Paying home loan and rent for the same property makes no sense

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.

Choosing between 401(k)s

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).

Divorce, death and Social Security

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.

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