Q: Recently, we attended a seminar about protecting one's retirement savings from the negatives of taxes, lawsuits, and probate. As we're both retired and living on pensions and Social Security, we welcomed advice on reducing exposure of our nest egg principal. The thrust was to transfer (despite penalties) one's CDs and traditional IRAs to an Equity Indexed Annuity (nine years). It sounded too good. What are the drawbacks of EIAs?
M.S., St. Petersburg, Fla.
A: One drawback is the withdrawal penalty most banks charge for terminating your CDs early. After that, Gary Altman, a certified financial planner in Rockville, Md., says that some of the disadvantages of EIAs or any annuity are high fees, inflexible rules, and significant early withdrawal penalties if you change your mind.
If an EIA is a better investment than your CDs or IRA and will make you more money than your current investments, then Mr. Altman questions why it's being sold to you for income-tax savings, creditor protection, and probate avoidance, when none of these is really an advantage of an EIA (especially over an IRA).
In many states, traditional IRAs are protected from lawsuits. Also, IRAs are not subject to probate. Instead, they pass automatically to beneficiaries. While assets inside an IRA are not subject to income taxes as they grow, distributions are taxable income. Transferring your IRA to an EIA does not change any of these rules. As a result, you should only invest your IRA in an EIA if you believe that the EIA, after expenses, will generate a better return than the investments now held in your IRA, Altman says.
Q: I filed for Chapter 7 bankruptcy in 2004. It was later dismissed. Is there any way to repair my credit and/or have the bankruptcy removed from my credit report?
A.J., via e-mail
A: The good news is you can repair your credit. The bad news is the bankruptcy filing will stick to your credit report for up to a decade after it was dismissed.
Steven Katz, a spokesman for the truecredit.com portion of credit-reporting agency TransUnion, says that by law, information on both Chapter 7 and Chapter 13 bankruptcies remains on credit reports for up to 10 years. Credit-reporting agency policy dictates that Chapter 13 is removed three years early. All records marked "included in BK" (shorthand for bankruptcy) remain on your credit report for seven years from the date of first delinquency, or as otherwise limited by state law, says Mr. Katz.
There are things that you can do, however, to boost your credit score – a figure based on reports compiled by TransUnion, Experian, and Equifax.
For a bankruptcy or any other negative payment item, the FICO score considers how recently it occurred and how many other delinquent payment records are on the credit report, says Craig Watts, public affairs manager of credit-score calculator Fair Isaac Corp. As a result, older items and items with small amounts will count less against a person's FICO score than more recent items or those with larger amounts.
Although a six-year-old Chapter 7 bankruptcy will have less impact than a more current one, it will continue to affect a credit score until it drops off the report.
Since a bankruptcy counts less against a person's score as it ages, and since roughly 65 percent of a FICO score is unrelated to payment history, it's possible to begin improving a FICO score from the time that a bankruptcy is discharged. The keys, Mr. Watts says, are to get current and stay current on credit obligations, take on new credit only when it's really needed, and keep credit balances low.
People who follow these guidelines have been known to regain a FICO score high enough to qualify for a prime rate loan in as few as three or four years after filing for bankruptcy, Watts says.
Mr. Katz adds that you can check out the TrueCredit.com website. Click on the "Learn" tab for information.