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Options For a Spousal Inherited IRA

spousal inherited IRAElsewhere in this blog we’ve discussed inherited IRAs and how to handle them – but we have not covered all of the options for a Spousal Inherited IRA separately. There are some differences, specifically more options available, so this is an important topic. It should be noted that the majority of this article applies to inheriting IRAs or Qualified Retirement Plans (QRPs, such as a 401(k) or 403(b)), although the term IRA is used throughout. The receiving account must always be an IRA, though, when rolling over.

As a person who has a spousal inherited IRA, you have the following options if you are the sole beneficiary of the IRA:

  • Leave the IRA where it is, and begin taking distributions based upon your own life (see Table I for the factors). This is the default position. If it works in your favor, you could also take distributions based on the original owner’s (your late spouse) lifetime.
  • Rollover the IRA to an inherited IRA (see this post for more information). In this case, you’re treating the situation the same as if you were a non-spouse beneficiary.
  • Rollover the IRA into an existing or new IRA in your own name. This is the special provision that spouses can use that a non-spouse beneficiary cannot. (Note: you could also leave the IRA where it is and just begin treating the account as if it was your own – more on this below.)

Rollover Into Your Own IRA

There’s nothing terribly complex about the mechanics of a spousal rollover of an inherited IRA – you simply put in motion the paperwork for a rollover, making sure that both the original custodian and the new custodian are aware of the fact that you’re taking advantage of this special provision for spouses. It is also possible to leave the IRA in place where it is and treat the IRA as your own – this will become the default if you 1) make a contribution into the account; or 2) fail to take the RMDs as if the account were inherited. This assumes that you’re not yet 70½ years old. You’ll still have to take RMDs when the time comes for them.

Now you have the IRA funds in your own account – which you can contribute to, convert to a Roth IRA, or whatever you’d like. Plus, if you’re under age 70½, you don’t have to start Required Minimum Distributions (RMDs) from the account. This brings up the one possible downside that you should be aware of as well, prompting a word of caution…

A word of caution

IF you go ahead and rollover the IRA from your deceased spouse’s account into an account in your own name and you’re less than age 59½, you do not have free access to the funds in the account – one of the 72(t) exceptions must apply, or you’ll be charged the extra 10% penalty in addition to taxes on the withdrawal. It is for this reason that many inheriting spouses do not take the IRA on as their own account – especially when there is a need to access the funds for income before reaching age 59½.

One more provision

As mentioned earlier, the provision for the spousal inherited IRA to treat the IRA as his or her own is generally for a spouse that is the sole beneficiary. There are two ways to resolve this situation if the spouse would like to rollover the account to her own IRA and there is more than one beneficiary.

  1. Other beneficiaries could disclaim the inheritance, leaving only the spouse (see this article for more information). Many times, a well-intentioned IRA owner will designate her spouse and a child or grandchild (or a trust for the whole mob of children and/or grandchildren) as split beneficiaries of an IRA account. This can bring about unintended results, such as very young children having to take RMDs that they do not need. By disclaiming the inheritance and leaving only the spouse, the spouse can set up a new IRA in her own name, with the same original, now disclaimed, beneficiary or class of beneficiaries as the beneficiary(s) of the new account. This will fulfill the original owner’s intent, while opening up the account to the extra privileges available to an owner of an IRA versus an inheritant.
  2. A somewhat less messy method is available – as a spousal beneficiary, but not the sole beneficiary, you can take a distribution of your entire share from the account, and then roll it over to an IRA in your own name, as long as it’s within the 60-day period following the distribution. You may need to make up the difference of the withholding – in general a distribution from an IRA will not be subject to 20% withholding, but from a 401(k) there will be mandatory 20% withholding of tax. If you don’t roll over the full amount into your own IRA, you will be taxed and perhaps assessed a 10% penalty on the amount that you did not roll into the new account. Using this method eliminates the disclaiming requirement which might be necessary if there are many other beneficiaries or if the other beneficiaries do not wish to disclaim. (Note:  This method is STRICTLY for a spousal inherited IRA. A non-spouse beneficiary will bust the stretch IRA by taking a distribution of this type, even if they rollover the amount into a properly-titled account within the time allotted. Those rollovers should ONLY be done via trustee-to-trustee transfer.)

How Social Security COLA is Calculated

200px-Double ColaAs you are probably aware, each year your Social Security benefits can be increased by a factor that helps to keep up with the rate of inflation – so that your benefit’s purchasing power doesn’t decrease over time.  These are called Cost Of Living Adjustments, COLAs for short.  The increase for 2019 was 2.8% – and for 2020 the COLA is 1.6%.  But how are those adjustments to your benefits calculated?

Calculating the COLA

There is an index, compiled and managed by the Bureau of Labor Statistics, called the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  This index, or rather changes to the index, indicates the fluctuations in selected wages over time.  Each October, SSA looks at the CPI-W level for the third quarter of that year (averaging July, August and September), and compares it to the same level for the previous year’s third quarter.  The percentage of increase, if any, is then used as COLA for Social Security benefits.  This is an automatic process, no action is required by Congress to enact the increases over time. Also, being automatic, without passage of a law Congress can’t bypass an increase when the numbers warrant.

As an example, the CPI-W average for the third quarter of 2019 was 250.200, and for the same period in 2018 the average was 246.352. Comparing the two amounts we see that the CPI-W has increased by 3.848. Dividing this number by the 2018 average, we see that the increase year-over-year has been 1.561%, which is rounded up to 1.6% for the COLA increase for 2020.

How it’s applied

So, simple enough, right?  We have the COLA, just multiply that by your benefit, right?  Not so fast there, calculator-breath.  Staying true to form, SSA has a more complicated method to determine what your benefit will be each year.

As we mentioned before in the article on Calculating the Social Security Retirement Benefit, when you apply for benefits affects your benefit permanently.  All benefit calculations begin with your Primary Insurance Amount (PIA), and are adjusted up or down depending on whether you apply for benefits after or before Full Retirement Age (FRA), correspondingly.

For example, if your Full Retirement Age is 66 and your PIA is $2,000, but you’ve filed for benefits early at age 62, your actual benefit amount began at 75% of the PIA, or $1,500.  The COLA is applied to your PIA, and then your reduction applied to that amount.  So for a COLA of 1.6%, your new benefit amount would be $1,524 – calculated as PIA ($2,000) times COLA (1.6%) equals $2,032, times the reduction amount of 75%, for a total of $1,524.

The math works the same either way, you could just simply multiply your current benefit amount by 1.6% to come up with the increase. I just walked through it this way because that’s how Social Security calculates it. Sorry about the calculator-breath comment earlier, it was unwarranted. 

Similarly, if you delayed your benefit to age 70, your benefit would begin at 132% of your PIA, or $2,640.  For the 2020 increase of 1.6%, your new benefit would be $2,682.20.  Amounts are always rounded down to the next lower dime.

3 Myths About Social Security Filing Age

This article takes a long hard look at these three “facts” about Social Security filing age and shows the real math behind them. All three are only true to a point – and as you’re planning your Social Security filing age, you should understand the real truth behind these three items.

First, let’s look at the concept of delay.

You Should Always Delay Your Social Security Filing Age to 70

This one is the easiest to understand why it’s wrong – but the component of truth in it can be important because it could work in your favor to delay. Of course an absolute like this is going to be proven incorrect in some circumstances.

If you happen to be able to delay your Social Security filing age and you live a long time after age 70, over your lifetime you will receive more from Social Security than if you file early. However, if you need the cash flow earlier due to lack of other sources of income, filing early may be your only choice. Plus, if you don’t happen to live past the magic 80-82 age, you’ll do better off by filing early.

Filing earlier can provide income earlier, but depending on your circumstances you may be short-changing your family by filing early. When you file early, you are permanently reducing the amount of benefit that can be paid based on your earnings record. Your surviving spouse’s benefits will be tied to the amount that you receive when you file, and so if you delay to maximize your own benefit and your spouse survives you, you’re also maximizing the benefit available to him or her. This is to assume that your surviving spouse’s own benefit is something less than your benefit.

John has a benefit of $1,500 available to him if he files at age 66, his Full Retirement Age (FRA). His wife Sadie has a benefit of $500 available at her FRA. If John files at his age 62, his benefit is reduced permanently to $1,125 per month. When John dies, assuming Sadie is at least at FRA, Sadie’s benefit will be stepped up to $1,237 (the minimum survivor benefit is 82.5% of the decedent’s FRA benefit amount).

On the other hand, if John delayed his benefit to age 68, he would receive $1,740 per month since he has accrued delay credits of 16%. Upon John’s death, Sadie will receive $1,740 in survivor benefits. By delaying his benefit 6 years, John has improved his surviving spouse’s lot in life by over $500 per month. Of course this has required him to come up with the funds to get by in the meantime, and so if he has the funds available this makes a lot of sense. If he doesn’t have other funds available, one thing that can help matters out is if Sadie files for her own benefit at age 62 – this will provide them with $375 per month while John delays his benefits.

The key here is that it’s often wise for the member of a couple that has the larger benefit to delay filing for the longest period of time that they can afford, in order to increase the survivor benefit available to the surviving spouse. But it’s also often necessary to file earlier due to household cash flow shortages. As we’ll see a bit later, only the question of surviving benefits makes this delay a truism. Otherwise, it could be more beneficial to file earlier.

Increase Your Benefits by 8% Every Year You Delay Filing

This one again comes from a truth: for every year after FRA that you delay your Social Security filing age, you will accrue 8% in delay credits. But the year-over-year benefit differences are not always 8%, and often the difference is much less.

It is true that if you compare the benefit you’d receive at age 66 to the benefit you’d receive at age 67, it will have increased by 8%. However, if you compare your age 67 benefit to your age 68 benefit, it will have increased by 7.41%. This age 68 benefit is 16% more than the age 66 benefit, but only 7.41% more than the age 67 benefit.

The table below shows the year-to-year increases across the spectrum of filing ages when your FRA is age 66:

Filing Age Difference
63 6.67%
64 8.33%
65 7.69%
66 7.14%
67 8.00%
68 7.41%
69 6.90%
70 6.45%

And this table shows what the year-over-year increases are if your FRA is age 67:

Filing Age Difference
63 7.14%
64 6.67%
65 8.33%
66 7.69%
67 7.14%
68 8.00%
69 7.41%
70 6.90%

So as you can see, only from one specific year, your FRA, to the following year, is the increase 8%. Otherwise, with only the exception of one filing age (the difference between 3 years before FRA and 2 years before), the year-over-year increase is less than 8%, and sometimes it’s less than 7%.

The Break Even Point is 80 Years of Age

I’ve often quoted this – rarely pinning it down to a specific year, but giving the range of around 80 years old. It’s not that simple though when you consider all of the different ages that an individual can file.

For example, when deciding between a Social Security filing age of 62 versus filing at age 63, your break even point occurs at age 77 (when your FRA is age 66).  But when deciding between age 63 and age 64 (with FRA at 66), the break even occurs at age 78.

On the other end of the spectrum, when choosing between filing at age 69 versus filing at age 70 (FRA of 66), the break even occurs at age 84 – considerably later than age 80. The break even for the decision to file at age 68 versus age 69 occurs at age 82.

The two tables below illustrate the ages at which the break even occurs between the various filing ages. This only illustrates the breakeven between in one year versus filing in the following year. In addition, this only considers one individual, not a married couple, as the variables become far too complex for this short article.

This first table is when your FRA is 66:

Filing Age Break Even
63 77
64 78
65 76
66 79
67 80
68 80
69 82
70 84

And this table shows what the differences are year-over-year if your FRA is age 67:

Filing Age Break Even
63 77
64 75
65 78
66 79
67 79
68 81
69 83
70 85

So the year-over-year break even point varies, depending on which Social Security filing age you’re considering. If the two options are earlier (before FRA) the break even point occurs before age 80. If at or around FRA, then the break even occurs right around age 80. But if the Social Security filing age you’re considering is near age 70, count on the break even being much later, as late as age 85.

Can A Grandchild Get Social Security Benefits?


In today’s complicated world, there are many cases where a grandparent is the primary person responsible for a minor grandchild. The reasons are far and wide; regardless, many times the primary support for a minor child comes from an grandparent. If the grandparent in question is receiving Social Security benefits, can a grandchild also get Social Security?

After all, we know that the minor child of a parent who is receiving Social Security benefits may be eligible for child’s benefits, so why would it be any different with a grandparent?

The primary difference is in the relationship. The Social Security rules are written specifically to provide benefits for a minor child of a Social Security recipient. And the minor child (under age 18 or under age 19 while still in high school, or disabled) must either be 

  • the natural (biological) child of the parent
  • the adopted child of the parent
  • the stepchild of the parent

In the case of a grandchild, unless the grandparent has taken the extra step to legally adopt the grandchild, the child we’re referring to here does not fit any of those descriptions. However, depending on the reason that the grandparent is the primary support for the child, there may be benefits available.

In addition, the minor child in question must be receiving at least half support from the grandparent, and must reside with the grandparent.

If adoption is not in order, the reason why the parent is not in the picture for support and care is important. If the parent is unable, physically or mentally, to care for the child, then the parent might be considered disabled for Social Security purposes, for example. This could open the door for the parent to receive Social Security Disability benefits (potentially making benefits available to the child). Otherwise, the grandchild could become eligible for benefits on the grandparent’s record.

The grandparent may become the de facto guardian of the minor child in the case of the death or disability of the parent, but in those cases the parent’s own record would provide for either survivor benefits or child’s benefits (in the case of disability of the parent). 

The definitive way to resolve this is for the grandparent to adopt the grandchild. This would qualify the minor child for benefits based on the grandparent’s record, for certain, with no questions.

However, if the parent of the child is either disabled or deceased, the child may also become eligible for benefits based on the grandparents’ record, as long as the support and residence requirements are met. This eligibility will be weighed against benefits that the child may be eligible for based on his or her own parents’ record(s) (the record of the child of the grandparent). 

The best way to resolve this is to consult Social Security about your situation. It’s very possible that a minor grandchild could be eligible for benefits based on your Social Security record, but Social Security will have to make the final determination for you.

Social Security Earnings Test

first paycheck earnings testAs you know, you can receive Social Security retirement or survivors benefits and continue working.  If you happen to be less than Full Retirement Age (FRA) and you earn more than the earnings test, your benefit will be reduced.  (Note: these reductions are not really lost, you will get credit for the withheld benefits at FRA.)

Earnings Test

If you’re at or older than FRA (age 66 if born between 1946 and 1954, ranging up to 67 if born in 1960 or later) when you begin receiving retirement or survivors benefits, you may earn as much as you like and your benefit will not be reduced.  If, however, you are younger than FRA, your benefit will be reduced $1 for every $2 you earn over $17,640 (in 2019) before the year of FRA. The Social Security benefit will be reduced by $1 for every $3 you earn over $46,920 in the year of FRA, up until the month you reach FRA. These limits are adjusted every year with cost-of-living indices.

The income we’re talking about here is W2 (employee) income or self-employment income, referred to as earned income. Non-earned income, such as interest, dividends, pensions, retirement withdrawals, or rents received are not included for the purpose of the earnings test. Plus, in the first year that you start benefits, only that earned income after you’re receiving benefits is counted, on a monthly basis. Any income received before you start receiving Social Security benefits is not counted toward the earnings test.

For example, let’s say your benefit is $700 per month ($8,400 for the year) and you are 63 years old, starting benefits at 62.  You work part-time and earn $20,000 during the year, which is $2,360 more than the earnings test.  The Social Security Administration will withhold a total of $1,180 from your benefit ($1 for every $2 over the limit). This is done by withholding your Social Security benefit for two months, January and February of the following year – for a total of $1,400 being withheld. Beginning in March you’ll receive your full $700 benefit. In January of the next year you’ll receive $220 extra for the additional amount that was withheld above the $1,180. If you advise SSA of your income expectation in the coming year, the withholding will be done during the year of the income (withholding from each check), rather than the following year. If your actual income differs from the expected income you reported, it will be “trued up” in January of the following year.

If this was the year you’ll reach FRA – for example in June, and your earnings through May were $48,000 ($1,080 more than the limit), $360 would be withheld from your $8,400 benefit which is accomplished by withholding your first check of the year, and the additional $340 will be refunded to you in January of the following year.

First Year

In your first year of Social Security benefits, you can earn as much as you like before you start to receive benefits. Then, for each month after you start your Social Security benefit, you are limited by the monthly amount (listed above) divided by 12. For 2019 that is $1,470 per month.

So, if you’re under FRA and worked for 8 months of the year in 2019 and started Social Security benefits in September, you can earn up to $1,470 each month (September thru December) without limitation. If you earn above that limit in any month, for each $2 over the limit, $1 will be withheld. This will occur with your first check(s) in the following year.

For every year thereafter (until your FRA year), the earnings test is applied on an annual basis, rather than monthly. So as long as you don’t go over the $17,640 limit (for 2019) you have no benefits withheld. As with the monthly test, for each $2 over the limit, $1 will be withheld.

FRA Year

In the year that you’ll reach FRA, there is an annual limit applied to your earnings. If you’re reaching FRA in August 2019, you are limited to earning no more than $46,920 prior to the month you reach FRA. For every $3 over that limit, $1 will be withheld.

Starting with the month you reach FRA, there are no earnings limits.

Credit for Reduced Social Security Benefits When Subject to the Earnings Test

earningsContinuing to work while receiving Social Security benefits may cause a reduction to your benefit – if you earn more than the annual earnings test (AET) amount. But this reduction isn’t permanent – you will get credit for reduced Social Security benefits when you reach Full Retirement Age. So how does this work?

Earnings Test

The earnings test limit is $17,640 for 2019 if you are under Full Retirement Age for the entire year. The limit is $46,920 in the year that you reach Full Retirement Age. Full Retirement Age (FRA) is age 66 if you were born between 1946 and 1954, ratcheting up to age 67 if your birth year is 1960 or later.

So for 2019 if you were born after 1952 and you are receiving Social Security benefits, for every two dollars that you earn over $17,640, one dollar of your benefit is withheld.

For example, if you earn $20,000 in 2019 and your Social Security benefit is $500 per month, that’s $2,360 more than the limit. Your $500 benefit will be withheld for the first 3 months, in order to withhold the full $1,180. The extra $320 will be refunded to you at the beginning of the next calendar year.

The same would happen if you will reach FRA in 2019 and you earn more than $46,920. Let’s say you make $48,000 during the first half of 2019 and you reach age 66 on July 1. Since you’ve earned $1,080 more than the limit before reaching FRA, $1 is withheld for every $3 over the limit. So if your SS benefit is $1,000, in order to withhold $540, 1 months’ worth of benefits will be withheld, and the over-withheld $460 will be paid out in January of the following year.

The Payback

Once you reach Full Retirement Age, you will receive credit for reduced Social Security benefits. SSA will look at your record to determine how many months’ worth of benefits that you have had withheld due to the earnings test. Your filing age is then re-calculated, adding on those months of withheld benefits.

For example, let’s say over the years a total of 9 months’ worth of benefits had been withheld due to the earnings test. At FRA, your filing age is re-calculated as if you had filed at the age of 62 years, 9 months – an addition of 9 months.

Since your original benefit was reduced by 25%, your re-calculated benefit would only be reduced by 21.25% – owing to the fact that the year between age 62 and 63 increases your benefit by 5%. So your $500 benefit is increased to $525 per month from now forward.


This reduction and payback applies to your own retirement benefit, spousal benefits, and survivor benefits. If your own benefit is withheld due to earnings over the limit, your beneficiaries’ benefits (your spouse’s or children’s benefits) will also be withheld until the reduction amount is completely covered.

Social Security Income Replacement Rates


Image by woody1778a via Flickr

It’s a fact that Social Security retirement benefits are not designed to provide retirement income in the same ratio to all levels of wage earners. The system, being a social insurance system, is designed to benefit folks with lower lifetime income levels at a higher rate than those with higher income levels.

So, what are the replacement rates? Of course it is different for each individual, but some examples are listed in the table below. This is based on someone who is reaching Full Retirement Age (FRA) in 2019, and who is filing for benefits as of reaching FRA:


Average Lifetime Earnings
(annual, indexed)

FRA Social Security Benefit

Replacement Rate

















This is just a small sample of various levels of lifetime average income. The average income over your lifetime is indexed to wage inflation, making some of your earlier earnings years much higher to account for inflation over time. The table above shows how at lower income levels Social Security replaces a much higher ratio of the average lifetime indexed income. Therefore, at higher income levels, a higher amount of savings must be laid aside in order to ensure that adequate income is available for retirement.

Filing at an earlier age before FRA will reduce the benefit amount. This will drive down the replacement rate, naturally. For example, if the person with a $20,000 lifetime income average filed for benefits at age 62, the replacement rates would be reduced to 46%, with benefits of approximately $9,112.

Vice versa, filing at any age after FRA up to age 70 will increase the benefit amount and the replacement ratio. If the person with a $100,000 average lifetime earnings delays her benefit to age 70, this would result in an annual benefit of $40,797 and a replacement rate of almost 41%.

Don’t take this to mean that the system is broken or unfair – it’s working exactly as it was intended to, by providing a measure of insurance to those who need it most.

Sometimes the Obvious Choice Isn’t Optimal

Situations arise where it seems like the law was written in our favor. Tax laws change, retirement accounts have their tax advantages, and the best intentions get us excited to take action.

However, it may not always make the most sense to do what seems to be the best or most obvious thing. There are times we can stop, think, and see if the most obvious choice is the best decision for our situation.

For example, the tax law allows an individual with company stock in their 401(k) to take advantage of Net Unrealized Appreciation in their retirement account. To understand what NUA is, please see our previous articles and posts.

In a nutshell, by keeping employer stock in the account until retirement and taking advantage of NUA, the tax law allows significant tax savings on the appreciation of the stock in a 401(k). However, just because it makes the most sense from a tax percentage, it may not be the ideal decision.

Although there may be a big tax savings, there could be a huge tax bill when trying to take advantage of this option. A five or six-figure tax bill or higher, may not be the most ideal choice for a retiring individual. The tax rate as a percentage may be lower because of capital gains, but the overall tax paid as a dollar amount may be higher then simply taking distributions and paying ordinary income tax.

Another example is a Roth 401(k). This allows after-tax money to be saved to the account, and qualified distributions to be withdrawn tax-free in retirement. However, in most cases the tax-free benefit doesn’t come into play until a person reaches age 59.5.

It looks like a great option, but for someone wanting to retire earlier than age 59.5, having most of their retirement income in a Roth 401(k) may not make sense. It may be wiser to save in a non-qualified account, where money can be accessed before age 59.5, without penalty.

Finally, it may be tempting to save a lot for college. People may want to save so much that they ignore their own retirement savings. They’re getting the benefit of saving for college which is great but may fall short of their retirement income needs since much of their money was going to pay for college. Again, it seems like a good idea at first, but the long-term consequences of lost retirement savings may be catastrophic.

The point is not that the above strategies are poor choices. They can be very good financial decisions; but they need to be weighed with the other potential options available, potential consequences, and impact on other financial and wealth management goals.

Adjusting Your Withholding and Estimated Tax Payments

Now is a good time to look at the amount of tax that you have withheld from your pay, pension or Social Security, as well as any estimated payments that you make throughout the year. The amount of any payment that you had to make on April 15 should be fresh in your mind. If it was a sizable amount you should review the situation and quite possibly adjust your withholding or estimated payments.

It’s also possible that you’ve been having more tax withheld than necessary. If you received a rather large refund, you’re essentially giving the government a tax-free loan of your money for a good part of a year. Many folks like to receive a big refund, it’s sort of a “bonus” each year, but you could help yourself out paycheck-by-paycheck if you adjusted withholding. If you still want the “bonus” effect, set up an automatic deposit into a savings account and make it “hands off”. Then in April you can withdraw the money and do whatever you would have done with the refund.

Withholding Water
Image by GStevens via Flickr

For example, if you commonly receive a $2,500 refund, you could adjust your withholding so that you get an extra $100 per month in your take-home pay, and still have a $1,300 refund after filing your taxes. Better yet, adjust your withholding to have an extra $200 in take-home pay and then you’ll still get a $100 refund.

So How Do You Do It?

First of all, you need to estimate how much your total pay is going to be for the year. You can start with your pay stub for the current month – then project out for the remainder of the year how much your total pay will be at the end of the year.  The same would be true for pensions and Social Security payments. Be sure to use the “taxable gross” or perhaps “gross pay” figures for your calculations, not the take-home amount. If you only have a “gross pay” figure, understand that some deductions will come out of your check pre-tax, like a 401(k) contribution, so you’ll want to reduce the “gross pay” figure by those deductions to come up with your taxable income.

Having calculated the total taxable income you’ll receive for the year, make the same sort of calculation to project the amount of income tax you’ll have withheld for the year. Do the same thing for your state income tax withholding (if you’re lucky enough to live in one of the states that imposes an income tax).

Don’t forget to include any planned IRA distributions (including Roth Conversions) as income, along with any tax you plan to withhold from these distributions. Also calculate any capital gains or losses you may be planning during the year, as well as your dividends you’ll receive.

If you have self-employment income, the calculation becomes a bit more difficult. To be conservative, just subtract your expected expenses from your expected income to produce a net income figure to work with.

Next, go to the IRS website and locate Form 1040-ES for the current year. This form will help you to complete the calculations. Follow the instructions on the form, using your prior year’s tax return to help you with things like any credits you will receive. In the instructions for form 1040-ES, you’ll also find the tax rates to apply to your projected taxable income for the year.

You’ll need to make sure that your total withholding and estimated payments tally up to at least 90% of the projected tax you’ll owe, or 100% (110% if your AGI is $150,000 or more) of your prior year’s tax amount (whichever is less). If your withholding is less than the prior year’s tax and more than $1,000 less than the 90% figure for this year’s tax, you could be subject to a penalty for underpayment. Generally this is only applied if you have had a significant underpayment in the previous year (the first year is a “gimme”).

You’ll also want to locate the estimated tax payment calculations for your state tax withholding and run through the numbers there as well.

Okay, I did that. Now what?

If you’re underpaying your tax significantly, now it’s time to figure out how to reconcile the situation. (If you’re overpaying tax and you want to increase your take-home pay or net payments from pensions or Social Security, you can use similar measures.) The tactics you use depend upon the type of pay that you receive:

W2 Pay (regular employee pay): If you are receiving a paycheck from an employer, you can make adjustments to the amount of pay that is being withheld by using Form W4 – available from your Human Resources department. Follow the instructions for the form, making adjustments for your pay as it continues through the remainder of the year so that you have a total withholding that is appropriate for your projected taxable income. A simple way to do this is to request a specific amount to be withheld in addition to your regular withholding. Many employers provide access to a substitute Form W4 online.

Pensions: Much the same as with W2 pay, you make adjustments to your withholding for pension payments using Form W4P, which will be available from your pension administrator. Use the same methods of calculation mentioned above with W2 pay. Many pension providers have an online facility to allow changes to Form W4P withholding.

Social Security: Same as pensions and W2 pay. You will be using Form W4V, available from the Social Security Administration. This is also available online at

IRA or 401(k) Distributions: When you take a distribution from an IRA or 401(k) account, one part of your distribution includes the ability to withhold taxes from the distribution. You can increase the total tax you’ve had withheld for the year by having some of your distribution withheld in taxes. Distributions from 401(k) plans automatically have 20% withheld, although you can increase that amount. You may not decrease it, however. IRAs do not have this mandatory withholding.

When doing a Roth Conversion, you need to keep in mind that any amount that you don’t convert by either having it withheld for taxes or just taking as a regular distribution will not only be taxed but also can be subjected to the early withdrawal 10% penalty if you’re under age 59½.

1099 Pay (such as an independent contractor) or self employment income: In this case you can make estimated payments using the vouchers included with Form 1040-ES. You’ll want to make these payments in a timely fashion – April 15, June 15, September 15 and January 15 – for the amount of net income you’ve received up to the end of the prior month. Don’t forget to run the calculations for your self-employment income and include that in your estimated payments.

You can make estimated payments no matter what sort of income you receive throughout the year, in addition to the Form W4 adjustments mentioned above. Failure to make these payments in a timely manner can also result in interest and penalties for underpayment.


Bear in mind, the quarterly estimated payments are necessary to be made within specific timeframes. Form W4 withholding is also sent to the IRS (by your employer) regularly, in a timely fashion. Withholding from an IRA or 401(k) distribution is the only one that doesn’t have to be spread out over the year. For example, if you found that your tax withholding was going to be too little for the year, you could wait until December and make up the difference using an IRA distribution withholding mentioned above (this is not recommended). See the article IRA Trick – Eliminate Estimated Tax Payments for more details.

Filing after restricted application


You are one of the lucky folks who was born before 1954 and you filed a restricted application for Social Security spousal benefits. This allowed for your own Social Security benefit to be delayed, accruing the delayed retirement credits (DRCs). So now you’re about to turn 70 – what should you do now? Will your own Social Security benefit be automatically applied once you hit 70?

Unfortunately, no. You will need to go through the regular Social Security application process. This is the only way to get your own Social Security benefit to start up for you now that it has maximized.

You should not delay past age 70 in filing this application. There is no further increase to your Social Security benefits after you’ve reached 70, so waiting will only leave money behind that you are due at this point. Generally you should file this application within the 2-3 month period prior to your 70th birthday.

If for some reason you missed filing for your own Social Security retirement benefit at age 70, you should file as soon as possible. If it’s been less than 6 months since your 70th birthday, you can get a retroactive lump sum for the missed months. Unfortunately, if it’s been more than 6 months, you’ll have lost any additional months (beyond 6) that you should have received.

Use POMS to help your case with SSA

Recently a client asked me about a situation with her Social Security benefits. She had spoken with Social Security (SSA) several times and has received erroneous information each time. Below is how we used POMS to help her prove that she had benefits coming to her.

The individual in question is a divorcee (a year ago, after a 40 year marriage) who was born in 1953 (reaching 66 this month). The ex-husband has been collecting Social Security benefits for several years. 

She’s heard about the restricted application for folks born before 1954, and it seems as if this should fit her situation. However, in speaking with SSA about it, she’s been told that she is not eligible for spousal benefits via a restricted application because it has not been 2 years since her divorce (it’s now been about 14 months).

While what SSA told her would be true in some cases, the fact that her ex-husband is already receiving benefits overrides the 2-year waiting period for independent entitlement. This is all well and good to know, but how does she prove this to SSA?

This is where we go to POMS. In case you’re not familiar with POMS, it’s a database of the Social Security Program Operations Manual System. Within POMS are all of the rules and procedures that are used to implement all of the different programs and facets that Social Security administers. You can find it by clicking on this POMS table of contents link.

Specifically for this case, we’re looking at the POMS page indexed as RS 00202.005 Divorced Spouse, Section B. Within section B we find the following information:

B. Policy – Entitlement Requirements

   1. Divorced Spouse

       To be entitled as a divorced spouse, a claimant must:

    1. be the divorced spouse of a NH entitled to a RIB or DIB

(I removed the parenthetical references to clarify)

Following is some more clarifying information about the POMS reference above:

NH – stands for NumberHolder – this is someone who has a Social Security Number assigned to them. In this case, it is referring to the ex-husband as the NH.

RIB or DIB – means Retirement Insurance Benefit or Disability Insurance Benefit. Since the ex-husband has been receiving retirement benefits for several years, he’s “entitled to a RIB”.

Because of this, as long as the individual fits in with the rest of the requirements listed in the Section B, she is eligible for the ex-spouse benefit via a restricted application.

Don’t let Section B.1.e trip you up – the words “entitled to” mean that the individual has filed an application for the RIB or DIB. Since she has not filed for RIB at this point, she is still eligible for the ex-spouse benefit, via restricted application, since she was born before 1954. This is regardless of the amount of her own RIB when compared to the ex-spouse benefit.

To SSA, there is a distinctly different meaning between the words “eligible for” and “entitled to”. “Eligible for” means you meet the requirements for a benefit except for filing an application. “Entitled to” means you’ve filed an application for the benefit.

In Section C you’ll find the definition which includes the 2-year waiting period. However, Section C does not apply in this case since Section B applies to the client.

Use POMS to help your understanding

You can use POMS to help you better understand how SSA’s rules work. But don’t expect to just simply open it up and find your answer. POMS is a large system, encompassing more than 15,400+ pages. I know this, because I am reading through all of the pages, and I’m indexing the pages as I read them (I’ve read through almost 7,000 pages so far). And I learn something new every time I sit down to work on this read-through. On top of this, POMS is an ever-evolving system, with changes being applied nearly every day. (Most of the day-to-day changes are for clarification or to simplify wording or update annual figures, but sometimes actual policy changes are implemented via a POMS update.)

The point is that POMS is the official manual which SSA uses to implement their policies and rules. So if you spend time learning about your unique situation and the rules that apply to it, you can be in a much better position to ensure that the rules will be applied properly to your situation. If SSA disagrees with your expected outcome, you can ask the SSA staff to direct you to the POMS section that applies. That way you can view for yourself how they’re applying the rule. If you’ve found some other reference that seems to contradict, ask the SSA folks about this. These are your benefits after all, you deserve to understand the rules they’re applying to you.

Friends With (Social Security) Benefits

Social Security is arguably one of the most important cash flows for individuals in retirement. Many individuals have paid into the system for years, and in turn will be eligible for reduced benefits as early as age 62, or at their full retirement age (between ages 66 and 67).

The decision on when to start collecting benefits is important and can impact your retirement cash flows for your remaining retirement. This decision should not be taken lightly, and it should not be left to informal conversations with friends, coworkers, etc. In other words, don’t base your decision to take benefits based on what your friends have done. Your situation is different. And in most cases, your decision is final.

There are several strategies that may be employed when collecting benefits. Such strategies include taking benefits early at a reduced amount, delaying benefits for a higher amount, spousal retiree benefits, and even restricted application (rare, but still allowed).

While it’s not bad to discuss Social Security with friends and relatives, the decision on when to collect should not be based solely on when they took theirs, or plan to take theirs. Some reasons include different working periods, salaries, family dynamics, longevity, and other sources of retirement income.

To get a clear understanding of the benefits you may be eligible for, one of the first steps to take is talking with the Social Security Administration. Calling your local office, making an appointment, and discussing your options is wise, and the people at the SSA are equipped to help give you the best information about your options for benefits.

Additionally, it may be wise to discuss your situations and goals with a financial professional with expertise in Social Security (expertise meaning they have in-depth knowledge of Social Security – not just a software package that tells them what to do). He or she will be able to provide insight, advice, and recommendations for your situation. They may ask questions you haven’t thought of in order to give you the best options for your filing strategy.

Social Security benefits are an important part of many retiree’s plans. Don’t base the decision of such an important retirement cash flow on what friends have done. Make the decision based on the best information and advice relative to you.

The Do It Yourself Do Over For Social Security

Do it yourself
Image by iNNoVaNDiS via Flickr

About 10 years ago, the Social Security Administration made a change to their rules that took a powerful option off the books – the payback and Do-Over.

Back in the olden days (prior to December, 2010), there was an option available that allowed a person to file for Social Security retirement benefits at any age, and then later pay back all of the benefits received and re-file at a later age. This action effectively cleaned the slate and allowed starting over at your later age at a higher rate.

When the rule was changed, the payback and re-file now must be completed within 12 months of your filing date. But all is not lost – there is still a way to reset things if you find yourself having filed earlier than you really needed to and you wound up working longer than you thought.

The Do It Yourself Do Over

If you’re still under Full Retirement Age (FRA) and working, you’ve probably heard about how earning more than a certain amount will result in forfeiture of part of your benefits. (More on the specifics on the earnings test here.) The thing about forfeiting some of your Social Security benefit is that – once you reach FRA, you’ll get credit back for the benefits that you forfeited. (This only applies to your own retirement benefit, not spousal or survivor benefits.)

In a way, by earning more than the limits, you’re effectively paying back the amounts that are being forfeited, and at FRA your benefit will be recalculated, which is the Do Over in disguise.

Granted, this isn’t exactly as  powerful as the original Do Over, but it’s a way that you could re-set when you’ve started receiving benefits earlier than you needed and would like to get that credit back and file at a later age, without as much (or with no) reductions in your benefit.

Large IRA Planning Opportunities


According to a report from the GAO, in 2011 (most recent data) there were over 600,000 Americans with IRAs with a balance of $1 million or more. Suffice it to say, that number is bound to be much larger today, nearly 10 years later. In fact, Fidelity recently reported that the number of folks with $1 million or more in a 401(k) plan is nearly 200,000.

With that in mind, if you’re in this group or plan to be in this group, what are the planning opportunities that you have available to you? Naturally this fits into the “good problem to have” environment, because having a significant amount in retirement accounts can help ensure a comfortable retirement.

On the other hand, $1 million isn’t necessarily that much money when you consider that you’ll need to make it stretch out over (possibly) 30+ years in your retirement. For a 70-year-old with a $1 million IRA, the Required Minimum Distribution (RMD) is only approximately $36,500. For many folks, that’s hardly a drop in the bucket for living expenses, if that’s the only money available.

Thankfully there are other sources many folks have available to them – such as Social Security, pensions, and other investments outside of retirement accounts. 

For some folks, such a withdrawal is more than they’ll need. If the IRA money is likely to be more than you need for living expenses (specifically when you reach age 70½), there can be some opportunities early on in the process to help you ease the tax hit. This is especially important right now, during a time of historically-low income tax rates.

For example, if your taxable income needs are met with an income of $80,000 (for a married taxpayer), this puts you in the 12% tax bracket with approximately $23,000 of headroom (income that would continue to be taxed at the 12% rate). Further, you have an additional roughly $89,000 that could be claimed as income before you breached the 22% bracket. So that makes a total of around $112,000 of income that you could claim before hitting the 24% bracket.

For one possible strategy, you could convert a portion of your $1 million-plus IRA over to Roth, taking advantage of these low rates while we have them. This wouldn’t be without a significant tax burden – it would cost approximately $22,305 extra in taxes to convert this amount (about 20%). If you have other sources of funds to pay the tax, you’ll preserve more of the Roth money for later use (tax-free!). But even if you have to use the IRA withdrawal and only convert approximately $90,000 to the Roth, this still makes a lot of sense.

As you convert this money from traditional IRA to Roth IRA, you’re removing that money from the Required Minimum Distribution calculations, thereby reducing the amount that you’ll be required to withdraw when you reach 70½. Gradually you can reduce the size of the traditional IRA and bolster your Roth IRA, forestalling the over-distribution mentioned earlier.

In addition to the benefit of reducing future RMDs, converting to Roth will set your heirs up with a tax-free fund at your passing. Of course, tax-free is far better than fully-taxable, which is how a traditional IRA is treated when inherited. Plus, when you add in the looming legislation of the SECURE Act, your heirs might be forced to take the full amount of your IRA as taxable income over as little as 5 years (or possibly 10 years).

Rather than convert the money from traditional to Roth, you might also consider using the traditional IRA money in place of income that you could produce from non-IRA assets. For example, if you have a taxable investment account that is subject to capital gains taxes, preserving this money can also be very beneficial from an estate planning standpoint. So instead of taking money from your capital gains-taxed fund, take it from the IRA and preserve the capital gains account.

This is because your taxable account, when you die, receives a step up in basis for your heirs. So, for example, if your taxable account is worth $500,000 and $100,000 of it represents capital gains, when your beneficiaries inherit the account the capital gains are wiped out. Your heirs will only have capital gains to the extent of any growth that occurs after your death. This is almost as beneficial as a Roth account, but not quite.

Another strategy you might consider is using the IRA money instead of filing for Social Security early. As detailed in the post Should I Use IRA Funds or Social Security at Age 62?, it can be tax-advantageous to use IRA funds (or another source) and delay taking Social Security until it’s maximized.

In either of the above strategies, since you’ll be withdrawing more fully-taxable money from your IRA you’ll be artificially increasing your income, at least for a few years. Keep in mind the impacts that this might have on any income-based medical insurance expenses – such as if you are eligible for ACA exchange premium reductions.

In general, for a married couple to take advantage of these significantly-lower medical premiums from the ACA exchanges, your taxable income must be less than approximately $67,000. Over that amount, and your medical premiums could increase dramatically. This would be applicable at any age under 65, Medicare eligibility age.

Plus, even if you’re able to get by with an employer-based medical plan and don’t have to worry about the ACA exchange income limitations, once you reach 65 you might be subjected to additional premiums for Medicare if your income is above certain levels. If your MAGI is over $170,000, this would bump up your Medicare premium to $189.60 from the usual $135.50. There’s also an increase of $12.40 a month to your Medicare Part D premium (if you have it) for this income level. This increase is based on your gross income two years previous, so keep this in mind as you plan.

Lastly, if you still have an IRA which is going to cause you a significant amount of extra taxable income when you reach 70½, consider using a Qualified Charitable Distribution (QCD) at that time. The QCD provision allows you to directly distribute funds from your traditional IRA to a qualified charity, and you don’t have to claim this distribution as income on your tax return. This is especially helpful if you are already inclined to make significant contributions to a charity or charities – and whatever money you distribute by QCD is counted toward your RMD for the year.

Stressful Events

adjusting withholdingAt times in our lives, we may be faced with sudden events, occurrences, or outcomes that we never expected to happen. Such events may cause us to react, even overreact out of emotion rather than taking time to think things through. Granted, this is easier said than done.

The death of a loved one can take a huge emotional toll on us. Aside from coping with our loss, there’s the additional stress of taking care of things after the death. Wills, trusts, property transfers, and retirement accounts all need to be handled.

Divorce is also a stressful event. Deciding on property division, living arrangements, parenting time, and legal aspects all take their toll. Feelings of fear, anger, sadness, and resignation can linger for a long time.

Losing a job also adds stress to our lives. Our minds may reel with the sudden loss of income, what we’re going to do next, along with the fear of being unemployed. Retirement plans may suddenly be shattered. Feelings of guilt may arise when a provider feels they’ve let their family down.

Throughout all these events, it is ok to slow things down, and even do nothing – for a period of time. It may also help to talk with someone to get their input and advice.

For example, when someone loses their job, he or she may feel they need to get money – and fast. This could lead to dipping into retirement accounts, gambling, or other unwise actions.

Instead, an individual can apply for unemployment, update their resume, and take some time to let the dust settle, before doing anything rash. Their emergency fund will help with expenses through this time as well.

In a divorce, reacting emotionally under stress can cause an individual to make decisions they’ll later regret. This could be from disposing or spending of assets unnecessarily, giving up assets they are otherwise entitled to, or relinquishing time with kids.

It’s ok to slow down and try to think clearly and reflect. Here’s where hiring an attorney may be a wise decision. As fiduciaries, they can take an unemotional approach to the divorce, with the knowledge of the law to help with the situation.

Regardless of the event, individuals may also benefit from talking with someone – a counselor, spouse, friend, loved one, or trusted professional. Taking with someone can help relieve some of the stress of the situation and the individual may have some objective, unbiased advice to help process and think clearer.

Taking the time to slow down, think, and not react emotionally can improve the outcome of an unpleasant situation and potentially save thousands of dollars from unwise decisions.


Spousal Benefits are for One Spouse at a Time

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

This post intends to clarify something that comes up repeatedly: both spouses cannot collect Spousal Benefits at the same time.

If you stop and think about the mechanics of Spousal Benefits, it should become clear to you that this isn’t possible. Below is a recap of the rules that are necessary for Spousal Benefits to work.

Modern differential, cut away to show structure
Image via Wikipedia

Rules for Spousal Benefits

1. In order for a spouse to file for Spousal Benefits, the other spouse in the couple must have filed for his or her own retirement benefit as well.

2. When the spouse begins receiving Spousal Benefits, he or she must also be currently receiving his or her own retirement benefit at the same time due to deemed filing. If the benefits are filed for before FRA (Full Retirement Age), both benefits (retirement and spousal) are permanently reduced. If the spouse receiving spousal benefits was born before 1954, it is possible to file solely for spousal benefits after FRA. If born in 1954 or later, deemed filing requires filing for both benefits when either is filed for if eligible for both.

3. The Spousal Benefit is always a differential between the individual’s own PIA and the factor-applied PIA of the other spouse. If Spousal Benefits are being applied for at or after FRA, the factor is 50%; it’s between 32.5% and 35% at age 62 (depending on FRA), and phased for ages in-between. This differential is then added to the retirement benefit. If the spouse in question is at FRA or older, then the Spousal Benefit differential is 50%.

Now, if all of that is confusing, don’t feel alone. It’s a very confusing set of rules. Let’s run through some examples to sort things out.

Spousal Benefit Examples

John and Priscilla are both age 62. John has a PIA of $800, while Priscilla has a PIA of $2,000.  If John wants to file for Spousal Benefits now, he must file for his own benefit first, and it will be reduced to $600 since he’s filing early. The second thing that must happen is that Priscilla must also be collecting her benefit. Now John can also file for Spousal Benefits (in fact he must due to deemed filing rules, if he is eligible when he files for his retirement benefit). John’s Spousal Benefit will be reduced to 35% of Priscilla’s PIA minus his PIA. But wait a minute: 35% of Priscilla’s PIA is only $700, and John’s PIA is $800. So the reduction means that John gets no Spousal Benefit at all.

How about if they decide to delay Priscilla’s filing until her FRA. So now, John still started his own retirement benefit at 62, so that portion of his benefit is permanently reduced. Priscilla files for her own benefit at FRA. Once she has done so, John is now eligible for the Spousal Benefit. The differential is now 50% of Priscilla’s PIA minus John’s PIA ($1,000 – $800), which equates to $200. This is added to John’s reduced benefit of $600, for a total benefit of $800. Note that, even though they waited until FRA for John to file for Spousal Benefits, he will never receive 50% of Priscilla’s PIA, since his own benefit has been reduced by filing for it at age 62. Had he waited until FRA to file for his own retirement benefit, he could have a total benefit equal to half of Priscilla’s PIA.

There’s another way this could work out:  What if Priscilla files for her retirement benefit at FRA and John delays filing? Could John still receive a Spousal Benefit based on Priscilla’s record? No – because if John has delayed filing for his own retirement benefit, deemed filing will require him to file for his own benefit when he files for spousal benefits. Regardless, his Spousal Benefit will be 50% of Priscilla’s PIA if he first files for any benefit at or after his FRA.

So now we come to the crux of the matter, the question that started this post off from the beginning:  Can both John and Priscilla file for Spousal Benefits? If you think about what’s required for Spousal Benefits to be available, you’ll have your answer.

Clearly, John could file solely for Spousal Benefits when he reaches FRA, but in order to be eligible, Priscilla must have filed for her retirement benefit. On the other hand, Priscilla could file for spousal benefits, but since her own benefit is greater than 50% of John’s, no spousal benefit is available to her.

The act of filing for retirement benefits establishes the currently-filed PIA for that individual. So, while John could still receive a small increase over his PIA in terms of a Spousal Benefit (half of Priscilla’s PIA is $1,000, minus his PIA of $800 equals $200), Priscilla doesn’t have that luxury. Half of John’s PIA is only $400, and Priscilla’s PIA is $2,000, so there is no differential available for her Spousal Benefit. If Priscilla was born before 1954, it is possible for her to file solely for the Spousal Benefit at or after her FRA. If born in 1954 or later, this option is not available.

So the answer is: You can’t have receive Spousal Benefits for both spouses at the same time. Both must have filed for their own retirement benefits, and as such only one can have a Spousal Benefit (and only if his or her own PIA is less than 50% of the other spouse’s PIA). I hope this helps to clear things up.

Should I Use IRA Funds or Social Security at Age 62?

orange flowers
Image via Wikipedia

Folks who have retired or are preparing to retire before the Social Security Full Retirement Age (FRA) face a dilemma if they have IRA assets available. Specifically, is it better to take an income from the IRA account during the years prior to FRA (or age 70) in order to receive a larger Social Security benefit; or should you preserve IRA assets by taking the reduced Social Security benefits at age 62?

At face value, given the nature of IRA assets, it seems like the best thing to do is to preserve the IRA’s tax-deferral on those assets, even though it means that your Social Security benefit will be reduced.

If you look at the taxation of Social Security benefits though, you might discover that delaying receipt of your Social Security will provide a much more tax effective income later in life. In the tables below I’ll work through the numbers to illustrate what I’m talking about.


For our example, we have an individual who has a pre-tax income requirement of $75,000 per year. The individual has significant IRA assets available. If he takes Social Security at age 62, he will receive $22,500 per year. Delaying Social Security benefits to FRA would get him $30,000; waiting until age 70 would provide a benefit of $39,600 per year. In tables below we show what the tax impact would be for using Social Security at age 62, FRA, and age 70. In each case the required income is always $75,000.

Tax table in use is from 2019, and we’re assuming the individual is single. COLAs are not included in the example.

Table 1 – taking Social Security benefit at age 62:

62 $ 52,500 $ 22,500 $ 8,932
63 $ 52,500 $ 22,500 $ 8,932
64 $ 52,500 $ 22,500 $ 8,932
65 $ 52,500 $ 22,500 $ 8,932
66 $ 52,500 $ 22,500 $ 8,932
90 $ 52,500 $ 22,500 $ 8,932
Totals $ 1,522,500 $ 652,500 $ 259,028

Table 2 – taking Social Security benefit at age 66:

62 $ 75,000 $ 0 $ 9,674
63 $ 75,000 $ 0 $ 9,674
64 $ 75,000 $ 0 $ 9,674
65 $ 75,000 $ 0 $ 9,674
66 $ 45,000 $ 30,000 $ 8,684
90 $ 45,000 $ 30,000 $ 8,684
Totals $ 1,425,000 $ 750,000 $ 255,808

Table 3 – taking Social Security benefit at age 70:

62 $ 75,000 $ 0 $ 9,674
63 $ 75,000 $ 0 $ 9,674
64 $ 75,000 $ 0 $ 9,674
65 $ 75,000 $ 0 $ 9,674
66 $ 75,000 $ 0 $ 9,674
67 $ 75,000 $ 0 $ 9,674
68 $ 75,000 $ 0 $ 9,674
69 $ 75,000 $ 0 $ 9,674
70 $ 35,400 $ 39,600 $ 5,917
90 $ 35,400 $ 39,600 $ 5,917
Totals $ 1,343,400 $ 831,600 $ 201,647

The difference that you see in the tables is due to the fact that Social Security benefits are at most taxed at an 85% rate. With that in mind, the larger the portion of your required income that you can have covered by Social Security, the better. At this income level, the rate of taxable Social Security is even less, as only 85% of the amount above the $44,000 base (provisional income plus half of the Social Security benefit). This results in almost $5,000 less in taxes paid over the 29-year period illustrated by delaying to age FRA. The big benefit comes by a reduction of nearly $58,000 in taxes when you delay to age 70.

Note: at higher income levels, this differential will be less significant, but still results in a tax savings by delaying. It should also be noted that COLAs were not factored in, nor was inflation – these factors were eliminated to reduce complexity of the calculations. In addition, in calculating the tax, only the standard deduction was included.

This is to assume that the individual has the available IRA assets to allow for the early use of the funds, although in the end result, delaying to age 70 required less of a total outlay from the IRA, by nearly $180,000, in addition to the tax savings.

Hands down, this is a very significant reason to delay receiving Social Security benefits at least to FRA, and even more reason to delay to age 70. The only factor working against this strategy would be an early, untimely death, especially if the individual in question is not married. In that case the IRA assets would have been used up much more quickly than necessary, and no surviving spouse is available to carry on with the Social Security survivor benefit.

Trust Me, You’re Gonna Like This – The See-Through Trust as a Beneficiary

sniff alert by obensonOne area that often gets short shrift in discussions of IRAs and beneficiary designation is the use of a trust as the beneficiary. Part of the reason behind this may be the perceived complexity of trusts in general; at any rate, it’s not as complicated as it sounds, and it can be beneficial, depending upon your circumstances. We’re specifically discussing the “see-through” trust here, as this type of trust is most appropriate for IRA and Qualified Retirement Plan beneficiary designations.

The See-Through Trust as a Beneficiary

If you designate a trust as the beneficiary of your IRA or Qualified Retirement Plan (QRP), the trust should be set up with certain properties associated with it:

  • the trust must be valid under the plan owner’s state’s law;
  • the trust must be irrevocable upon the plan owner’s death;
  • the trust beneficiaries must be identifiable;
  • ALL of the trust beneficiaries must be individuals (cannot be another trust); and
  • the trust documentation must be delivered to the plan administrator or custodian by October 31 of the year following the year of death of the plan owner.

Taken together, these properties describe a “see-through” or “look-through” trust. Other types of trusts could be eligible as beneficiaries, but the see-through trust provides the ability to enact a rollover (a trustee-to-trustee transfer) to an inherited IRA for the benefit of the individual beneficiaries, if there are multiple beneficiaries. With this ability, your beneficiaries can split out the IRA into separate inherited IRAs and stretch out the payments over each beneficiary’s individual lifetime, rather than all beneficiaries having to use the oldest beneficiary’s lifetime for Required Minimum Distribution (RMD) calculations.


You might want to use a trust as your beneficiary because it is much simpler to make changes to the trust documents than to file additional beneficiary designation forms with your plan administrator. The trust also provides for additional flexibility. For example, if you wanted your IRA to be distributed to your three children, and in the event of one or more of your children’s pre-deceasing you then you’d like that child’s share to be apportioned equally among the heirs of that child – and so on, and so on. This sort of language doesn’t always fit in very well with the standard IRA beneficiary designation form, but a trust could quite easily describe this situation ad infinitum.

In addition, you might want to include certain provisions in a trust to carry out your wishes. For example, you might want to include a spend-thrift provision, which could control the amount of distributions over a specified schedule, rather than a lump-sum distribution.

Other provisions could ensure that, for example, children from a previous marriage will receive benefit from the account, in addition to a current spouse. This is often handled by way of a QTIP trust.

The Spousal Benefit

Fun With Dick and Jane
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Note: with the passage of the Bipartisan Budget Act of 2015, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details. Specifically, Example 4 and Example 5 below are not available if the person filing for spousal benefits was born in 1954 or later.

One of the most confusing concepts in the Social Security retirement system is the Spousal Benefit. This option allows one spouse to file for benefits and the other spouse to receive a benefit based upon the first spouse’s retirement benefit. The greatest amount that the Spousal Benefit could be is 50% of the PIA (Primary Insurance Amount, generally equal to the retirement benefit at Full Retirement Age, or FRA) of the spouse who has filed.

Let’s work through a few examples to explain this. Let’s say we have a couple named Dick and Jane. Dick is 66 years old (his FRA), and Jane is 62. Dick is eligible for a benefit at his current age of $2,400 per month, and Jane would be eligible for a benefit of $1,000 when she reaches FRA (66 years, 6 months).

Example 1

If Jane files for her own benefit today, it will be reduced by 27.5% due to early filing, leaving her a total benefit of $725. If she also files for the Spousal Benefit today (Dick will have to file for his retirement benefit to enable this), then her Spousal benefit would be equal to 50% of Dick’s PIA minus a factor for filing early ($2,400 times 50% times 67.5% equals $810) minus her own reduced benefit of $725. In other words, filing for the Spousal Benefit now would increase Jane’s overall benefit by $85 per month.

Example 2

Jane could delay until she reaches FRA before filing for Spousal Benefits, which would then give her a Spousal Benefit of 50% of Dick’s PIA ($2,400 times 50% equals $1,200) minus her PIA of $1,000, for a Spousal Benefit differential of $200 ($1,200 minus $1,000). Her total benefit would be the reduced amount of $725 plus the $200 differential, totaling $925.

Due to deemed filing, this delay is only possible for Jane if Dick delays filing for his retirement benefit until Jane is at FRA. Dick would then be 70 years, 6 months. If Dick files for his retirement benefit at any earlier age, Jane will be deemed to have filed for the spousal benefit as soon as she becomes eligible for the benefit (when Dick has filed).

If, for example, Dick files for his benefit at his age 70, Jane will be 66 at that point, 6 months before her FRA. The deemed spousal benefit for Jane would be 47.92% of Dick’s PIA, or $1,150. Subtracting Jane’s PIA from this amount yields $150, which is then added to her earlier-reduced benefit of $725 for a total monthly benefit amount of $875.

Example 3

If Jane delays receiving her own retirement benefit until FRA, she would receive the full $1,000. At this point she would also file for Spousal Benefits, giving her an additional $200 (as calculated above) for a total benefit of $1,200, exactly half of Dick’s PIA.

Keep this factor in mind: Jane can file for her own benefit early and delay the Spousal Benefit until later (as long as she’s not currently eligible for the Spousal Benefit in the month that she files for her own benefit, due to deemed filing); she cannot file for Spousal Benefits early (before FRA) and delay her own benefit.

Example 4 (only if Jane was born before 1954)

On the other hand, Jane could wait until she reaches FRA and then file solely for the Spousal Benefit, delaying her own benefit until age 70 if she wishes (if she were born before 1954).

This is because once Jane reaches FRA she is no longer subject to the deemed filing rule. This means that her Spousal Benefit would be calculated based upon 50% of Dick’s PIA – but Jane’s PIA is not subtracted from it since she has not filed yet.

If Jane was born on or after January 2, 1954, this option is not available.

Example 5 (only if Dick was born before 1954)

Mixing this up a bit, Jane could file for her own benefit at any age, and then Dick could file for a Spousal Benefit based upon 50% of Jane’s PIA since he’s 66, his FRA. Just like in Example 4, his Spousal Benefit would not be reduced by his benefit since he has not filed yet. Later Dick would file for his own benefit (as late as his age 70), which then would deem Jane to have filed for the spousal benefit based on Dick’s record.

As before, if Dick was born on or after January 2, 1954, this option is not available.


The following rules apply:

  • In order to be eligible for Spousal Benefits, your spouse must have filed for his or her own benefit.
  • If applying for your own benefit prior to FRA when you’re also eligible for Spousal Benefits (that is, your spouse has applied for his or her own benefit already), deemed filing requires you to apply for both the Spousal Benefit and your own benefit at the same time.
  • The Spousal Benefit is always a differential between your own PIA and your spouse’s PIA with a factor applied (50% at the greatest, 35% at the least, depending on your age).
  • If you have already applied for your own benefits, the Spousal Benefit differential is added to your own benefit to give you your total benefit. If your own benefit is reduced due to filing early, your total benefit will always be something less than 50% of your spouse’s PIA, even if you wait until your own FRA to file for Spousal Benefits.
  • Spousal Benefits are only available to one spouse at a time.

Hopefully this review will help you as you work through the options of the Spousal Benefits for you and your spouse.  If not, you can always leave a question in the comments – and I’ll do my best to help you understand the way it works.

Substantial Earnings With Regard to WEP


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If you’re subject to the Windfall Elimination Provision (WEP), your Social Security retirement benefit can be reduced in the first bend point to as little as 40% from the normal 90% rate. The WEP applies if you worked in a job that did not require Social Security withholding in addition to a job that was subject to Social Security withholding. Here’s how substantial earnings can help.

If you’ve worked in the Social Security-covered job for a significant amount of time and the amount of earnings you received there was substantial, it is possible that the reduction due to WEP could be lessened and eventually eliminated if you amass enough years of substantial earnings.

Each year’s substantial earnings is only applicable to that particular year. So if you earned more than the substantial earnings in one year, this doesn’t carry over to the next year. At the same time, if you miss the substantial earnings limit for the year, even by one dollar, you cannot count that year as a substantial earnings year.

According to the Social Security Administration, substantial earnings is defined as an amount equal or above the amounts shown in the table below:

Year Substantial Earnings
1937-1954 $900
1955-1958 $1,050
1959-1965 $1,200
1966-1967 $1,650
1968-1971 $1,950
1972 $2,250
1973 $2,700
1974 $3,300
1975 $3,525
1976 $3,825
1977 $4,125
1978 $4,425
1979 $4,725
1980 $5,100
1981 $5,550
1982 $6,075
1983 $6,675
1984 $7,050
1985 $7,425
1986 $7,825
1987 $8,175
1988 $8,400
1989 $8,925
1990 $9,525
1991 $9,900
1992 $10,350
1993 $10,725
1994 $11,250
1995 $11,325
1996 $11,625
1997 $12,150
1998 $12,675
1999 $13,425
2000 $14,175
2001 $14,925
2002 $15,750
2003 $16,125
2004 $16,275
2005 $16,725
2006 $17,475
2007 $18,150
2008 $18,975
2009-2011 $19,800
2012 $20,475
2013 $21,075
2014 $21,750
2015 $22,050
2016 $22,050
2017 $23,625
2018 $23,850
2019 $24,720

So, if your earnings from your Social Security-covered job are substantial according to the table above, it is possible to change the reduction factor, increasing it from the standard 40% – and even possibly eliminating it, depending upon how many years you’ve earned those substantial earnings.

As long as you’ve had those substantial earnings for more than 20 years, follow the table below to determine what your first bend point factor would be.

Years First Bend Point
Percentage Factor
30 or more 90%
29 85%
28 80%
27 75%
26 70%
25 65%
24 60%
23 55%
22 50%
21 45%
20 or less 40%

What this means is that if you had 20 or fewer years in a Social Security-covered job with substantial earnings, your WEP-reduced factor on the first bend point is 40%. For each year more than 20 of substantial earnings, your WEP-reduced factor increases by 5%, and if you have 30 or more years of substantial earnings, the WEP doesn’t impact your first bend point factor at all.

Effectively, with 20 or fewer years of substantial Social Security-covered earnings, your projected benefit is reduced by 50% of the first bend point (from 90% to 40%). See the article on calculation of your PIA for more on how the bend points work.

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