Look for Credentials Before Taking Advice of So-Called Financial Advisor
Q: I was wondering if anything can be done about the following: I received money from my ex’s individual retirement account as part of a divorce settlement. I had it transferred to my bank and asked the financial advisor in charge there if I could take some of that money for the purchase of a home; the rest was put in a mutual fund.
He did not tell me that this amount would be calculated as income and taxed unless I replaced it within 60 days. As a result, I owe the IRS close to $20,000 in taxes, part of which I paid, depleting all my certificates of deposit and most of my money market at the bank. I make only a teacher’s salary and he knew it. He told the investigator from the bank that he informed me of the penalties. He did not; otherwise, I would not have taken the money. I could have used my money market account or I probably would just not have purchased a house at that time. Am I stuck with paying all this money to the IRS?
A: You learned the hard way that just because someone calls himself a financial advisor doesn’t mean that he a) knows what he’s talking about; or b) follows any ethical standards.
The Certified Financial Planner Board of Standards, which regulates the CFP trademark, estimates that between 250,000 and 400,000 people call themselves financial planners. The vast majority have no special training, degrees or certification in the field. (If you want to know more about choosing a financial planner and what all the designations mean, visit https://www.latimes.com/finplan.)
When it comes to tax advice, you should be particularly suspicious of anyone who isn’t an enrolled agent or a certified public accountant. (An enrolled agent is a federally licensed tax specialist.) Any transaction that involves a retirement fund should be checked out with one of these professionals before proceeding.
That doesn’t mean you have to roll over and play dead, however. You can contact the government regulators who oversee the bank. (Federal Deposit Insurance Corp. at https://www.fdic.gov can help you determine which regulator that might be.) You can also hire a lawyer to write the bank a pointed letter about how its employee messed up. Given the amount of money at stake, the $250 to $500 you would pay could be a worthwhile investment.
Since you clearly could have tapped money from other sources, it makes sense that you wouldn’t have used the IRA money had you understood the consequences. No, you probably shouldn’t have relied on the bank employee’s advice, but he shouldn’t have lied to the bank investigator. If he’s calling himself an advisor and giving bad tax advice, he needs to be held accountable.
Deductions for IRA Contributions
Q: I occasionally work for a temporary agency that offers a 401(k) plan, to which the agency contributes nothing. The plan does not offer any socially conscious funds, and I refuse to invest in ways that are contrary to my ethics. I have been investing instead in a traditional IRA. Are my contributions deductible?
A: People who are not covered by retirement plans at work are allowed to deduct their contributions to a traditional IRA, regardless of how much money they make. By contrast, those who are considered covered by a plan are only allowed to deduct contributions if their incomes are below certain limits.
The question is whether or not you would be considered covered by the plan. I asked your question of CPA Phil Holthouse, partner at Holthouse, Carlin & Van Trigt in L.A. He said if you don’t participate at all in the plan and your employer contributes nothing, you should be able to deduct your IRA contributions regardless of how much money you make. To make sure your employer isn’t reporting you to the IRS as someone who is covered by a retirement plan, check your W-2 to make sure your boss doesn’t check the “pension” box. That’s how the IRS monitors who is and isn’t considered covered by a plan, Holthouse said.
Lasting Effect of Foreclosure
Q: My wife lost her condominium to foreclosure in 1994, before we were married. Since then, her credit, as well as mine, has been sparkling clean and her FICO credit score is an exceptional 750. Unfortunately, despite the high rating, the foreclosure still haunts us. It came up when she recently tried to lease a car and again now that we are in the process of trying to get an equity line on our house, which I purchased in my name three years ago before changing the title to include both of us. Does the foreclosure technically ever drop off her credit report, or does it just become less relevant over time?
A: The foreclosure is already less relevant than it was six years ago, although as you’ve seen, bad marks on your credit report can have a lasting effect. Even though you may be able to get that line of credit, you could wind up paying more for it because of your wife’s past credit troubles.
The credit bureaus are required to take most negative items, including foreclosures, off consumers’ credit reports after seven years. Bankruptcies typically stay on for 10 years.
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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.
