MONEY Ask the Expert

Why a High Income Can Make It Harder to Save for Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My employer’s 401(k) plan considers me a “highly compensated” employee and caps my contribution at a measly 5%. I know I am not saving enough for retirement. What are the best options to maximize my retirement savings? I earn $135,000 a year and my wife makes $53,000. – Eric Ober, Long Island, NY

A: It’s great to have a six-figure income. But, ironically, under IRS rules, being a highly compensated worker can make it harder to save in your 401(k).

First, some background on what it means to be highly compensated. The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer’s company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.

As an HCE, you’re in a different category. Uncle Sam doesn’t want the tax breaks offered by 401(k)s only to be enjoyed by top executives. So your contributions can be limited if not enough lower-paid workers contribute to the plan. The IRS conducts annual “non-discrimination” tests to make sure high earners aren’t contributing disproportionately more. In your case, it means you can put away only about $6,000 into your plan.

Granted, $120,000, or $135,00, is far from a CEO-level salary these days. And if you live in a high-cost area like New York City, your income is probably stretched. Being limited by your 401(k) only makes it more difficult to build financial security.

There are ways around your company’s plan limits, though neither is easy or, frankly, realistic, says Craig Eissler, a certified financial planner with Halbert Hargrove in Houston. Your company could set up what it known as a safe harbor plan, which would allow them to sidestep the IRS rules, but that would mean getting your employer to kick in more money for contributions. Or you could lobby your lower-paid co-workers to contribute more to the plan, which would allow higher-paid employees to save more too. Not too likely.

Better to focus on other options for pumping up your retirement savings, says Eissler. For starters, the highly compensated limits don’t apply to catch-up contributions, so if you are over 50, you can put another $6,000 a year in your 401(k). Also, if your wife is eligible for a 401(k) or other retirement savings plan through her employer, she should max it out. If she doesn’t have a 401(k), she can contribute to a deductible IRA and get a tax break—for 2015, she can contribute as much as $5,500, or $6,500 if she is over 50.

You can also contribute to an IRA, though you don’t qualify for a full tax deduction. That’s because you have a 401(k) and a combined income of $188,000. Couples who have more than $118,000 a year in modified adjusted gross income and at least one spouse with an employer retirement plan aren’t eligible for the tax break.

Instead, consider opting for a Roth IRA, says Eissler. In a Roth, you contribute after-tax dollars, but your money will grow tax-free; withdrawals will also be tax-free if the money is kept invested for five years (withdrawals of contributions are always tax-free). Unfortunately, you bump up against the income limits for contributing to a Roth. If you earn more than $183,000 as a married couple, you can’t contribute the entire $5,500. Your eligibility for how much you can contribute phases out up to $193,000, so you can make a partial contribution. The IRS has guidelines on how to calculate the reduced amount.

You can also make a nondeductible contribution to a traditional IRA, put it in cash, and then convert it to a Roth—a strategy commonly referred to as a “backdoor Roth.” This move would cost you little or nothing in taxes, if you have no other IRAs. But if you do, better think twice, since those assets would be counted as part of your tax bill. (For more details see here and here.) There are pros and cons to the conversion decision, and so it may be worthwhile to consult an accountant or adviser before making this move.

Another strategy for boosting savings is to put money into a Health Savings Account, if your company offers one. Tied to high-deductible health insurance plans, HSAs let you stash away money tax free—you can contribute up to $3,350 if you have individual health coverage or up to $6,650 if you’re on a family plan. The money grows tax-free, and the funds can be withdrawn tax-free for medical expenses. Just as with a 401(k), if you leave your company, you can take the money with you. “So many people are worried about paying for health care costs when they retire,” says Ross Langley, a certified public accountant at Halbert Hargrove. “This is a smart move.”

Once you exhaust your tax-friendly retirement options, you can save in a taxable brokerage account, says Langley. Focus on tax-efficient investments such as buy-and-hold stock funds or index funds—you’ll probably be taxed at a 15% capital gains rate, which will be lower than your income tax rate. Fixed-income investments, such as bonds, which throw off interest income, should stay in your 401(k) or IRA.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Why Regular Retirement Saving Can Improve Your Health

MONEY Ask the Expert

Why Stock Forecasts Are Often Off Target

Investing illustration
Robert A. Di Ieso, Jr.

Q: Investment web sites such as Yahoo list one-year price targets for stocks. How often are these correct? — Hal

A: Simply put, these numbers are based on where analysts collectively think a stock will be trading a year from now.

“The one-year number you see on Yahoo and other sites is the median or average opinion of these analysts,” says David Schneider, a certified financial planner and principal of Schneider Wealth Strategies in New York. He adds that the analysts who contribute to this target estimate typically work for investment banks and brokerage firms, as opposed to mutual funds or firms whose research is for their own internal use.

To come up with their individual estimates, these analysts have to project what a company’s business will look like a year from now, typically focusing on its earnings, among other factors.

Then they need to account for how much investors will be willing to pay for those earnings. In other words, after forecasting a company’s earnings — which is the “e” in a stock’s price/earings ratio — analysts have to determine the price (or “p”) that investors will assign that company.

This goes to show that a company’s stock price a year from now isn’t just a factor of it’s business prospects, but on the subjective opinions of analysts about investors’ confidence and passion for that stock.

An analyst could nail the estimate but be wrong on the P/E, or what Wall Street types refer to as the “multiple.” Conversely, an analyst could get the right multiple but miss the estimate, says Schneider. This only compounds any inaccuracies of these targets. Add to that all of the other things that influence stock prices — from interest rates to geopolitical events — and you can see why these targets are an educated guess at best.

Meanwhile, the numbers can vary from analyst to analyst and site to site.

The target for Apple APPLE INC. AAPL -0.31% , for example, was recently about $148 on Yahoo Finance, $146 on MarketWatch.com and $145 on Nasdaq.com. For electric car maker Tesla Motors TESLA MOTORS INC. TSLA 1.62% , which was recently trading at around $244 a share and has yet to report any profits, the differences are greater. On Yahoo Finance, the target estimate was $269. At Nasdaq.com it was $275 and on MarketWatch.com it was $258.

While it’s possible that the average or median recommendation may be predictive, research on individual recommendations isn’t encouraging. “Unless the target is close to the current price these things are pretty useless,” says Schneider, noting that there have been numerous academic studies on the topic, most with the same conclusion.

An MIT Sloan School of Management working paper published in 2004, for example, found that 54% of analysts’ one-year forecasts hit their price targets at some point during that period.

The odds for success, however, diminished greatly if the targets were considerably higher than the current price. If the forecasted price was up to 10% higher than the current price, it had a 74% chance of meeting its target. If it was 10% to 20% higher, there was a 60% chance of success. But once projections exceeded 70% of the current price got above that, the success rate plummeted to 25%.

“What this means if you want to use these target estimates to find stocks with big return potential you’re not likely to be successful,” Schneider adds.

Now, this isn’t to say you should turn a blind eye to these estimates altogether. “If you are interested in stock, I think it makes sense to get a sense of how the experts feel about it,” he says, noting that individual investors often focus on the “story” and make numbers an afterthought.

He adds: “If you are really bullish about something and the experts aren’t, you want to examine your views and see if you can still defend them.”

MONEY Ask the Expert

How to Get a Double Dose of Tax-Deferred Savings

Investing illustration
Robert A. Di Ieso, Jr.

Q: When I turn 70½ I’m required to start withdrawing funds from my 401(k) and pay taxes on it. I don’t need this money to live on. Is it too risky for me to invest it? – Dolores

A: What you’re referring to are required minimum distributions (RMD), which generally begin in the calendar year after you turn 70½.

Even if you can afford to keep your money parked in your retirement plans, the Internal Revenue Service insists that you start withdrawing money annually from your retirement accounts once you reach a certain age.

“It typically starts at 3% to 4% of the value of your account and goes up from there,” says Gretchen Cliburn, a certified financial planner with BKD Wealth Advisors headquartered in Springfield, Mo. You can estimate your RMD using a worksheet from the IRS.

Fail to withdraw the minimum and you’ll face a hefty penalty – 50% on the amount that should have been withdrawn, plus regular income taxes.

“Where things can get confusing is if you have multiple accounts,” says Cliburn. “I recommend consolidating accounts so you avoid missing an RMD.”

To add to the confusion, you can take your first distribution the year you turn 70½, or postpone it until April 1 the following calendar year – though you’ll need to take double the distributions that year. Likewise, if you’re still working, you’ll need to take RMDs on your IRAs, but you can delay taking distributions on your 401(k) or other employer-sponsored plan until the year after you retire.

Now, what should you do with that distribution?

“The answer really depends on your situation and your goals for that money,” says Cliburn. “Will you use it to support your lifestyle over the next 10 or 20 years, or do you want it to go to future generations?”

“If you want to hang onto those funds, your best bet is to open a taxable investment account and divide the distributions into three buckets,” she says. One bucket can be cash; another bucket might go into a balanced mutual fund, which owns stocks and bonds; the final bucket might go to a tax-efficient exchange-traded stock fund, such as one that tracks the S&P 500.

Just how much goes into each bucket depends on your other sources of income. “If you have a guaranteed source of income, you may feel more comfortable taking on a little more risk,” says Cliburn.

If you’re absolutely certain that you won’t need these required minimum distributions to live on — and that you have other funds to cover your retirement living expenses — then you could use the distributions to help others, and possibly get some tax savings.

You need earned income to contribute to a Roth IRA. But you could, for example, help your children fund a Roth IRA (assuming they qualify). You can gift any individual up to $14,000 a year before you have to file a gift tax return. They’ll make after-tax contributions to the Roth, but the money will grow tax-deferred. Withdrawals of principal are tax-free — provided the account has been open at least five years — and all withdrawals are tax free after the account holder turns 59½.

Another option is to open or contribute to a 529 college savings plan. The money grows tax-deferred and withdrawals for qualified education expenses are exempt from federal and state tax. Depending on where you or your children live, there may be a state tax deduction to boot.

A tax-free charitable transfer is another possibility, though you’ll need to wait to see if so-called qualified charitable contributions, or QCDs, are renewed for the 2015 tax year. Taxpayers didn’t hear about last year’s renewal until December.

Assuming it’s a go, it’s a sweet deal. Last year, IRA owners age 70½ or over were able to directly transfer up to $100,000 per year from their accounts to eligible charities, sans tax.

MONEY Ask the Expert

How to Save For Retirement When You Don’t Have a 401(k)

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: The company I work for doesn’t offer a 401(k). I am young professional who wants to start saving for retirement but I don’t have a lot of money. Where should I start? – Abraham Weiser, New York City

A: Millions of workers are in the same boat. One-quarter of full-time employees are at companies that don’t offer a retirement plan, according to government data. The situation is most common at small firms: Only 50% of workers at companies with fewer than 100 employees have 401(k)s vs. 82% of workers at medium and large companies.

Certainly, 401(k)s are one of the best ways to save for retirement. These plans let you make contributions directly from your paycheck, and you can put away a large amount ($18,000 in 2015 for those 49 and younger), which can grow tax sheltered.

But there are retirement savings options beyond the 401(k) that also offer attractive tax benefits, says Ryan P. Tuttle, a certified financial planner at Connecticut Wealth Management in Farmington, Ct.

Since you’re just getting started, your first step is to get a handle on your spending and cash flow, which will help you determine how much you can really afford to put away for retirement. If you have a lot of high-rate debt—say, student loans or credit cards—you should also be paying that down. But if you have to divert cash to pay off loans, you won’t be able to put away a lot for savings.

That doesn’t mean you should wait to put money away for retirement. Even if you can only save a small amount, perhaps $50 or $100 a week, do it now. The earlier you get going, the more time that money will have to compound, so even a few dollars here or there can make a big difference in two or three decades.

You can give an even bigger boost to your savings by opting for a tax-sheltered savings plan like an Individual Retirement Account (IRA), which protects your gains from Uncle Sam, at least temporarily.

These come in two flavors: traditional IRAs and Roth IRAs. In a traditional IRA, you pay taxes when you withdraw the money in retirement. Depending on your income, you may also qualify for a tax deduction on your IRA contribution. With a Roth IRA, it’s the opposite. You put in money after paying taxes but you can withdraw it tax free once you retire.

The downside to IRAs is that you can only stash $5,500 away each year, for those 49 and younger. And to make a full contribution to a Roth, your modified adjusted gross income must be less than $131,000 a year if you’re single or $193,000 for those married filing jointly.

If your pay doesn’t exceed the income limit, a Roth IRA is your best option, says Tuttle. When you’re young and your income is low, your tax rate will be lower. So the upfront tax break you get with a traditional IRA isn’t as big of a deal.

Ideally, you’ll contribute the maximum $5,500 to your IRA. But if you don’t have a chunk of money like that, have funds regularly transferred from your bank account to an IRA until you reach the $5,500. You can set up an IRA account easily with a low-fee provider such as Vanguard, Fidelity or T. Rowe Price.

Choose low-cost investments such as index funds and exchange-traded funds (ETFs); you can find choices on our Money 50 list of recommended funds and ETFs. Most younger investors will do best with a heavier concentration in stocks than bonds, since you’ll want growth and you have time to ride out market downturns. Still, your asset allocation should be geared to your individual risk tolerance.

If you end up maxing out your IRA, you can stash more money in a taxable account. Look for tax-efficient investments that generate little or no taxable gains—index funds and ETFs, again, may fill the bill.

Getting an early start in retirement savings is smart. But you should also be investing in your human capital. That means continuing to get education and adding to your skills so your earnings rise over time. Your earnings grow most quickly in those first decades of your career. “The more you earn, the more you can put away for retirement,” says Tuttle. As you move on to better opportunities—with any luck—you’ll land at a company that offers a great 401(k) plan, too.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Quick Guide to How Much You Need to Retire

MONEY Ask the Expert

How the Social Security Earnings Test Could Wipe Out Your Income

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My wife and I had an appointment with Social Security today—she is 72, and I just turned 62. I know my benefits will be reduced by filing early at 62 but doing so would enable my wife to collect spousal benefits. She didn’t work enough to qualify for her own benefits, so I figured this would be the best way to maximize our benefits. But it turns out that I earn too much to get any benefits myself and, because of this, my wife can’t get any benefits, either! Everything I researched indicated that I would only be hit with a reduction while she would receive the spousal benefits. This whole system is just too complicated to really understand. —Lou

A: Lou has run into Social Security’s Earnings Test. These rules may seem benign, but as he found out, there are hidden snags that can seriously derail your retirement dreams.

The Earnings Test applies to people who take benefits before what’s called Full Retirement Age. This is 66 for most people now and gradually rises to age 67 for people born in 1960 and later years.

If you take benefits before your FRA, they will be reduced if you continue to work and your wage earnings are above two thresholds in 2015—$15,720 or, in the year you reach FRA, $41,880. These amounts are adjusted upward each year as average wages rise.

If you earn more than $15,720, your Social Security retirement benefits are reduced by $1 for every $2 your wage income exceeds that limit. For the higher income test, the reduction is $1 in benefits for every $3 you earn above $41,880.

As Lou found out, his income is so far above $15,720 that he cannot receive any Social Security benefits whatsoever. In its consumer notices, Social Security emphasizes that benefits forfeited by the Earnings Test are not truly lost. When a person who takes early retirement benefits reaches FRA, the agency will automatically restore the lost income by permanently increasing his or her monthly payment to make up the difference.

Well, that’s better than nothing. And perhaps Lou would have settled for a lower, postponed benefit – claiming at 62 reduces your payout by 25% vs filing at FRA—if it meant his wife could begin receiving spousal benefits.

But she won’t.

There’s no mention of this in the agency’s online explanation of the effects of the Earnings Test. But the agency brochure, How Work Affects Your Benefits, includes this eye-opener:

“If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too.”

So, not only does Lou earn too much money to get any benefits for himself, he also he earns too much money for his wife to qualify to receive any spousal benefits at all, as he discovered.

Lou doesn’t have any school-age children at home. But if he did, their benefits based on his earnings record would also be wiped out by the Earnings Test.

Here’s a sample provided by a Social Security spokesman that shows how the Earnings Test can affect family-member benefits.

“Mr. Doe is entitled to a Social Security retirement benefit of $378 [a month]. His wife and child are each entitled to a benefit of $160. Mr. Doe worked and had excess earnings of $2,094. These earnings are charged against the total monthly family benefit of $698 ($378 plus (2 x $160)). Therefore, no benefits are payable to the family for January through March (3 x $698 = $2,094).”

Got that? In this example, the test cancels out benefits for part of the year. In Lou’s case, of course, the benefits are wiped out for the entire year.

Under the rules, Lou’s lost benefits would be restored when he reaches his FRA in four years, as I mentioned earlier. And his wife’s lost spousal benefits would be restored as well, when she is 76.

But Lou and his wife are better off waiting four years to file, or at least until his earnings no longer cancel out their benefits. At 66, he can file and suspend his benefits. This will entitle his wife to a full spousal benefit equal to half his retirement benefit. He then can defer his own benefit for up to four years, allowing it to increase by an inflation-adjusted 8% a year.

I feel for Lou, and I fully agree with him that the system is too complex for the vast majority of Americans to understand. At the very least, the family-wide impact of the Earnings Test should be prominently featured in all Social Security materials mentioning this rule.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: This Little-Known Pension Rule May Slash Your Social Security Benefit

 

MONEY Ask the Expert

The Best Investment Gift for a Grandchild

Investing illustration
Robert A. Di Ieso, Jr.

Q: What is the best investment gift that I can give to my 19-month-old granddaughter? – L. Gutierrez

A: Whether you have $100 to give or $10,000, the best investment gift for a young grandchild is to open or contribute to a tax-advantaged 529 college savings plan.

“For grandparents who want to help their kids pay for college, these make the most sense,” says John Gajkowski, a certified financial planner and co-founder of Money Managers Financial Group, in Oak Brook, Ill. “You have a broad range of choices of where and how you invest, and you can maintain control if you wish.”

More importantly, your investment grows sans tax, and qualified withdrawals—for things like tuition, fees, and room and board for higher education—aren’t subject to state or federal tax. Some states offer a tax deduction to boot if you go with your home-state plan.

Meanwhile, saving money in a 529 plan will have a minimal impact on financial aid. By contrast, if you were to put money in a traditional investment account in your granddaughter’s name, those sums would be factored into the family’s expected contribution.

Should your granddaughter get a full scholarship to college, no worries. You can just name another person as the beneficiary—they can be any age and needn’t be related.

If you must cash out, you will have to pay a 10% penalty, plus federal and state tax, on any earnings. This shouldn’t be a deal breaker, says Gajkowski. The advantages of socking away money in a 529 plan outweigh the risk that you won’t use the funds for higher education.

There are a couple of ways to go about making a contribution to a 529 account. The first is to open a 529 account in your name—you would serve as the custodian—and designate your granddaughter as the beneficiary. The advantage of going this route, says Gajkowski, is control. You can control how the money is invested, and you can change the name of the beneficiary at any time.

Option 2 is to help your granddaughter’s parents open their own 529, and make contributions to their plan. While you’ll give up control, this is a great way to get buy-in from your adult children—and get other relatives on board.

“We’ve had a lot of clients offer matching benefits to their [adult] children to incentivize them to save,” Gajkowski adds. “You can spread the word and let people know there is a general pool for college savings.”

While 529s are sponsored by individual states, you can invest in any state’s plan. In other words, if you don’t like the options or fees of your home-state plan, you can go with any state’s plan—and the money can be used for higher education in any state.

Start by seeing how your state plan sizes up against other states.

If your state allows for an income tax deduction (it’s typically capped at a few thousand dollars) and has a solid plan, that’s a good starting point. “But I would be far more concerned about the performance of the portfolio than any state tax benefit,” says Gajkowski, who recommends looking at the overall fees, investment options and track record.

If your state’s plan gets poor reviews, shop around for the best direct-sold non-resident plans at SavingForCollege.com. Most advisers recommend going with an age-based investment option, which will invest fairly aggressively when your child is young and gradually get more conservative as college approaches.

Your contributions are subject to the gift tax, though you can gift an individual up to $14,000 ($28,000 for couples) a year without running into that limit. You can also contribute up to $70,000 ($140,000 for couples) in one year and claim it over a five-year period.

The lifetime maximum contribution limits on most plans range from $200,000 to $350,000 per beneficiary. As college tuition trends higher, so are these saving ceilings.

MONEY home improvement

The Best Garden Tools for Mom

gardening tools
Andrew Unangst—Getty Images

Q: My wife and I started a gardening seriously a couple of years ago, and I want to get her some solid, high-quality tools for Mother’s Day to replace the standard “homeowner-grade” junk we’ve been using. Can you recommend a good basic set?

A: Gardening tools are one of those purchases where you really do get what you pay for. Affordable, light-duty products will inevitably snap, bend, or fall apart if you put them through anything more strenuous than, say, planting annuals each spring. And you’ll find that top-of-the-line tools also make laborious tasks easier. Here’s a roundup of high-quality yet reasonably affordable basic gardening gear.

Hand pruner: For everything from clipping overgrown bushes to removing spent flowers so a plant can produce more blooms, you’ll want a good set of bypass pruners, such as those made by Felco ($53 at homedepot.com).

Hand tool set: Look for heavy-duty metal hand tools, such as Lee Valley’s 3-piece set ($62 at leevalley.com), plus Fiskar’s tool apron, ($13 at amazon.com), which is designed to wrap around a standard 5-gallon bucket (about $3 at any home center) so you can carry all your tools and supplies in one hand.

Cart/seat: Gardening means getting down into the dirt, either by kneeling or sitting on a comfortable seat. A Tractor Scoot ($90 from gardeners.com) is a seat plus a storage bin set on chunky wheels.

Gloves: Make sure to get her a pair of good leather gauntlet gloves, which protect wrists as well as hands. While you’re at it, get yourself a pair too ($30 at duluthtrading.com).

Long-handled tools: Perhaps nowhere is quality more important than with tools designed to quite literally do the heavy lifting. For starters, consider the forged round-point shovel, PROHOE 6-inch scuffle hoe, and Union half-moon turf edger ($46, $35, and $40, respectively, at amleo.com).

Read next: 4 (Mostly) Cheap and Easy Ways to Green Up Your Grass

MONEY Ask the Expert

Should I Use Home Equity to Invest for Retirement?

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: We recently retired. We have a small mortgage on our home and lots of equity. Should we refinance our mortgage to free up additional money to invest for our retirement? —Bea Granniss, Amityville, N.Y.

A: Even at today’s low mortgage rates, it’s risky to borrow against your home at this stage of your life, says Tim McGrath, a certified financial planner and founding partner of Riverpoint Wealth Management in Chicago.

It’s true that more older Americans are retiring with heavy debt loads. But taking on additional debt when you are no longer bringing in income puts you in a precarious financial position. In retirement, your income is fixed—you probably have Social Security, your retirement savings, and possibly a pension. If an unexpected expense comes up, your chief recourse is to adjust your spending on discretionary costs, such as eating out and taking vacations. If you pile on more debt, you may not have enough leeway to avoid cutting your fixed expenses, says McGrath.

No question, refinancing looks attractive now. At today’s low interest rates, freeing up cash for a potentially higher return is a tempting notion—after all, stocks have done pretty well in recent years.

But it’s a mistake to compare today’s low mortgage rates to an expected return on investment, especially for retirees. Moreover, the basic math of refinancing may not make sense given your financial situation.

Let’s start with the refinancing rules. Unless you have a mortgage rate that’s significantly higher – at least a half percentage point above the current rate—you won’t free up much income with a refi. And now that you’re not working, it will be harder to get the best terms from a bank.

Borrowing against your home will reset the loan, which means you’ll be paying more in interest over time instead of paying down principal. “Instead of building more equity, you’ll be racking up more debt,” says McGrath.

Refinancing also costs thousands of dollars in fees. So you’ll need to stay in your home for a long time in order to recoup those expenses. But when you’re older, you’re more likely to reach a point where you want to downsize or move.

As for those enticing investment returns, there’s no guarantee the money you invest will produce the gains you’re seeking—or any gain at all. Lately, many investment pros have been warning that the returns on stocks and bonds are likely to be lower in the years ahead. Most retirees, in fact, are better off with a more conservative portfolio, since you have less time and financial flexibility to ride out market downturns.

Of course, every retiree’s financial situation is different. Refinancing might be a good solution if you want to pay off other high-rate debt. Or if you’re struggling to afford the mortgage payment, and you want to stay in your home, then refinancing could give you more of a cushion for your regular expenses.

But that doesn’t sound like the case for you. As McGrath says, “Taking money from your home equity and gambling on what could happen by investing it is too much risk in your retirement.”

Read next: How to Squeeze the Most Value from Your Home

MONEY Ask the Expert

When Does a Gift Trigger a Tax Bill?

Ask the Expert – Everyday Money illustration pulling cash out of wallet
Robert A. Di Ieso, Jr.

Q: “I want to pay off a sizeable ($15,000) debt that my adult son has. Are there any tax implications for either of us? —Jack

A: Your generosity will have no impact on your son’s taxes, but in theory it could affect the taxes on your estate down the road.

Every year, you’re allowed to give another person up to the annual gift tax exclusion—this year $14,000—without reporting the transfer to the IRS or having to pay taxes on the sum, says CPA Cari Weston, senior technical manager of the American Institute of CPAs taxation division.

For any gift above that limit, you will have to report the excess to the IRS through Form 709. That sum will be subtracted from your total lifetime gift and estate tax exclusion. Currently you can transfer up to $5.43 million in assets federal-tax-free over your lifetime, making it unlikely that any gifts will push your estate above that threshold.

Of course, there are easy ways to get around the limit and avoid any risk of estate taxes. If you’re married, you and your wife can together give up to $28,000 to your son per year. Or, if your son is married, you can gift him $14,000 and gift his spouse the other $1,000 to settle the debt, suggests Weston.

Paying the full amount directly to the creditor, while perhaps a wise financial move given your son’s current predicament with debt, will not help you get around the gift-tax limit, says Weston. No matter who the check is made out to, the IRS will still count it as a gift.

If you are covering tuition or medical expenses for another person, says Weston, you can get around the gift-tax rule, however, as both of these types of gifts are considered non-taxable.

MONEY Ask the Expert

Have Mutual Funds Lost a Key Advantage Over ETFs?

Investing illustration
Robert A. Di Ieso, Jr.

Q: ETFs seem to be taking the place of mutual funds, but my understanding is that mutual funds are still your best option if you want to reinvest dividends. Is that true? — Bill from Florence, S.C.

A: Once upon a time, there was some truth to this. But the popularity of dividend-focused exchange-traded funds has prompted most brokerages to tweak their policies to accommodate dividend reinvestors.

“From an investor standpoint the experience should be similar, though the process behind the scenes is different,” says Heather Pelant, a personal investor strategist with BlackRock, which manages mutual funds as well as ETFs via the firm’s iShares division.

Before ETFs became widely adopted, some brokerages charged ETF investors a transaction cost for dividend reinvestments, says Pelant. Hence the notion that mutual funds are a better vehicle for reinvesting dividends. “These platforms have since come up with procedures and features that are parallel to mutual funds,” she says.

Today, most large brokerages give investors the option of depositing dividend payouts into their cash accounts or automatically reinvesting dividends back into the security – be it an individual stock, mutual fund, or ETF. You should be able to make this choice on a fund by fund basis, change your preference at any time, and reinvest your dividends for free.

Still, it’s always a good idea to double check your broker’s own policy, lest you get dinged with additional fees.

One way ETFs are different (slightly) from mutual funds is the timing of reinvestments. Mutual fund dividend payouts are reinvested at a fund’s net asset value on the ex-dividend date, which is essentially the cutoff date for new shareholders to collect that dividend.

ETF investors, on the other hand, have to wait for all transactions to settle, typically a few days, to repurchase shares. If share prices swing widely during that short window of time, it could make a difference — for better or for worse.

For most investors, however, this nuance matters far less than all the other factors that go into deciding whether to invest via an ETF or fund.

Meanwhile, dividend reinvesting is a great tool to stay fully invested and systematically buy additional shares over time, says Pelant. Over the long term, these payouts really can add up.

Of course, because different funds will have different payouts, automatically reinvesting dividends could eventually throw off your allocations — even more reason to make sure you periodically rebalance your portfolio.

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