Polish Up Your Credit Rating Before Applying for Mortgage
Question: I am planning to purchase a home later this year. I recently paid off my student loans and have no debts whatsoever. I have three credit cards that I’ve used for many years. However, I also carry six department store cards that I haven’t used in eight to 10 years. How do I go about closing those accounts? Do I call the department store or send a letter? I do not want to hurt my credit rating.
Answer: As long as you don’t carry a balance on any of your credit cards, it shouldn’t matter if you close those old accounts. You might keep the oldest one to help show the longevity of your credit, and then write the other issuers a letter requesting the accounts be closed.
Be sure to request that these issuers report to the credit bureaus that the accounts were closed at the customer’s request.
If you do carry a balance, hold off on closing the accounts until after you get your mortgage. Shutting down a bunch of credit lines can make your existing balances loom larger in the calculations that are used to determine your credit score.
Reasons to Hold On to 401(k) Statements
Q: I have a question about saving quarterly statements for 401(k) and 403(b) accounts. I now have a 3-inch binder full of such statements from 1984 to the present, representing six different accounts from different companies that employed me or my wife. Do I really need to save all this?
A: Crank up your shredder.
You probably won’t need any of that historical information unless you have company stock in your plan or you made after-tax contributions to your accounts. Withdrawals from 401(k) and 403(b) plans are typically 100% taxable, so there’s no need to keep track of how much you made or lost on the underlying investments.
If you made after-tax contributions--and not many people do--you’ll want to keep the evidence of how much because those contributions would be deducted proportionately from your withdrawals when figuring taxes.
You also might want to keep your old statements if you invested in company stock. That’s because of a special tax rule that allows you to separate the stock from your other investments when you retire and to pay taxes based on what you paid for the stock, not what it’s worth today. Any gains are taxed, when you eventually sell, at capital gains rates, rather than the higher income tax rates that would apply to other 401(k) withdrawals. You should talk to a tax pro about the details of this maneuver to see whether it’s right for you.
Otherwise, there’s little reason, other than nostalgia, to keep all your old statements. You might enjoy, for example, looking at your December 1999 balance, and remembering your wild hopes of early retirement. Most of us, though, find that kind of thing depressing.
As long as you’re simplifying your life, consider consolidating all those accounts, if you haven’t already. You may be able to transfer the old balances to your current employers’ plans, or roll them over into individual retirement accounts.
Comparing 529 Plans, Custodial Accounts
Q: I would appreciate your further insights comparing custodial accounts with 529 plans. You recently said that a Uniform Transfers to Minors Act, or UTMA, account could be transferred to a 529 college savings plan.
My broker, however, told me I would have to sell the investments held within the UTMA because 529 plans accepted only cash. True? This would have real tax consequences now that could outweigh the future benefits. My broker also tells me I would have much less control over the investments in a 529. Isn’t this lack of control a disadvantage? I have an UTMA for my 4-year-old and was thinking of establishing another account for the baby who’s about to arrive.
A: Your broker is correct: 529 plans accept only cash contributions, so transferring the account would require selling your current investments. And you would have less day-to-day control over a 529 account.
Although most 529 plans offer a variety of investment options, the decisions on which individual stocks and bonds to purchase are left to professional money managers.
Whether you see this as a disadvantage depends on how much confidence you have in your own investing abilities, or those of your broker. Many people prefer to turn over their investments to professionals rather than worry about the daily monitoring and research typically required when investing directly in stocks and bonds.
Which option is better for tax purposes depends on the details of your situation. Income and realized gains in custodial accounts such as UTMAs may be taxable, whereas 529 plans are tax-free.
You might want to sit down with your tax preparer to go over the numbers, but generally speaking, the younger your children are and the more you have saved, the more likely it is that the tax benefits of the 529 plan will outweigh the tax consequences of selling the investments now and paying taxes at the children’s current rate.
For more about 529 plans, see the Web sites of accountant Joseph Hurley at www.savingfor college.com or of the College Savings Plan Network, an affiliate of the National Assn. of State Treasurers, at www.collegesavings .org.
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Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at asklizweston@hotmai l.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 questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.
