Dear Liz: I'm reaching out on behalf of my father, who does not know how to write emails. He was wondering if he pulls his money out of his IRA, how much will he get charged? Also, how much would he be able to give to his granddaughters without being charged?
Answer: Withdrawals from IRAs and most other retirement accounts are taxable. The tax bill will depend on his tax bracket and whether his contributions were pre-tax (deductible) or after-tax (non-deductible). If he withdraws money before age 59 1/2, he also may face tax penalties. A premature withdrawal can easily trigger a tax bill of 25% to 50%. Once the money is withdrawn, it also loses all the future tax-deferred returns it could have earned.
If he gives the money to his granddaughters, it's unlikely he would face an additional tax bill. He would be required to file a gift tax return if the amount exceeded $14,000 per recipient in a year, but he would only have to pay gift taxes if the total amount he gives away in his lifetime over that limit exceeds $5.49 million.
Clearly, taking money out of a retirement account is a big deal and something that shouldn't be done lightly. At the very least, your dad should consult a tax pro who can estimate the bill he's likely to face. He'd be smart to consult a fee-only financial planner as well so he understands the potential effect this withdrawal could have on his future standard of living.
Making sure your free credit report really is free
Dear Liz: Please tell me again how to get my free credit report each year.
Answer: You can get a free annual look at your credit reports from the three major credit bureaus at www.annualcreditreport.com. If you search for "free credit report," you may wind up at a look-alike site, rather than the federally mandated one. A good clue that you're on the wrong site will be if you're asked for a credit card number.
Your free reports don't include free scores, which are the three-digit numbers lenders and others use to judge your creditworthiness. Your bank or credit card companies may offer free scores, or you can sign up with one of the many sites that offer them. Keep in mind that there are different types of scores, and the one that you're seeing may not be the same as the ones your lenders use.
More advice on how to find a reliable cheap car
Dear Liz: I have repaired my own vehicles all my life, and I wanted to add a bit to your response to the person in Chapter 13 bankruptcy who needs another car after paying $1,500 cash each for two junkers. You are correct that a $3,000 car is likely to be more reliable, but I would stress heavily that there are no guarantees on cars at that price range even if you have a mechanic check the vehicle.
My advice on getting a reliable cheap vehicle is to first identify what make and model vehicle you want, then spend several weeks on the model-specific forums on the Internet reading the Q&As. There are wide variations in even the same models of the same year. One might use an engine that has a serious defect, but others do not have that defect.
The mistake most used-car buyers make who are looking for a cheap car is to be too impatient. They go for the first thing that's listed at their price range with no regard to what make and model it is. It is simply not possible to research the skeletons in the closet of unfamiliar models in the hour in between viewing the listing online then running out to see it. Figure out the model in advance, then be patient.
Answer: Thanks for offering your advice. Even people who have plenty of money often don't spend enough time researching their options and wind up regretting a purchase or paying too much.