Is it OK to pay off student loans early?

Here’s question from one of our own — Mandi Woodruff, Yahoo Finance’s personal finance reporter: It’s my job to know answers to questions like these every day but trust me — being objective about your own finances isn’t easy. So here’s my issue: I’m $2,500 away from being student debt free (huzzah!). But I’ve repeatedly been told to make the minimum payment each month and focus on building my savings. I’ve saved up about 5 months’ worth of living expenses, consistently contribute to my 401(k), have a great job (Thanks, Yahoo!) and very little credit debt. The credit debt I do have was strategically placed on cards that have 0% interest for at least another 6-12 months. My student loans (both federal) are accruing 6% interest. As of now, they are my most expensive debt.

I want to get this nagging student debt off my shoulders and, most importantly, off my mind! I know what the “right” answer is — keep saving until I’ve got at LEAST six month’s worth of living expenses. But I can’t help but wonder … would it really be so bad to take a chunk out of my savings and pay off the debt early?

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Is there any special student loan help for members of the military?

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Ron emailed: I am in the U.S. Army Reserve as an Officer. When I joined the Army I was in graduate school. Then after my graduation, I decided to go back to a graduate school to take another masters degree. So right now my student loans are about $60,000. Do you know any organization that is military-friendly that can help me pay off this student loan?

As a member of the military, you get a break on the interest rate on your loans (for both graduate and undergraduate). Under the Servicemembers Civil Relief Act, if you took out student loans before entering the military or being called to active duty, the interest rate is capped at 6% during your active duty military service. 

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Will my IRA beneficiaries be taxed when they withdraw funds from the account?

T emailed: When I die and my children are the recipients of my IRA, is the IRA amount taxed in a lump sum or can my children roll over the IRA funds into their own account?

Short answer is yes, with an inherited traditional IRA, beneficiaries do pay taxes on distributions. (They don’t pay taxes on distributions with an inherited Roth IRA.) Your children would be considered a “non-spouse beneficiary” of your IRA, and they’d generally have some options when inheriting an IRA. That allows your beneficiaries to take required minimum distributions (RMDs) over their own life expectancy, a method known as a Stretch IRA. 

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Is converting to a Roth IRA a good tax strategy if we live abroad and pay no US taxes?

Jay emailed: As Americans living and working in Canada, my wife and I earn no taxable income in the U.S. We are both over 60 and plan to continue working for a while. All our American funds are in tax deferred retirement accounts. It seems like it would be advantageous to withdraw $6,500 annually from our traditional IRA accounts and move them into ROTH IRA accounts? I’m thinking that our U.S. tax liability would be minimal. Do you agree?

We’d agree that your strategy is a good one and that your tax liability would be minimal (based on the facts you gave us). We assume you mean you intend to do a Roth IRA conversion. (And we’re not sure why you’re aiming for $6,500 withdrawals from your traditional IRA. The maximum contribution to an IRA is $5,500, or $6,500 if you’re 50 or older, in 2014.)

Converting an IRA to a Roth IRA is often a great idea because you’ll pay little or no tax now, and you’re guaranteed to pay no tax later from any distributions (under current rules), says Art J. Canter, a CFP and CPA with Investment Advisory Professionals in Boca Raton, Fla. And Roth IRAs don’t have required minimum distributions. Assuming you file taxes in the U.S., the Roth conversion will be includable in your U.S. gross income, but you may not pay any tax because of your personal exemptions and standard deductions, Canter says.

Lump sum IRA investment or monthly contributions?

Maria emailed: Is it more advisable to pay the maximum contribution for the Roth IRA one time than do a monthly contribution?

We’re going to give the good old “it depends” answer here. A good thing about spreading the contributions over time is that you get the benefit of dollar-cost averaging. Dollar-cost averaging makes sense in that you don’t run the risk of putting all that money in at the top of the market, but most of the time it’s going to work against you, says Brett Horowitz, a CFP with Evensky & Katz

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I’m getting remarried. Will my soon-to-be wife’s Social Security change?

Terry emailed: I’m 64, planning to retire at 66 at full retirement age. I’m remarrying soon. My spouse to be is 62, collecting Social Security at her deceased husband’s benefit. Once married, can she change to my SSN benefit if it’s higher than her deceased husband’s benefit? Or does she revert to her own benefit?  

Your soon-to-be wife will be allowed to continue to receive her survivor benefits based on her deceased husband’s record – as long as that amount is greater than what she’d get through her Social Security benefits. When you file for your own benefits – at 66, as you said – your new wife would be entitled to file for spousal benefits based on your work record, says Jim Blankenship, a CFP in New Berlin, Ill. But if she files in two years from now, when she’s 64, the spousal benefit would be less than 50% of your benefit because she’d be filing before full retirement age (66). Blankenship recommends that your wife compare how much she’d get in both circumstances before switching. There’s more information on the Social Security Administration’s web site here.

What should I do with the extra money I save?

J emailed: I’m 34, and make about $170,000 per year before tax. My cars are paid but not my house. I owe about $130,000 for my house. Interest rate on house is 4.75%. No other debt. I have about 25,000 per year which I save so what should I do with it? I max out my retirement every year.

You’re retirement plan is maxed out, so your next priority should be building an emergency reserve, if you don’t already have one. This is the money you use when a real emergency happens – your basement gets flooded, your car breaks down or you lose your job. Most financial pros recommend being able to cover three to six months’ worth of living expenses. 

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I’m retiring soon. Should I downsize?

Vincent emailed: I am retiring after 30 years of employment. The only debt I will have will be my home mortgage. Should I sell my home and maybe acquire some cheaper accommodations?

Congrats on retiring – and for being on the ball with your question! The share of older households with housing costs greater than 30% of income was about 32% in 2012, and has been rising since 2000. So downsizing to a smaller, cheaper home when you retire is a smart move if you feel you might be financially squeezed. The move can boost your nest egg by lowering overall housing expenses – smaller quarters means less spent on heat, maintenance, upkeep, furnishings, and often lower property taxes. And moving to a lower-cost area means saving even more. Of course, remember that moving costs will chip away at any profit you make from selling your home, as will the real estate agent’s fee, closing costs, etc.

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The Social Security Admin. says they overpaid me. What do I do?

Edwin emailed: Where might I find guidance on a recent notice I received from SSA that I owe them for 2013 overpayment? Any information you might provide in terms of a contact name of organization would be deeply appreciated.

The Social Security Administration determined that it paid you more money that you should’ve been paid. This can happen for a several reasons: you didn’t report to the SSA that your living situation changed, your marital status changed, you started working, the SSA incorrectly figured your benefits because of wrong information, etc.

Check the statement and make sure the information they have on you is correct – try to determine if you were really overpaid. If you believe you weren’t, you can request reconsideration (and if you ask for an appeal within 10 days of the date on the notice, any payment the SSA is currently making will continue until it makes a determination). Check out the SSA’s web site for information about the appeals process.

Can the executor of our uncle’s trust sell the condo we’re supposed to inherit?

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Elisabeth emailed: We are to inherit our uncle’s condominium in Florida after our aunt, his wife, passes away. She has moved to an assisted living facility and we are concerned that her son, the executor of her trust, will want to sell or rent her condominium without giving us an opportunity to take it over.

What happens – at least what should happen – with your uncle’s condo depends on what the trust says the trustee (your uncle’s son) can do with the property. Elder law attorney Stuart Zimring says the trustee is a fiduciary and is obligated to deal with trust’s assets honestly and fairly. Also, he says, the terms of the trust is presumably governed by Florida law, so you’d be best off consulting with an attorney in that state who’s well-versed in trust law to find out how your concerns can be addressed. (You can search for estate planning lawyers by state on the National Association of Estate Planners & Councils’ web site.)

Do I need a will?

Betty emailed: I have all my retirement [accounts] shown on investment forms for my children. Do I also need a will?

This is pretty straightforward. If all of your investment and retirement accounts are to be distributed by “beneficiary designation,” then you don’t necessarily need a will, says Wendy Hartmann, an estate planning attorney in Los Angeles. Depending on what other assets you have, you might want to consider drafting a will too.

How can I get my credit card interest rate lowered?

Melanie emailed: I pay more than the minimum due on my cards each month, but end up using one again for living expenses so all are near their max. Is there any way to get the interest lowered as it consumes most of any monthly payment?

It’s certainly possible to get your interest rate lowered. But first we’d suggest you find out where your credit stands now. You can order copies of your credit report from AnnualCreditReport.com. You can also purchase your credit score from MyFICO.com, or directly from the three credit bureaus. You can also get it from a few services that offer a version of your credit score for free (click here to read more about that).

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Where can I get a free credit score without having to give my credit card info?

Mary emailed: Where can I get my credit score free without having to give out my credit card info?

Several personal finance tools have come on the market in recent years offering credit scores to consumers for free. A few of our favorites are Credit Sesame, Credit.com and Credit Karma — and none requires you to enter your credit card information. However, you will have to be OK with entering your Social Security Number, which the tools need in order to request your credit history from credit reporting agencies.

Not all free credit scores are alike, however. 

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Can I avoid paying capital gains tax on the sale of a house I inherited?

Randy emailed: I am receiving some money from the sale of a house from my mother’s estate. Is there some way to avoid paying the Capital Gains Tax? Can that money be applied to fixing up my own home or applying it to the mortgage?

When you inherit property after the owner dies you automatically receive a “stepped-up basis.” If the house was included in your mother’s estate, the home’s basis, for tax purposes, is not what your mother paid for it, but rather the current fair market value at the time of your mother’s death. If you sell the inherited property immediately after your mother’s death, you owe no capital gains tax. But if you sell it later, you would only recognize the loss or gain and pay capital gains tax on the difference between the sale price and the fair market value of the house as of your mother’s death, says Hal Terr, a CPA and CFP with PWM Advisory Group in New Jersey.

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Can I name my will in all beneficiary forms?


Harry emailed: Can you designate on a beneficiary form “as pertaining to last will and testament”? This way you only need to update your will instead of all forms.

You can do that, but you probably shouldn’t. We spoke with a CFP in Spokane, Wash., who said that if you designate “as pertaining to last will and testament” on, say, your IRA form, the account will become part of your estate when you die. And when that happens, it will potentially be exposed to creditors and, what’s more, your estate will have to pay taxes on it. If it goes to an individual beneficiary, it does not trigger a tax bill as it normally would when it’s transferred from one person to another. (The individual beneficiary has the ability to continue the tax-deferral status of the IRA).