One Can Pay Dearly in Bills, Bad Credit for Generosity in Lending Car to Others

Q. My sister and her boyfriend borrowed my car and drove it out of state. The boyfriend was arrested for drug trafficking and the car was confiscated and repossessed by the finance company. All claims and charges against my sister were dropped and the finance company eventually allowed me to get my car back. But now my credit report shows a repossession, which is damaging my once-excellent credit rating. I talked to the finance company, but they refuse to remove the damaging information. Can you tell me how to solve my dilemma without the cost of an attorney?

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A. I took your question to several attorneys who specialize in credit problems, and none of them offered much hope.

You can get false information removed from your credit report, but true information can stay on for seven years (10 years if it’s a bankruptcy). Your car did indeed get repossessed, so the notation on your credit report is accurate.

You can write a 100-word statement that will be included in your credit report, but don’t expect it to have much effect. Few lenders read these statements, and fewer still give much credence to them. Your best hope is to try to maintain the best credit possible, because the repossession’s importance in your credit rating will fade over time. If you want more information on how credit ratings work, check out Fair, Isaac’s Web site at https://www.fairisaac.com.

You learned the hard way that lending your car to anyone is risky business. Even if the people who borrow it are model citizens, you can still wind up paying for anything that happens while they’re in control of the vehicle. Best to be a little less generous with the car keys and a little more protective of your financial well-being.

Saving in Child’s Name for College

Q. I have set up custodial accounts for my two sons, ages 12 and 14. The mutual funds in the accounts are worth $35,500 and $46,500. Is this the best way to accumulate college savings for them? I have heard that they may not qualify for student loans with these assets in their names, so the tax savings may not be worth it.

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A. Think about that a bit. You want your sons to go into debt, rather than have their educations paid for?

Right now, you’ve saved enough for both boys to cover most of the costs of a four-year education at a public college. Given a few more years of contributions and good returns, and you might swing private-school educations for your sons.

You could play games with college financial aid offices by not saving in the boys’ names. But given the amount you’ve managed to save already, you probably have too much income and too many assets to qualify for much financial aid.

Generally, it’s people with middle-class incomes or less who should be cautious about using custodial accounts for college because the savings could hurt their chances for financial aid. Also, people in any income bracket who don’t trust that their kids will actually go to college should avoid custodial accounts, because any unused money eventually must be turned over to the child.

Folks in higher income brackets usually should just save as much as possible if they want to give their children a debt-free start.

401(k) or Roth Better Savings Tool?

Q. You recently suggested that a family consider contributing to a 401(k) only to the maximum matched by an employer, and then use any extra money to fund a Roth IRA. I have always thought that you should fund a 401(k) to the maximum allowed, even if you didn’t get a match and even if that meant not being able to contribute to a Roth. Am I wrong?

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A. That depends on your situation.

It’s almost always best to contribute to a 401(k) at least up to the maximum matched by the employer. Typically, employers give 50 cents for each dollar you contribute up to some maximum percentage, such as 6% of your salary. That match means you get an immediate 50% return on your money. You can’t beat that with a stick.

For people who expect to be in a lower tax bracket at retirement, continuing to fund the 401(k) to the maximum allowed before contributing to a Roth IRA is probably the better strategy.

But the Roth IRA is an incredibly powerful savings vehicle for people who expect to be in the same or higher tax bracket in retirement, and for those who want to leave an inheritance for their kids. That’s because the Roth IRA is completely tax-free when withdrawn in retirement, and it doesn’t have the minimum distribution requirements of other tax vehicles, including 401(k)s and traditional IRAs. So if you expect to be well-off in retirement, it can make sense to contribute to a Roth IRA after you’ve set aside the maximum your company will match. If you still have money lying around after you fund your Roth, you could return to the 401(k) and contribute up to the maximum allowed.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk columns, visit https://www.latimes.com/moneytalk.