No hurry in closing out unused credit cards

One buying a home might prefer to wait

July 07, 2002|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

I am planning to purchase a home later this year. I recently paid off my student loans and have no debts whatsoever. I have three credit cards that I've used for many years. However, I also carry six department store cards that I haven't used in eight to 10 years. How do I go about closing those accounts? Do I call the department store or send a letter? I do not want to hurt my credit rating.

A: As long as you don't carry a balance on any of your credit cards, it shouldn't matter if you close those old accounts. You might keep the oldest one, to help show the longevity of your credit, and then write the other issuers a letter requesting the accounts be closed. Be sure to request that these issuers report to the credit bureaus that the accounts were closed at customer's request.

If you do carry a balance, hold off on closing the accounts until after you get your mortgage. Shutting down a bunch of credit lines can make your existing balances loom larger in the calculations that are used to determine your credit score.

I have a question about saving quarterly statements for 401(k) and 403(b) accounts. I now have a 3-inch binder full of such statements from 1984 to the present, representing six different accounts from different companies that employed me or my wife. Do I really need to save all this?

Crank up your shredder.

You probably won't need any of that historical information unless you have company stock in your plan or you made after-tax contributions to your accounts. Withdrawals from 401(k) and 403(b) plans are typically 100 percent taxable, so there's no need to keep track of how much you made or lost on the underlying investments.

If you made after-tax contributions - and not many people do - you'll want to keep the evidence of how much because those contributions would be deducted proportionately from your withdrawals when figuring taxes.

You also might want to keep your old statements if you invested in company stock. That's because of a special tax rule that allows you to separate the stock from your other investments when you retire and to pay taxes based on what you paid for the stock, not what it's worth today. Any gains are taxed, when you eventually sell, at capital gains rates, rather than the higher income tax rates that would apply to other 401(k) withdrawals. You should talk to a tax pro about the details of this maneuver to see whether it's right for you.

Otherwise, there's little reason, other than nostalgia, to keep all your old statements. You might enjoy, for example, looking back at your December 1999 balance, and remembering your wild hopes of early retirement. Most of us, though, find that kind of thing depressing.

As long as you're simplifying your life, consider consolidating all those accounts, if you haven't already. You might be able to transfer the old balances to your current employers' plans, or roll them over into individual retirement accounts.

My mother-in-law transferred her home to my husband in 1992. In 2000, she went into a nursing home and we sold the house, paying capital gains on the difference between the sale price and what she paid for the house. Since then, we have heard that we didn't need to pay those taxes. Is that true, and if so, how do we go about getting a refund?

It's true that had you done things differently, you easily could have avoided those taxes. Because of the way you handled this, however, you pretty much locked in a big tax bill.

If your mother-in-law had kept the house and it was sold after she went into the nursing home, she could have avoided taxes on at least $250,000 of profit. Every homeowner is entitled to exclude that much profit on the sale of a home, provided she has lived in the house for at least two of the past five years.

Taxes on the home sale also could have been avoided if your husband's mother had kept the house and bequeathed it to her son. The house then would have been revalued for tax purposes, receiving what's known as a "step up" in its tax basis. Translated, that means your husband could have sold the house shortly after her death without owing any taxes.

Don't make decisions about major assets without consulting a tax pro who can walk you through the financial implications of your choices.

I would appreciate your further insights comparing custodial accounts with 529 plans. You recently said that a Uniform Transfers to Minors Act, or UTMA, account could be transferred to a 529 college savings plan. My broker, however, told me I would have to sell the investments held within the UTMA because 529 plans accepted only cash. True? This would have real tax consequences now that could outweigh the future benefits years from now. My broker also tells me I would have much less control over the investments in a 529. Isn't this lack of control a disadvantage? I have an UTMA for my 4-year-old and was thinking of establishing another account for the baby who's about to arrive.

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