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10 questions: Social Security Spousal Benefits

Photo courtesy of Dan Ruswick on unsplash.com

Photo courtesy of Dan Ruswick on unsplash.com

I recently had the pleasure of taking part in a live interactive event with Yahoo! Finance, where folks were able to ask virtually any question they wished. We received and responded to over 200 questions – they’re all on Facebook on the Yahoo! Finance page (click the link to go to the page). One recurring theme played out over and over: Social Security Spousal Benefits are not understood by a vast number of folks.

Naturally I find this to be disturbing.  Social Security Spousal Benefits often represent a large part of the total benefits available to a couple.  This benefit is even more important for many divorced spouses, as it might represent the only benefits available to many divorcees. Understanding this benefit is very important, as SSA staff often isn’t fully-conversant in the options that you have available.

Keep reading…

Social Security Wage Base Projected for 2015

According to the Social Security Administration trustees, the Social Security wage base for 2015 is projected to be $119,100.  This represents an increase of $2,100 from the 2014 wage base of $117,000.

This is an increase of 1.79% – and won’t be finalized until October when the other increases for Social Security amounts are announced. This is a relatively small increase when compared to recent annual increases we’ve seen.  The previous 3 years’ increases have averaged 3.09%.

This is different from the COLA (Cost of Living Adjustment), which has increased an average of 2.27% in the past three years. The 2014 COLA (applicable to 2015 benefits and other figures) will be released later in the year, typically in October.

RMD Avoidance Scheme: Birthdate Makes All The Difference

Photo courtesy of Lizzy Gadd on unsplash.com

Photo courtesy of Lizzy Gadd on unsplash.com

As you may recall from this previous article, it is possible to use a rollover into an active 401(k) plan as an RMD avoidance scheme. Of course, this will only work as long as you’re employed by the employer sponsoring the 401(k) plan and you’re not a 5% or greater owner of the company. In addition, the rollover must be done in a timely fashion, prior to the year that you will reach age 70 1/2 in order to avoid RMD.

An example of where timing worked against a taxpayer (at least temporarily) recently came to me via the ol’ mailbag: Keep reading…

File For Part B Medicare – COBRA Isn’t Enough

Photo courtesy of Lukasz Szmigiel on unsplash.com

Photo courtesy of Lukasz Szmigiel on unsplash.com

For most folks, when you reach age 65 and have ceased regular work, filing for Medicare Parts A & B is an automatic thing. If you don’t file during the 3 months before or after your 65th birthday, you may have penalties to pay. This applies even if you have recently been laid off of work and are covered for health insurance under a COBRA plan. Part A carries no cost if you’re fully covered (40 quarters of coverage), but Part B requires a monthly premium.

When laid off from an employer who has provided health insurance coverage to you while employed, you have the option of continuing the health coverage for a period of time, up to two years. This continuation of coverage is called COBRA, named for the law that put it into place (Consolidated Omnibus Budget Reconciliation Act). You have to file in a timely manner for Medicare – COBRA coverage doesn’t remove that requirement.Keep reading…

Windfall Elimination Provision May Impact Spousal Benefits but not Survivor Benefits

danny and sandyWhen your Social Security retirement benefit is subject to the Windfall Elimination Provision (WEP), you’re likely painfully aware of the reduction to your own benefit by this provision. What you may not be aware of is that the effect goes beyond your own benefit – your spouse’s and other dependents’ benefits are also impacted by this provision. However, the impact of WEP does not continue after your death. Keep reading…

Don’t Let the Premium Tax Credit Hang You Out to Dry

Photo courtesy of Charles L. on unsplash.com

Photo courtesy of Charles L. on unsplash.com

When you are using the Health Insurance Marketplace for your family’s health insurance, you may be receiving assistance with the premiums in the form of a premium tax credit.  This credit is paid to the health insurance provider, allowing your monthly premium to be lower.

These premium credits are based upon your residence, income, family size, and eligibility for health insurance via other avenues, such as through a new employer.  If something has changed in your life, you may be receiving too much or too little in premium tax credits.  The IRS recently issued a Health Care Tax Tip designed to help you understand if you need to make a change to the premium credit you’re receiving to avoid unpleasant surprises at tax time. Keep reading…

3 Do Over Options For Social Security Benefits

do overs as easy as jumping in the lake

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You’re allowed to file for your Social Security retirement benefits when you reach age 62 (in general). Most advisors recommend that you delay filing until some later date to better maximize your lifetime benefits. But what do those advisors know anyhow?

At least that is what you were thinking when you first filed. After all, you’ve paid into the system for your entire working life, you deserve to get the money back out, right? Plus, who knows when Social Security will go bankrupt, right? Gotta get the money while you can!

Then a couple of years pass and you realize that you short-changed yourself (and your spouse) by taking early benefits. Turns out that you didn’t need that money at 62 – you could have delayed. And you’ve come to realize that Social Security is not likely to go away, at least not in your lifetime. (Maybe those advisors were right after all?) Keep reading…

Retrieving a Prior-Year Tax Return Copy

my tax return copy is lost somewhere in this city

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Sometimes you need access to a previous year tax return copy, and dadgummit you just pitched the box of tax copies from 2011, thinking you couldn’t possibly need it again!  There are ways to get this information – some easier than others.

First of all, if you prepared and filed your own return using one of the commercial programs, and you’ve maintained your access to the program over the years, you should be able to go back and re-print a copy of the return from that year.  This is the quick and simple method.

If you had a tax professional prepare and file the return for you, she should have a copy of your return – if not the fileable copy, then at least a client’s or preparer’s copy, which should be adequate for fulfilling most requirements.  Many preparers retain these copies, with supporting documentation, for many years for just this sort of purpose.  Our office maintains copies of all returns we’ve filed, for example.  Keep reading…

Using First Year RMD Delay to Your Advantage

Photo courtesy of Alicja Colon on unsplash.com.

Photo courtesy of Alicja Colon on unsplash.com.

When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution.  For all other years you must take your RMD by December 31 of that year.  For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year.  However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden.

There may be many circumstances that could make this delay work to your advantage – maybe you’re still working in the year you reach age 70½ and your income is much higher than it will be the following year, for example. Keep reading…

How to Deal With Missed Required Minimum Distributions

fixing missed required minimum distributions can be like staring into the sun

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What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA?  In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years?

The Inheritance

So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary.  Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death.  As of now, for example’s sake, let’s say we’re in the fourth year after your mother’s passing. (see Notes below) Keep reading…

Annuity in an IRA? Maybe, now

Annuities can produce mountains of fees

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Forever and a day, the rule of thumb has been that you should not use IRA funds to purchase an annuity – primarily because traditional annuities had the primary feature of tax deferral. Since an IRA is already tax-deferred, it’s duplication of effort plus a not insignificant additional cost to include an annuity in an IRA.  This hasn’t stopped enthusiastic sales approaches by annuity companies – plus new features may make it a more realistic approach.

Changes in the annuity landscape have made some inroads against this rule of thumb – including guaranteed living benefit riders, death benefits, and other options.  Recently the IRS made a change to its rules regarding IRAs and annuities that will likely make the use of annuities even more popular in IRAs: The use of the lesser of 25% or $125,000 of the IRA balance (also applies to 401(k) and other qualified retirement plans) for the purchase of “longevity insurance”, which is another term for a deferred annuity. Keep reading…

Resurrecting the Qualified Charitable Distribution?

You could use your computer to make a qualified charitable distribution

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This past week the US House of Representatives passed a bill (HR 4719, known as the America Gives More Act) which would re-instate the Qualified Charitable Distribution from IRAs and make the provision permanent.  This provision expired at the end of 2013, as it has multiple times in the past, only to be re-instated temporarily time and again.

A Qualified Charitable Distribution (QCD) is when a person who is at least age 70½ years of age and subject to Required Minimum Distributions from an IRA is allowed to make a distribution from the IRA and direct the distribution to a qualified charitable organization without having to recognize the income for taxable purposes.  This has been a popular option for many taxpayers, especially since the QCD can also be recognized as the Required Minimum Distribution for the year from the IRA. Keep reading…

How to Compute Your Monthly Social Security Benefit

steps to compute your monthly social security benefit

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So you’ve seen your statement from Social Security, showing what your benefit might be at various stages in your life.  But not everyone files for benefits at exactly age 62 or 66 – quite often there are months or years that pass before you actually file.  This article will show you how to compute your monthly Social Security benefit, no matter when you file.

Computing your monthly Social Security benefit

First of all, in order to compute your monthly Social Security benefit, you need to know two things: your Primary Insurance Amount (PIA) and your Full Retirement Age (FRA).  The PIA is rather complicated to define, but for a shorthand version of this figure, you might use the figure that is on your statement from Social Security as payable to you on your Full Retirement Age (or “normal” retirement age).  Keep reading…

The Dog Ate My Tax Receipts Bill

dog ate my tax receiptsNow here’s some legislation that I could get behind!

Recently, House Representative Steve Stockman (R-TX) introduced a bill in response to the IRS’ lame excuse of a “computer glitch” that purportedly erased all of the incriminating evidence from the agency’s computers.  This was part of the testimony offered by former IRS Exempt Organizations Division director Lois Lerner in response to the accusation that her division targeted organizations critical of the current administration.

Stockman’s bill provides that if the IRS can use lame, flimsy excuses to avoid prosecution, taxpayers should be allowed to use similar excuses.  The actual text of the bill follows below: Keep reading…

QDRO vs Transfer Incident to a Divorce

sometimes people discuss transfer incident to a divorce in tall buildings in big cities

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Divorcing couples often face the need to split up some retirement account assets.  This can be done from a retirement plan such as a 401(k) or 403(b), or from an IRA.  Depending on which type of account you’re splitting, the rules are very similar but are referred to by different names.  For a qualified retirement plan (401(k) or 403(b) plan), the operative term is Qualified Domestic Relations Order or QDRO (cue-DRO).  For an IRA, the action is known as a transfer incident to a divorce.

We discussed the QDRO in several other articles, so we’ll focus on the transfer incident to a divorce in this article.

Keep reading…

Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld

part year withholding works for cab drivers too

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When you file your W4 form with a new employer, this instructs the employer how much tax to withhold from your pay, based on a full year’s pay rate.  There is a strategy you can employ that will reduce the amount of tax withheld from your pay – known as the part year withholding method.  This method of tax withholding calculation takes into account that you are only working and earning for a part of the year, so your overall income will be less, and there would be less tax required.

If you start working in the middle of the year (or worse, late in the year) the normal rate of withholding would result in significant over-payment of tax withheld.  The standard tables used to calculate withholding make the assumption on each pay that you are earning at this rate over the entire period.

Keep reading…

Why You Should Participate in a 401(k)

2559353875_e08d93e193_m1We all know that we should save money for a rainy day, a message we’ve received since we were little ones, but this article covers some more reasons why you should participate in a 401(k) plan, if you have one available.

It’s on you

Back in the olden days when the earth was still cooling, employees could count on (or at least thought they could count on) a pension benefit from their employer upon retirement.  This pension plan provided a safety net that allowed the employee to go into retirement with relatively little concern about whether there would be enough money to live on. Keep reading…

Roth 401(k) In-Plan Conversions

As of the beginning of 2013, a new provision became available for participants in 401(k), 403(b) and 457 deferred compensation retirement plans: the Roth 401(k) In-Plan Conversion.  This provision allows current employees participating in one of these Qualified Retirement Plans to convert funds from the traditional 401(k) (or other) account into the Designated Roth Account (DRAC) that is part of the plan.

This is new and different because previously the only way to convert funds from the 401(k) plan to a Roth-like account was to have left employment by the sponsoring employer. Keep reading…

Take Dave’s Advice With a Grain of Salt

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Dave Ramsey hands out advice to millions of people every day, and much of the time he’s right on track – or at least relatively so.  However, like all purveyors of financial advice to the masses, his advice should be taken with a grain of salt.

There are two reasons for this: First, your circumstances are very likely to be very different from the individual to whom the “vending machine” advice is rendered.  A subtle change to the circumstances can make a major difference as to whether the recommendation applies to you the same as the asker.  Dig deeper than just taking the recommendation verbatim, making a decision based on your own circumstances.

Second, the very nature of the forum that Dave (and Suze, Malcom, and others) use, that of mass-produced financial advice, is oriented toward the sound bite.  Take the recommendation Dave makes in this recent column as an example.  In the first question, Dave’s got no idea what the tax situation is for Jennifer, her income, her age (several years before retirement could be 5 or 50!), if she has other accounts, not even if she’s married.  Yet his response is unequivocal: a Roth 401(k) is best – presumably (at least in part) because that’s what Dave has chosen for himself.  Dave’s financial circumstances are bound to be drastically different from Jennifer’s, but the sound bite wins out.  Millions of followers now have the idea that in all circumstances, if you have a Roth 401(k) available, you should utilize it.  That’s not exactly poor advice, but it’s very generalized and incomplete at the very least.

A proper answer would require more information about Jennifer, much more.  For example, if it turns out that Jennifer has a very high income now and expected future income will be much lower, the traditional 401(k) could be the best for her.

Another problem with this answer is Dave’s calculation of the tax hit on distribution.  He says it could be $300k to $400k on a million-dollar account.  That could be the case if Jennifer withdrew the entire $1 million in one tax year (makes for a great sound bite!). However, if she takes that money out over a 20-year timeframe at $50,000 per year, is married, and that’s the only income that Jennifer and Mr. Jennifer receive, at today’s tax rates they’d pay less than $64,000 in tax during that period.  Not such a juicy sound bite, but likely a lot closer to reality.

My point is not that you should disregard what Dave Ramsey (or any of the other financial “gurus” out there) has to say.  Much of the time, as I stated before, he gives good guidance (notwithstanding his irrational fear of debt and his expectation of a 12% return from the stock market). I like a lot of what he has to say, helping folks via his Financial Peace University and whatnot.  Plus, how can you not like a guy whose offices are right next door to a Cracker Barrel and a Krispy Kreme, all right across the street from a swanky Galleria Mall??? No, my point is to understand the nature of the recommendations given, and that your circumstances are most likely very different from the seeker of wisdom from the mount.

File Now. Suspend Later.

Photo courtesy of Lacey Raper on unsplash.com.

Photo courtesy of Lacey Raper on unsplash.com.

Suspending benefits is a facet of Social Security filing that usually only gets written about in connection with filing – File and Suspend is often referred to as a single act, but it’s actually two things.  First you file for your benefits, which is a definite action with the Social Security Administration, establishing a filed application on your record.  Then, you voluntarily suspend receiving benefits.  If this happens all at once, the end result is that you have an application filed with SSA, but you’re not receiving benefits.  Since you have an application filed (in SSA parlance, you’re entitled to benefits), your spouse and/or dependents may be eligible for a benefit based on your record.

Since you are not receiving benefits, your record earns delayed retirement credits (DRCs) of 2/3% per month that you delay receipt of benefits past your Full Retirement Age (FRA).  (Note: you can only suspend receipt of benefits when you are at or older than FRA, age 66 for folks born before 1955.)

It doesn’t have to happen all at once though.  You could file for benefits and receive them for a few months or a long period of time, and then suspend benefits later in order to receive delayed retirement credits to increase your benefit later.

For example, Tim started receiving his Social Security benefit at age 62, because he figured he couldn’t count on the government to make the funds available for him in the future, and by gum he was going to get what was coming to him.  By starting early, Tim has reduced his benefit from a possible $2,000 (had he waited until FRA to file) to $1,500 per month.  The crazy thing is that Tim has a pension that covers his and his wife Janice’s monthly expenses completely, so he doesn’t really need the SS benefit for living expenses.

A couple years later, Janice explained (tactfully of course) to Tim how he had unnecessarily thrown money away by filing so early.  Since more than 12 months had passed, he couldn’t do anything about it, right?

Wrong – once Tim reaches FRA, he has the option of suspending his benefits, which will provide the ability for his benefit record to begin accruing the Delayed Retirement Credits at the rate of 2/3% per month, or 8% per year.  After four years, Tim’s benefit could be increased by 32%, up to a new monthly benefit of $1,980 per month – almost as much as what his original benefit would have been. (Cost of Living Adjustments have not been factored into the equation.)