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'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
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.”
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?”
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.