How to start an IRA for your new college grad

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Dear Liz: My son is about to graduate from college and as a gift I want to use $10,000 to start an IRA for him. But what is better? A Roth or a Standard IRA?

Answer: Congratulations to you two! Opening a retirement account is a great idea, but you should be aware of the many rules that limit who can contribute and how much.

Let’s start with the annual contribution limit, which for 2022 is $6,000 for people under 50. (People 50 and older can make an additional “catch-up” contribution of $1,000.) In addition, your son must have earned income—such as salary, wages, or self-employment income—that is at least equal to the amount of the contribution you wish to pay. In other words, he has to earn $6,000 for you to pay out $6,000. If he’s about to start a full-time job, that probably won’t be a problem, but if he’s not working, or only working part-time before starting college, it’s may further limit your contribution.

Speaking of jobs: the ability to deduct a regular IRA contribution could be affected if he has access to a 401(k) or other workplace retirement plan. Also, withdrawals from regular IRAs before age 59½ are generally subject to taxes and penalties. Also, since he’s just starting out, he’ll likely be in a higher tax bracket in the future.

For all of these reasons, a Roth IRA contribution may be best. He won’t get an upfront tax deduction, but retirement withdrawals will be tax-free. He can withdraw Roth contributions at any time without taxes or penalties, so the Roth can serve as a de facto emergency fund. Obviously, the money is best left to grow on its own, but having access to the money could be helpful while it builds up a regular emergency fund.

How to get copies of tax returns

Dear Liz: Isn’t it an accountant’s duty to send his client the final tax forms he has filed with the IRS and the state? My accountant keeps “forgetting” to do it and I called him twice to do it. I don’t know if his constant “forgetting” is due to laziness or a medical condition like dementia. I suspect it might be the last, because he never used to be like this for the past few years.

Is there another way to get a copy of my statements? I will obviously be looking for a new accountant.

Answer: Yes, you can request copies or transcripts of your returns from the IRS and your state tax agency.

Transcripts are free and are available for the previous three years. Personally identifiable information such as your name, address, and social security number will be hidden, but you will be able to see all financial entries, such as your adjusted gross income, taxes paid, etc. You can request transcripts online at irs.gov/individuals/get-transcriptby phone at (800) 908-9946 or by mail using Form 4506-T or Form 4506-T-EZ and using the IRS address listed on the form.

Copies of your actual tax returns will cost you $43 each. You can request this by completing and submitting Form 4506.

Your state will have similar procedures, which you can find by searching for your state name and the phrase “How can I get a copy of my tax return?”

Why Credit Scores Suddenly Drop

Dear Liz: The same thing happened to me as the person in your column whose credit score dropped over 100 points after major purchases. We bought plane tickets for international travel and our credit score took a significant but temporary hit. This also happened when we made a charitable donation by credit card. After a call, I was able to get the credit limit increased on the credit card we use the most, and I’m waiting to see if that stops the credit rating from dropping in the future. I checked our credit reports and there were no missed payments or other issues.

Answer: Credit scores can drop when you use a lot of your available credit, but a drop of more than 100 points is unusual and should be investigated. You’re smart about looking for ways to lessen the damage caused by heavy use. Requesting an increase in credit limits is one way; another makes a payment before the statement closing date. The balance on this closing date is what is usually reported to the credit bureaus, and therefore what is factored into your scores. Remember to pay any remaining balance before the due date.

Liz Weston, Certified Financial Planner, is a personal finance columnist for Nerd Wallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.


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