Credit Monitoring v. Security Freeze- Which is Best?

Reader Question: I read your article about signing up for Target’s credit monitoring program. The fact that you have to give all of your personal information to them, online no less, where it can be hacked, keeps me from signing up for this or any credit monitoring program!

I’ve authorized a credit freeze with the three credit reporting agencies (over the phone). Doesn’t this accomplish the same thing as credit monitoring? C.M.

Answer: These are two different things. With a security (credit) freeze, you contact each of the three credit bureaus, Experian, Transunion and Equifax and request that they not release your credit file to anyone making an inquiry. The effect of this is to help prevent someone from opening ‘new’ credit in your name, something identity thieves love to do. I say, ‘help prevent’ because most legitimate creditors will not open a credit account without determining the consumer’s credit worthiness with one or more of the credit bureaus. This strategy does not prevent any identity theft that does not require a credit review. Examples include stealing your bank and PIN information or stealing your credit cards. Credit monitoring services, such as those offered for free by Target, monitor credit activity including Internet activity, related to your name; bank, credit card, brokerage accounts; and Social Security number. If you think you are a likely target of credit or identity fraud, you should consider employing both strategies. Note that with a credit freeze, if you are seeking new credit, you’ll have to ‘un-freeze’ your credit file…a little bit of trouble but worth the effort if you’re worried about identity theft. I understand your reluctance to ‘trust’ Target with all of your personal information but my guess is that Target is one of the safest retailers on the planet at this time from a data security perspective. If you want to sign up for 12-month free credit monitoring offered by Target, go to You have until April 23rd, 2014.

Reader Question: I am writing about a thorny Traditional IRA matter.  My wife and I have about $43,000 of after-tax funds each in our IRA accounts.  Is there a tax-free way of transferring that money to our Roth IRAs? One concern we have is that somehow their tax status will get lost in the shuffle when we die and our kids inherit the accounts. C.A.

Answer: There are two possible solutions:

  1. If you have a 401-k (or similar plan), you may be able to ‘roll up’ (using IRS form 8606) the profit portion of your IRA into your plan which is not a taxable event. What you’ll have left in your IRA is your ‘cost basis’…meaning what you invested with after-tax dollars. You can then convert your IRA to a Roth without paying any taxes.
  2. If option 1 is not available to you, then a conversion of all or part of your IRA to a Roth will be taxed on a pro-rata basis. For example, if your IRA is worth $100,000 and your after-tax contributions equal $43,000, upon conversion you’ll have to report 57% of those dollars transferred to the Roth as income (taxed at your ordinary income tax rates).

Reader Question: I am retired in AL, but earned my pension and contributed to my IRAs while working in Florida. I know that my pension (a defined plan) is exempt from AL state taxes, but I am hearing conflicting answers on whether or not I must pay AL state taxes on the RMD I am now facing (this will be my first withdrawal year) for monies in my IRAs which were SOLELY contributed to while I was a resident of Florida.

Any information you might be able to provide to me concerning the issue of what is required by the State of Alabama on monies required to be withdrawn from my IRAs due to the Federal RMD calculations would be greatly appreciated. H.F.

Answer: Distributions from an IRA account will be subject to both federal and state income taxes regardless of which state you lived when making those contributions. The one exception is that if the IRA is a result of a rollover from an exempt retirement plan (such as a state employee retirement plan) and it has never been comingled with other IRA or retirement funds, distributions would be exempt from state income taxes.