Financial Q&A: Money Tips for Couples and Families
Money Girl answers 3 questions about family finances, including saving for college, using joint accounts, and co-signing loans. Plus you’ll get a bonus Q&A about using credit cards with the newest technology.
If you think having a successful financial life is challenging as a single, whew, does it get more complicated when you add a partner, spouse, or children to the mix!
In this episode I’ll answer 3 questions about family finances. We’ll cover saving for college, using joint accounts, and co-signing loans—plus, I’ll answer a bonus question about credit cards that clarifies information from a recent podcast.
How to Save for a College Education
Question #1: Michael A. asks, “What’s the best way to save for a child’s future college expenses, a 529 plan, a traditional IRA, or a Roth IRA?”
Answer:
The best choice for college savings is a 529 plan. Not only does it give you major tax advantages and a high contribution limit, but it also gives you the most control over the money.
These accounts allow you to save for college in two ways: using a prepaid plan or a savings plan.
With a 529 prepaid plan you pay for tuition at a state school ahead of time. That means you get tomorrow’s tuition at today’s prices. Since the cost of college continues to skyrocket every year, this prepayment strategy should save a lot of money.
But what if your child wants to go to a different school? Well, you have options. Funds in a prepaid plan may be withdrawn so you can use them at an out-of-state school or a private college. However, you may not get the full value out of the plan because you’ll generally have to make up the tuition difference.
With a 529 savings plan, you invest contributions in a tax-deferred account. This is similar to a retirement account, where you choose investments from a menu of options and your account value fluctuates based on their performance.
As long as the funds are used to pay for qualified education expenses, such as tuition and room and board, the earnings in the account are not subject to federal or, in most cases, state tax.
Savings plans are offered by states, not schools, and they can be used at any accredited school in the country, and even at some foreign institutions. For instance, you could live in New York, participate in a Florida 529 saving plan, and use the money to pay for a school in California.
Most states offer at least one 529 plan; however, the fees and benefits, such as the maximum contribution limit and investment options, vary. So do your homework and compare plans across the country using a site like Savingforcollege.com.
As long as the funds are used to pay for qualified education expenses, such as tuition and room and board, the earnings in the account are not subject to federal or, in most cases, state tax. Plus, some states offer tax deductions or credits for residents who choose in-state plans.
But if you use 529 funds for anything other than qualified education expenses, your earnings will be subject to income tax, plus a 10% penalty. So never contribute more to a 529 than you believe your child will need for the total of his or her education expenses.
You can even have both a 529 prepaid plan and a savings plan. The prepaid account would pay for tuition and the savings plan could be for other expenses, such as room and board, books, supplies, and computer equipment.
To sign up for a 529 you can go directly to the plan manager or use a financial advisor. Using an advisor may cost a little more, but may be worth it if you’re new to investing.
See Also: 6 Tips for Finding a Trustworthy Financial Advisor
Once you’re enrolled, you can link your 529 saving account to your bank account and set up automatic monthly deposits. You can even ask friends and family to make contributions to the account, instead of buying birthday or holiday gifts for your child.
Michael also mentioned the option of using an Individual Retirement Arrangement or IRA for college savings. You can use a traditional or Roth IRA to pay for college.
If you’re younger than age 59½, the IRA rules allow you to avoid the 10% early withdrawal penalty if you use distributions to pay higher education expenses for you, your spouse, your children, or grandchildren.
However, distributions from a traditional IRA will be subject to income tax and could also affect your child’s eligibility for financial aid. That’s because the withdrawal gets added to your income and counts against you for the amount of aid your student could qualify for in the following year.
Distributions from a Roth IRA are also exempt from the early withdrawal penalty. However, since you pay tax upfront on contributions to a Roth, only the investment earnings would be subject to tax and counted as income for the year. This makes a Roth a better option than a traditional IRA to tap for college expenses. But as I mentioned, using a 529 plan is the best way to go.
Free Resource: Retirement Account Comparison Chart (PDF download)—get the rules for the most popular retirement accounts
How Couples Should Manage Money
Question #2: Miriam S. says, “I’m a big fan of your podcast, I downloaded your book (Money Girl’s Smart Moves to Grow Rich) on my iPad and use your advice and financial tools as well.
My husband and I have been married for a year and we’ve been trying different ways to keep our finances in check, but it’s been a bit challenging and disorganized. We have separate accounts and pay for different things, but it doesn’t seem to be working well.
Do you recommend a joint account for household payments where both deposit money, plus individual accounts for extras such gifts for each other?”
If you’re in a long-term, committed relationship or marriage, there should never be “yours” and “mine” – only “ours.”
Answer:
Miriam’s dilemma is a common one, especially for people who get married in their 30s or 40s, after managing money on their own for many years. I recommend that you take the plunge and completely merge your money with your honey.
If you’re in a long-term, committed relationship or marriage, there should never be “yours” and “mine” – only “ours.” My husband and I have always had one main bank account where all deposits are made and all bills are paid.
However, as Miriam asked, if you want to also have a small separate bank savings or Paypal account that’s just in your name so you can buy an occasional gift that your spouse won’t see, that’s reasonable.
But if you’re spending time and energy deliberating about who should pay what bill, or allocating percentages for expenses based on income, you’re focusing on the wrong things.
When you’re a committed couple, it doesn’t matter if one of you makes significantly more money or has zero income. You should strategize and organize your life in unison because you will accomplish much more together than you ever will apart.
If you don’t feel comfortable becoming a single financial entity as a couple, maybe you’re not with the right person. Or perhaps you need counseling in order to completely trust each other financially.
Can You Remove Negative Information From Your Credit Report?
Question #3: Rose D. asks, “I co-signed my daughter’s student loans, but we’ve had problems paying and getting payments applied to the account correctly and it’s affected my credit score.
We hired an attorney to negotiate a settlement offer, but my credit report will still show that we paid less than the full balance on the account. What can I do to make sure this negative information is removed from my credit report once the debt is paid? Also, can we make sure that the 1099 is issued only in my daughter’s name for tax purposes?”
Answer:
When you co-sign a loan or credit account, remember that you’re putting your own credit on the line. That’s because both parties are equally responsible for 100% of the debt and the payment history will be reported on both of your credit files.
While negotiating a debt settlement can help you get rid of debt faster, it stays on your credit report for 7 years after the debt is paid. Settlements are better than not paying a debt, but they’re obviously not as good for your credit as paying in full.
If an item—such as a settlement or late payment—is negative but accurate, a creditor has no obligation to change it. If a settled account shows that it was paid, but for less than the full balance, that’s an accurate description of its history.
However, if there is inaccurate information on your report and you can prove it, always dispute it with the credit reporting agency. Additionally, if a creditor doesn’t correct an error, you can add a statement to your account explaining your side of the story.
Rose also asked about the tax implication of her situation. There’s a little-known tax rule that can take you by surprise when a debt is canceled, settled, or forgiven: you must generally count that amount as income and pay taxes on it.
When a lender cancels all or a portion of your debt, they send you Form 1099-C, Cancellation of Debt, to submit with your tax return. However, since Rose is a co-signer and her daughter is the primary borrower, she should be off the hook.
Tax on the canceled debt only needs to be paid once, by the person who used or benefited from the money. So the lender should only send the 1099-C to her daughter. But if Rose does receive a 1099-C in error, she should contact the lender and ask them to correct the mistake.
However, there are exceptions when a forgiven or canceled debt is not taxable, including insolvency. This is when your liabilities exceed your assets in an amount greater than the forgiven debt, prior to the cancelation. If Rose’s daughter is insolvent, she would not have to pay tax on the amount of forgiven student loan debt.
You can use the worksheet in IRS Publication 4681opens PDF file , Canceled Debts, Foreclosures, Repossessions and Abandonments, or consult with a tax accountant to determine insolvency.
See also: The Statute of Limitations and 4 Options for Old Debt
How Do the New Chip Credit Cards Work?
Bonus Question: Melissa D. asks, “I just listened to your podcast about chip credit cards. It was especially interesting to me because I just moved the UK and I’m dealing with the lack of chips on most of my cards. Does the presence of the magnetic stripe on the new chip cards mean that static information is still there—or is there any extra security because of the chip?”
Free Resource: Travel Card Comparison Chart (PDF download) – Laura compares the best no-foreign transaction fee credit cards!
Answer:
Credit cards with magnetic stripes still contain your static account information, even when they also have an EMV chip. However, that magnetic data is only accessed when you make a purchase by swiping through an old-school terminal.
When you use a chip card with an updated terminal, it doesn’t use the magnetic technology, so that static data in the stripe is safe. You’ll know that you’re using a chip terminal because you have to dip your chip, or insert the card into the machine and leave it there during the entire purchase.
Magnetic and chip technologies are completely separate and don’t share any information during a purchase. Having both a chip and a magnetic stripe on a credit card doesn’t give you enhanced security when you swipe it through an old-school terminal. You only get enhanced security when you check out on an updated chip-and-dip terminal.
If you’re ready for help managing debt, building credit, and reaching big financial goals, check out Laura’s private Facebook Group, Dominate Your Debt! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
