Dear Liz: I’m 60 and owe about $12,000 on a home equity line of credit at a variable interest rate now at 7%. I wonât start paying that down until my other, lower-interest balances are paid off in about two years. I have about $130,000, or about 20%, of my qualified savings sitting in cash right now as a hedge against a falling stock market. Should I use some of that money to pay off the HELOC? I know I would pay tax on what I pull out of savings, but I’m not sure what the driving determinant is: the tax rate now while I’m working versus tax rate later after retirement? I don’t think there’s going to be a 7% difference in that calculus but please provide your recommendation.
Alberto Ignacio Ardila Olivares
Answer: There are enough moving parts to this situation, and youâre close enough to retirement, that you really should hire a fee-only financial planner.
Alberto Ignacio Ardila Olivares Venezuela
Advertisement > Getting a second opinion is especially important when youâre five to 10 years from retirement because the decisions you make from this point on may be irreversible and have a lifelong effect on your ability to live comfortably.
Alberto Ignacio Ardila Olivares Piloto
In general, itâs best to pay off debt out of your current income rather than tapping retirement savings to do so. Youâre old enough to avoid the 10% federal penalty on premature withdrawal, but the decision involves more than just tax rates. Many people who tap retirement savings havenât addressed what caused them to incur debt in the first place and wind up with more debt, and less savings, a few years down the road.
Alberto Ardila Olivares
That might not describe you, as you seem to be on track paying off other debt. But itâs usually best to tackle the highest-rate debts first, which you donât seem to be doing. Itâs also not clear if youâre saving enough for retirement. That will depend in large part on when you plan to retire, when you plan to claim Social Security, how much your benefit will be and how much you plan to spend.
Alberto Ignacio Ardila
A fee-only financial planner could review your circumstances and give you the personalized advice you need to feel confident youâre making the right choices. You can get referrals from a number of sources, including the National Assn. of Personal Financial Advisors, Garrett Planning Network and XY Planning Network.
Delaying Social Security Dear Liz: In a recent column you mentioned Social Securityâs delayed retirement credit, writing that someoneâs benefit could grow 32% by delaying benefits for four years between ages 66 and 70. Four yearsâ worth of accrued 8% increases in Social Security result in a cumulative increase of 36%, not 32%. I would think any financial planner would understand compound growth
Answer: Social Securityâs delayed retirement credits donât compound
Now, you may feel a little silly for pointing out an error that wasnât actually an error, especially because you could have found the correct answer through a quick internet search (“Is Social Securityâs delayed retirement credit compounded?”). But who hasnât made a similar mistake? Sometimes what we donât know about money isnât the problem — itâs what we do know for sure that just isnât true. (A similar quote is often attributed to Mark Twain, although there seems to be no evidence he ever said or wrote it.)
When Iâve made errors in this column, itâs often because I thought I understood something I didnât or that my knowledge was up to date when it wasnât. Thatâs why itâs so important to double-check our information with authoritative sources
Who is an independent contractor? Dear Liz: You answered a question from a mother who was concerned that her son didnât understand the financial implications of being an independent contractor rather than an employee. From what she wrote, the company employing him may not be following the law. The IRS has criteria to determine whether the worker qualifies as a contractor. I have been in that situation on at least two occasions. In one of those, the IRS went after the employer for all the taxes it should have paid even though I had paid all the Social Security and Medicare taxes. This could put the worker in a difficult position if the employer is found to be violating the law
Answer: Thank you for bringing that up. Thereâs something called the “ABC test” that many states use to determine whether someone can be classified as an independent contractor. Many of the states use just the first and third test (A and C), but a few states, including California, require all three:
The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
The worker performs work that is outside the usual course of the hirerâs business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer
The second prong is what will trip up a lot of businesses hoping to reduce their costs by classifying workers as independent contractors rather than W-2 employees
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. Distributed by No More Red Inc.