Investors need to stop trying to time the market
Dear Liz: My 25-year-old son is a new investor. He put $11,000 ($5,500 each for 2016 and 2017) into an IRA in a money market fund with a discount brokerage firm. He doesn’t want to get into the market yet because he thinks it is in a bubble. I’m afraid with this strategy, he could be sitting there for a long time losing out to inflation. How would you present this argument?
Answer: You might ask him when he plans to enter the market. When stocks fall 10%? 20%? More? If stocks do tumble to his target level, there are likely to be plenty of scary headlines indicating that the market could fall further. Will he be able to follow through on his plan or will he put off investing — and miss the inevitable rise that will follow?
Newbie investors, and even some more experienced ones who should know better, often think that they can time the market. They can’t. They’re better off diving in with a well-diversified portfolio and adding to it regularly without worrying about the day-to-day swings of the market. Your son won’t need this money for decades, so there’s no sense fretting about what might happen tomorrow or next week. Over the next 40 years, he’ll see significant gains — but only if he gets off the sidelines and puts his money to work.
Co-signing a loan may affect credit score
Dear Liz: Despite having high credit card debt (about $35,000), which I am working hard to pay off, my FICO score is consistently over 765 and I have never been denied credit — until now. I was recently denied for a card because of “high debt to earnings” (I earn about $85,000 annually.) Could that be because I recently co-signed for a $15,000 education loan for my grandson? I trust him completely to pay off the loan, but is it now showing on my credit history as money owed even though it is not payable until after he graduates?
Answer: You’d need to check your credit reports to be sure, but it’s entirely possible the new loan is already showing up and affecting your scores. Your debt-to-income ratio was high even before adding this loan, though, so it’s not surprising that the credit card company balked.
It’s unfortunate that you weren’t clear about this when you co-signed, but you’re on the hook for that student loan every bit as much as your grandson is. If he misses a single payment, you could see your credit scores lose 100 points or more overnight.
If you want to protect your credit scores and have the opportunity to get good credit card deals in the future, continue to pay down your debt. Also, consider making the payments on the education loan yourself and having your grandson reimburse you. That’s really the only way to make sure a missed payment won’t torpedo your scores.
Capital gains tax on home sale profit
Dear Liz: I recently sold a home and am trying to escape the dreaded capital gains tax. I’ve done everything I can to reduce my overall tax bill, including maxing out my retirement contributions. I don’t want to buy a more expensive home to escape the gains tax. Any thoughts?
Answer: Buying a more expensive home wouldn’t change what you owe on your previous home. The days when you could roll gains from one home purchase into another are long gone.
These days you’re allowed to exclude up to $250,000 in home sale profit from your income (the limit is per person, so a couple can shelter $500,000). In other words, that amount is tax free, as long as you lived in the home for at least two of the previous five years. Beyond that your profit is subject to capital gains taxes. The top federal capital gains rate is 20%, plus a 3.8% investment surtax if your income is more than $200,000 for singles or $250,000 for married couples.
Here’s where good record-keeping may help. While generally you’re not allowed to deduct repair and maintenance costs from that profit, you can use home improvement expenditures to reduce the tax you owe. Home improvements are added to your cost basis — essentially what you paid for the property, including settlement fees and closing costs, and that’s what is deducted from your net sales price to determine your profit.
You’ll need receipts plus credit card or bank statements to prove what you paid. Improvements must “add to the value of your home, prolong its useful life, or adapt it to new uses,” according to IRS Publication 523, Selling Your Home. Examples of improvements include additions, remodels, landscaping and new systems, such as new heating or air conditioning systems. You can include repairs that are part of a larger remodeling job, but you can’t include improvements you later take out (such as the cost of a first kitchen remodel after you do a second one).
Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com. Distributed by No More Red Inc.
