A gift of financial planning is best left to those ready to receive it
Q: My daughter, age 34, has a good salary but is terrible with money matters. Her school loans are $100,000, and she has credit-card balances of $10,000. She spends freely and is not concerned about paying off bills. She contributes a little to a 401(k), but really needs to understand her situation better. I thought about giving her a session with a financial planner as a gift. Is that a good idea?
J.M., via e-mail
A: It's only natural for parents to want what is best for their children. But sometimes, in order for the child to learn a difficult lesson, it's the parent's job to sit back and let it happen, says Brian Jones, a certified financial planner in Fairfax, Va., and author of "Getting Started: The Financial Guide for a Younger Generation."
As it stands, Mr. Jones says that if your daughter were truly concerned about her situation then (a) she wouldn't be in the mess you describe and (b) she would be willing to do something about it.
If you seek financial counsel for her, no matter how good or wise it may be, the planner's advice will fall on deaf ears if she isn't committed to fixing her situation.
But parents are never too old to encourage their children. You might start subtly, perhaps even slipping her a copy of Jones's book. It's a short and to the point – an ideal read for those in Generation X and Y who want to learn about managing their finances, controlling debt, and saving. She may not listen to you, but she may listen to someone from her peer group.
Q: I'm concerned about tax consequences of leaving one IRA trustee for another. Is moving funds from one investment to another a sale, triggering income tax? I think you can switch from one trustee's funds into another of the same trustee's funds, and you can ask the company to send your IRA assets to another trustee for a different investment choice without triggering income tax. Even if I sell IRA assets and receive cash, do I not still have 60 days to reinvest it in another IRA before triggering income tax on the sale?
P.H., via e-mail
A: Changing IRA trustees is never a problem as long as you handle the transfers between the two trustees through each of them – with each one having the knowledge that a transfer is about to take place.
In the context of an IRA, moving funds is not necessarily a sale that would trigger taxes, says W. Thomas Curtis, a certified financial planner in Gaithersburg, Md. It would depend on whether your distribution includes income-tax withholding. If it does, the amount withheld for income tax is likely to become taxable income to you whether or not you rolled over the remainder of the funds. This is because the money was paid to the government. At that point, most people fail to get all of the money back into their the account within 60 days, triggering a taxable event, he says.
Trustee-to-trustee transfers are the best way to make IRA rollovers, says Mr. Curtis. The transaction is reported to the IRS on Form 1099 as a transfer, not as a distribution, so it isn't going to be looking to you for additional tax on a premature distribution. This is true even if you sell the amount in one IRA and have the cash transferred to the new IRA.
But selling it on your own and then trying to get the money back in 60 days can pose problems. Here, Curtis says, you're gambling that you'll have the funds to make the "recontribution." (And what emergency could have been so great that you want to tap your IRA rather than some other investment?)
There are numerous complications with this approach. Rather than worrying about making a mistake, Curtis advises hiring a professional. His or her fee is likely to be far less than any tax penalty you'd face if you got it wrong.