Here’s a tip to take advantage of rising interest rates
Dear Liz: Now that interest rates on savings accounts have started to rise, I have a quick tip for you to share: Check the rate you’re getting on your accounts! I discovered my online bank changed its account structure a few years back, and legacy high-yield savings accountholders aren’t getting the recent increases. I was earning only a paltry 0.3% rate, while people who opened accounts more recently were earning over 2%. I’m sure many customers like me assumed they had high-yield accounts, since that’s what they opened originally, but they are, in fact, not receiving competitive rates.
Answer: Thank you for the heads-up. People who have certificates of deposit also should check whether those CDs have matured. Some banks renew the CDs at competitive rates, while others dump the proceeds in a low-rate account. A little vigilance can help you squeeze out a much better rate of return.
A spouse’s debt, your credit score
Dear Liz: My spouse and I have added each other as authorized users on our credit cards. My spouse has more debt than I do. Does this impact my credit scores?
Answer: Possibly. Credit scoring formulas look at how much available credit is being used on each account. If your spouse has higher balances than you but also higher credit limits, your credit scores may not be harmed much, if at all. If, on the other hand, your spouse is using most of their available credit, your scores could suffer.
Most services that provide credit scores (including possibly your bank and your credit cards) typically offer some explanations about why your scores aren’t higher. If the explanations include anything about excessive credit utilization, you may want to consider getting yourself removed as an authorized user from the problematic cards.
Sorting out IRA taxes
Dear Liz: My traditional IRA contains both pre-tax and after-tax contributions. (Some years I was ineligible to deduct contributions because I was participating in an employer’s retirement program.) Now I am retired and am considering making Roth conversions from the traditional account. I admit I was a little careless about keeping track of the total after-tax contributions. For the past 10 years or so, I have been using one of the more popular tax programs and was letting it track the tax basis and file the Forms 8606. I recently reconstructed all of my IRA contributions since 1985 to check the basis and discovered that the amount the software had calculated was short by about $15,000. Is it possible to correct this so that I don’t end up paying tax on the wrong basis?
Answer: Yes, but this could be a difficult process, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
As you know, when making Roth conversions you’re required to pay income taxes on the portion of your IRA that represents deductible contributions plus any earnings. But you don’t have to pay taxes on the portion of your account that represents your nondeductible contributions — that is what is known as your tax basis. A higher basis means less taxes, so correcting this may be worth the effort.
You’ll have to go back and correct each Form 8606, working from the oldest year, Luscombe says. The corrections need to reflect the traditional IRA contributions for that year, including the dollar amount, any deduction taken and the return of any excess contribution.
Send the corrected 8606s to the same service center where you will send the tax return for the conversion. If you’ve taken any distributions from the account, your calculations for the taxable portion may be in error as well. You can correct that for the past three tax years, but you won’t be able to recover the excess tax paid in any previous years, Luscombe says.
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.