastly complicate matters because the balances in the various accounts could be quite different. Plus, predicting anyone’s future tax brackets can be tough.

Another approach is to name your children along with your spouse as the primary beneficiary of your IRA. That way, the children would get 10 years to spend down this first chunk of your IRA money after you die. When your survivor dies, they would get another 10 years to spend down the remainder, giving them 20 years of tax-deferred growth.

Alternately, you could focus on spending down the IRA to preserve other assets for your kids. The stretch IRA rules encouraged people to preserve their IRAs, but now it may make more sense to focus on passing down assets such as stock or real estate that would get a valuable “step up” in tax basis at your death.

Converting IRAs to Roths is another potential strategy for those willing and able. In essence, you’re paying the tax bill now so your heirs won’t have to pay taxes later (although they’ll still have to drain the account within 10 years). It may be possible to do partial conversions over several years to avoid getting pushed into the next tax bracket.

There are a few other approaches that involve costs and tradeoffs, such as setting up a charitable remainder trust that can provide beneficiaries with income. These are best discussed with an estate planning attorney who can assess your situation and give you individualized advice.

Friday’s need-to-know money news

Today’s top story: 3 steps to breaking unhealthy financial habits. Also in the news: Another $400 in free college aid, 4 retirement savings strategies for family caregivers, and what to know about the trend in buying “vacation homes” before a regular “starter home.”

3 Steps to Breaking Unhealthy Financial Habits
How do you know if you have unhealthy financial habits, and what can you do to build better ones?

Another $400 in Free College Aid Could Be Coming Your Way
The 2022 federal budget increases the annual Pell Grant limit, and students could receive more aid as a result.

4 Retirement Savings Strategies for Family Caregivers
Providing care for a family member can put a dent in retirement savings, but there are ways to get your finances on track.

Should You Buy a Vacation Home Before a Starter Home?
Why millennials are buying a “second” before their first.

Wednesday’s need-to-know money news

Today’s top story: 4 ways to tame financial stress and save for retirement. Also in the news: Is room service dead, how to handle awkward money situations on a group trip, and are unused travel card benefits actually a bad thing?

4 Ways to Tame Financial Stress and Save for Retirement
Financial stress can set back your retirement goals, but these strategies can help you get on track.

Is Room Service Dead? Replacements Could Be Better, Cheaper
With the advent of delivery apps and smart vending machines, room service may have seen its day.

How to Handle Awkward Money Situations on a Group Trip
Compromise and communication are key to budgetary harmony on any group trip.

Are Unused Travel Card Benefits Actually a Bad Thing?
Wringing every last cent of value out of your travel card might not be the best move.

Q&A: Here’s a strategy to avoid going broke in retirement

Dear Liz: A lot has been written about how much can safely be withdrawn from a balanced investment portfolio so that it will last a lifetime. A popular strategy is to withdraw a percentage, say 4%, in the first year and then increase that withdrawal each subsequent year by the rate of inflation.

What are your thoughts on an alternate strategy of withdrawing a fixed percentage, say 4%, at the beginning of each year? This has the disadvantage of providing a more variable income stream year to year but has the advantages of simplicity and it can never deplete the portfolio to zero.

Answer: Many retirees would find it hard to cope with incomes that swing wildly from one year to the next. One way to address that volatility is to ensure that retirees have enough guaranteed income — through Social Security, pensions and annuities — to cover their basic, must-have expenses. Retirement plan withdrawals then would provide for their “wants,” such as travel, meals out and so on.

Cutting back on the nice-to-haves isn’t easy, but it’s better than not having enough money to pay the mortgage or buy groceries.

This approach is the core of the “Spend Safely in Retirement Strategy,” created by retirement researchers Wade Pfau, Joe Tomlinson and Steve Vernon with the help of the Society of Actuaries and the Stanford Center on Longevity.

The strategy suggests maximizing Social Security and basing withdrawals on the IRS’ required minimum distribution percentages. Reports detailing the strategy and the research behind it are available on both organizations’ websites, and Vernon’s book “Don’t Go Broke in Retirement” explains the strategy in detail.

Of course, trying to eliminate any possibility of running short means that you may die with a whole lot of unspent money. That may be great news for your heirs, but sad for you if you denied yourself excessively while you were alive. Finding the right balance between security and spending is tough, to say the least.

Q&A: Where to park cash?

Dear Liz: I turned 72 in December and took my first required minimum distribution. With the goal of purchasing property next year, should I put the funds — $6,000 — in my Roth IRA or just put it in my bank savings account? Also, should I convert my traditional IRA to a Roth or just leave it alone?

Answer: To contribute to an IRA or Roth IRA, you must have earned income such as wages, salary or self-employment income. If you don’t have earned income, your contribution would be considered an excess contribution that could incur a 6% penalty for each year the money remained in the account.

You don’t have to be working to convert a traditional IRA to a Roth, but there’s typically not much reason to do so at this point unless you intend the money to go to your heirs and want to pay the income taxes rather than have them do so. Even then, you should run this idea past a tax pro or a financial planner since conversions can create other problems, such as higher Medicare premiums.

Thursday’s need-to-know money news

Today’s top story: 8 rules for saving, borrowing, and spending money. Also in the news: How purchase plans pay advances could change in 2022, how to find the hidden costs of starting a small business, and 1 in 5 Americans are saving less for retirement due to Covid.

8 Rules for Saving, Borrowing and Spending Money
The best personal finance advice is tailored to your individual situation.

How Purchase Plans and Pay Advances Could Change in 2022
BNPL and paycheck advance companies may draw the attention of competitors and regulators in 2022.

How to Find the Hidden Costs of Starting a Small Business
Discover some of the expenses to plan for when launching a business and how to learn about industry-specific costs.

1 in 5 Americans are saving less for retirement due to Covid
For those playing catch up, there are ways to get back on track, and free resources to help.

Thursday’s need-to-know money news

Today’s top story: Should you save less for retirement? Also in the news: Can student loan forgiveness happen, a new congressional proposal would require IRA/401(k) withdrawals to start at 75, and how to spot fake reviews on Amazon.

Should You Save Less For Retirement?
An extremely early retirement goal may rob you of the joy of living now. Consider a revised path and second career.

Can Student Loan Forgiveness Still Happen?
Debt forgiveness of $10,000 would cancel debt entirely for about 15 million borrowers, according to a NerdWallet analysis of federal data.

Required IRA, 401(k) withdrawals would start at age 75 under congressional proposal. Here’s who would benefit
How your retirement savings might be affected.

How to Spot Fake Reviews on Amazon
Those five stars might be bought and paid for.