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16 Ways to Withdraw Money From Your 401k Without Penalty

16 Ways to Withdraw Money from Your 401k Without PenaltyWhen hard times befall you, you may wonder if there is a way withdraw money from your 401k plan. In some cases you can get to the funds for a hardship withdrawal, but if you’re under age 59½ you will likely owe the 10% early withdrawal penalty. The term 401k is used throughout this article, but these options apply to all qualified plans, including 403b, 457, etc.. These rules are not for IRA withdrawals (although some are similar) – see the article at this link for 19 Ways to Withdraw IRA Funds Without Penalty.

Generally it’s difficult to withdraw money from your 401k, that’s part of the value of a 401k plan – a sort of forced discipline that requires you to leave your savings alone until retirement or face some significant penalties. Many 401k plans have options available to get your hands on the money (like a hardship withdrawal), but most have substantial qualifications that are tough to meet.

Your withdrawal of money from the 401k plan will result in taxation of the withdrawal, and if you do not meet one of the exceptions, a penalty as well. See the article Taxes and the 401k Withdrawal for more details about how the taxation works.

In addition to withdrawing money from a 401k plan, many plans offer the option to take a loan from your 401k. This can be a better alternative than the withdrawal. A loan is often the only way you can access the money in a 401k if you’re still employed by that company. The article at this link explains the differences between a 401k loan and a 401k withdrawal.

The list below is not all-inclusive, and each 401k plan administrator may have different restrictions or may not allow the option at all.

We’ll start with the obvious methods, all of which generally require the plan participant to leave employment:

1. Normal – Begin after age 59½ after leaving employment at any age

2. Age 55 Exception – Begin after age 55, having left employment after age 55 (also read about the potential Downside to the Age 55 Rule for 401k Plans)

3. Age 50 Exception – Begin after age 50, having left employment after age 50 from a job in a public safety profession, such as police, firefighters or emergency medical services for a governmental unit

4. Required Minimum Distributions – technically this one is covered by #1 above for most circumstances, but sometimes RMD is required of a person who has inherited a 401k, regardless of age.

5. Death – If you die, your beneficiaries are able to take distributions from your 401k without penalty.

6. Disability – If you are “totally and permanently disabled” by IRS definition, you may be able to take distributions from your 401k without penalty.

Now we’ll move into some of the not-so-obvious methods, starting with SOSEPP.

Series Of Substantially Equal Periodic Payments

This is the classic Section 72(t) method for withdrawing funds without penalty.  Essentially you agree to continue taking the same amount from your plan for the greater of five years or until you reach age 59½. There are three methods of SOSEPP:

7. Required Minimum Distribution method – uses the IRS RMD table to determine your Equal Payments.

8. Fixed Amortization method – in this method, you calculate your Equal Payment based on one of three life expectancy tables published by the IRS.

9. Fixed Annuitization method – this method uses an annuitization factor published by the IRS to determine your Equal Payments.

Section 72(t) provides additional methods for taking distribution from your 401k which can occur before leaving employment (if the plan allows):

10. High Unreimbursed Medical Expenses – for yourself, your spouse, or your qualified dependent.  If you face these expenses, you may be allowed to withdraw a limited amount (the actual expenses minus 10% of your AGI) without penalty.

11. Corrective Distributions of Excess Contributions – under certain conditions, when excess contributions are made to an account these can be returned without penalty.

12. IRS Levy – when the IRS levies an account for unpaid taxes and/or penalties, this distribution is generally not subject to penalty.

And lastly, here are a few additional ways that you can withdraw your 401k funds without penalty:

13. Auto-Enrollment – within time limits, when you are automatically enrolled in a 401k plan and you do not wish to be enrolled, permissive distributions may be allowed without penalty.

14. Qualified Reservist – If you were called to duty after September 11, 2001 and serve for at least 6 months, you may be allowed to make a withdrawal from your 401k during your active duty period without penalty.

15. Divorce – If a Qualified Domestic Relations Order (QDRO) is drafted as part of a divorce decree with the order to assign or divide and assign a portion of the assets of your 401k plan with your former spouse, this withdrawal is penalty-free

16. Roth IRA or Roth 401k Conversion – when you convert your funds from a 401k plan to a Roth IRA or Roth 401k, although you pay tax on the distribution, there is no 10% penalty applied. Usually you must have left employment to enact a conversion to Roth IRA, but not a Roth 401k.

17. (a bonus!) Birth or Adoption – With the passage of the SECURE Act of 2019, a new qualified exception is now available – to offset expenses for the birth of a child or an adoption. Each taxpayer may withdraw up to $5,000 (within one year of the birth or when the adoption is finalized) to pay for expenses associated with a birth or adoption. You are not allowed to take the distribution prior to the birth of the child or the adoption is finalized, only after the fact. You also have the option of paying this back (rules for the payback are still being developed at this time).

QCD after the SECURE Act


We’ve been reviewing the changes that the SECURE Act (Setting Every Community Up for Retirement Enhancement) has brought about. We’ve covered RMDs (just the regular kind), student loans, and contributions. Now we’ll talk about QCD – Qualified Charitable Distributions. We’ll also cover the new anti-abuse rule as well.

The original rules for QCD are that if you are over age 70½ years old (subject to RMDs under the pre-SECURE rules), you can make a direct distribution to a charitable organization from your IRA. (Only IRAs are allowed to make QCD distributions – h/t to reader Ritch!) By qualifying this direct distribution as a QCD, you do not have to include the amount of the distribution as income on your tax return. (For more on tax treatment and why this is a big deal, see this article about QCDs.)

After the SECURE Act passed, QCD now has a few differences.

First of all, even though SECURE changed the RMD age to 72, you are still allowed to make QCD distributions beginning when you reach 70½. That’s a slight departure from the old rule, which indicated that you had to be subject to RMD before you could make a QCD. Now you can make a QCD at any age after 70½, even though you may not be subject to RMD until age 72.

The other difference is more important, however: Since SECURE also made a change to the contribution rules, by allowing contributions to be made at any age (previously not allowed after 70½), there’s an anomaly that the rules address. This new rule is called the QCD anti-abuse rule, and it does exactly what you’d think, given the name.

If there wasn’t an anti-abuse rule in place, you could make a contribution to your IRA (if you have earnings) and then immediately withdraw it as a QCD. This would result in you taking a double-dip of tax preferences for that particular money.

For example, let’s say you’re single, 71 years old, and you have total income (before any dealings with your IRA) of $50,000. You make a regular, deductible contribution of $7,000 to your IRA, bringing your adjusted gross income down to $43,000. You then also direct the IRA custodian to distribute $7,000 to your favorite charity as a QCD. Since QCD distributions aren’t included as income, your adjusted gross income remains at $43,000.

But since you made a deductible contribution and a QCD, you’re getting twice the tax benefit from this activity. Enter the QCD anti-abuse rule.

With the QCD anti-abuse rule, when you make a QCD distribution, you must include in income any post-age-70½ deducted contributions to your IRA. Once the amount of your post-age-70½ deducted contributions is met with attempted QCDs, you will be eligible to have any excess amount treated as QCD, not included in taxable income.

Back to our example, let’s say at 71 you’re making the deductible contribution to your IRA, and you made a similar deductible contribution to your IRA in the previous year, when you had reached 70½. So you’ve made total deductible contributions to the IRA in the amount of $14,000.

Now you decide to make a QCD to your favorite charity, in the amount of $20,000. You are only allowed to bypass your tax return with $6,000 of the QCD distribution, since you had $14,000 of deducted IRA contributions after age 70½. So your income for that year, although you originally reduced it by $7,000 for the deductible IRA contribution, is now increased by $14,000 due to the disallowed portion of your QCD. The remaining $6,000 is still allowed as a QCD.

You can still itemize that $14,000 contribution to charity. Since (for 2020) the standard deduction for someone in your position (single and over age 65) is $13,700, you will get the full benefit of that itemized deduction, along with your other itemized deductions.

In order for this to work properly, if you’ve made deductible contributions after age 70½, you still need to attempt to make the QCD as if you had not made deductible contributions after age 70½. That is, ask your custodian to send the funds directly to the qualified charity, just the same for any QCD. Otherwise, if you bypass the QCD process and take a distribution in your own name, followed by a contribution to the charity, you won’t be able to eliminate that amount from your previously-deducted amounts.

From our prior example, if you had made $14,000 of deductible contributions to your IRA after age 70½ and later wanted to make a $5,000 contribution from your charity, you might think it’s fruitless to follow the QCD process since that amount is going to be considered a regular distribution (and therefore taxable) anyway. But if you don’t follow the QCD rules and attempt to make this $5,000 distribution a QCD, then you’ll still have a $14,000 balance in your deductions that will continue to work against your future potential QCDs. However, if you pass this $5,000 distribution through the QCD process, you’ll reduce your future deductible contribution figure for the anti-abuse rules to $9,000. Eventually, if you continue the QCD process in future years you’ll eliminate the deductible contributions balance and be able to make a successful QCD.

Just keep in mind that the post-age-70½ deducted contributions to IRAs will follow you for the rest of your life, or at least until you’ve made enough attempted QCD distributions to use up your deducted contributions from earlier. Say you waited until you were 80 years old to make a QCD – you’ll need to go back and add up all of your deducted IRA contributions from 70½ onward to this year, and subtract those deducted contributions before the QCD will be allowed the special tax treatment.

It may work out better in the long run if you were to make those IRA contributions as non-deductible, depending on your circumstances. You’ll want to run the numbers and maybe talk to your tax professional to decide which direction makes most sense for you.

IRA Contributions after the SECURE Act

IRA contribution

Following our articles last week – SECURE Act RMD Rules and The SECURE Act and Student Loans – today we’ll cover IRA contributions after the SECURE Act. A big change in store here for folks who are still working later in life, but not really earth-shattering.

With the passage of the SECURE Act, the prohibition for IRA contributions after age 70½ is lifted. Previously, once you hit that magical age, you were no longer allowed to make contributions to an IRA.

Employer plans, such as the 401(k) have always allowed contributions to continue as long as the employee was still employed at that company. If the employee is also a 5% or greater owner, however, the 401(k) contributions past age 70½ are disallowed (and have been for a long time). This did not change with SECURE.

Now that SECURE has passed, as long as you have earned income, you can make contributions to an IRA (or Roth IRA), no matter what your age is.

Like I said, nothing really earth-shattering about this, although it does give some taxpayers more time to make contributions to IRAs if they’re still working.

I imagine one of the bigger questions in the minds of folks nearing (or over) age 70½ is the subject of my next article – Qualified Charitable Contributions after SECURE (QCDs). Stay tuned!

The SECURE Act and Student Loans

The recent passing of the SECURE Act brought about some changes that have impacted savers and retirees alike. Required minimum distributions (RMDs) from retirement account have now been raised to age 72. Also, gone is the ability to “stretch” required distributions from retirement accounts to non-spouse beneficiaries (with few exceptions).

One potentially beneficial change comes from the broadening of the expenses 529 college savings plans can cover. 529 plans are tax-advantaged savings plans that allow parent, grandparents, and other relatives to save money for education. Contributions grow tax-deferred and withdrawals for qualified expenses are tax-free. In the past, qualified expenses included, tuition, books, fees, etc.

With the passing of the SECURE Act, another provision has been added that allows account owners to pay for student loan principal and interest. This new rule allows up to $10,000 maximum to be used to pay for outstanding student loans. In addition, the SECURE Act also allows an additional $10,000 to pay for the student loans of any sibling of the plan beneficiary. In other words, each sibling of the beneficiary is allowed up to $10,000 to pay down student debt – from the same 529 plan.

This new rule can help parents with left over money in the 529 plan pay down the debt of beneficiaries and their siblings. It should be noted, however, that any student loan interest paid from the 529 plan is no longer eligible for the student loan interested deduction at tax time (sorry – no double dipping).

The impact of this new rule may see more money flow into 529 plans as it removes some of the uncertainty of what to do with leftover funds once a beneficiary graduates. One word of caution: grandparents who own 529 plans may want to wait to distribute funds for the beneficiary until after the student graduates (assuming the graduate has outstanding loans).

The reason being is that a distribution for a non-parent owned 529 plan negatively impacts any financial aid the beneficiary may be eligible to receive. A distribution while the beneficiary is in college counts against the student’s financial aid as income to the student – likely reducing their eligibility for a higher financial aid award. After graduation, however, this dilemma no longer exists.

The Tax Cut and Jobs Act passed a few years ago allows 529 owners to pay for expenses related to elementary and secondary education. This new rule is only at the federal level. As of this writing, some states (such as IL) do not consider elementary and secondary school expenses as qualified expenses. In other words, federally, the expenses are qualified, but in some states they are not. This means that some states (IL) will tax and penalize this type of distribution.

The explanation above is mentioned because as of this writing, it has yet to be determined whether states (such as IL) will treat the payment of student debt from a 529 plan as a qualified expense. It’s allowed federally, but remains to be confirmed among state plans.


secure act rmd rules

Now that the SECURE Act (Setting Every Community Up for Retirement Enhancement) has been signed into law, there are several things that you need to know. The first that we’ll tackle are the SECURE Act RMD rules (Required Minimum Distribution) for original owners of IRAs. The change that went into effect (beginning with calendar year 2020) is that the age to begin RMDs has been pushed back to 72, where before it was 70½.

This part of the SECURE Act is beneficial for folks who don’t need the money from their IRAs and other retirement plans, giving them more time before this required withdrawal must begin. It’s not a huge change, but it’s still beneficial for some.

What this means is that you now have an extra 18 months (actually more for about half of you, less for the other half) before you have to start taking RMDs from your IRAs, 401(k)s and other retirement plans.

The change is more helpful to folks who have a birthday in the first half of the year, because in the past (under the 70½ rule), your first year of RMD occurred in the year that you reached age 70. With the new rules, your first year of RMD is always the year you reach 72, giving you two full years to delay that first RMD. If you were born in the second half of the year, under the old rules your first year of RMD occurred in the year that you reached age 71, so you only effectively get a one-year delay with the new rules.

The old rule about the first year’s distribution having a delayed deadline (by April 1 of the year following the year you reach the required age) still applies. So, if your 72nd birthday occurs on July 15, 2022, your first RMD deadline is April 1, 2023. You’d still have to take another RMD for 2023 before December 31, 2023 as well.

Current RMD folks

If you’ve been taking RMDs prior to the end of 2019 – that is, if you reached age 70½ during the 2019 calendar year – you must continue your RMDs as if nothing changed. The new rule applies for folks born any time on or after July 1, 1949 – who would reach 70½ on January 1, 2020. Starting with that date, July 1, 1949 and for any birthdate after that, you fit into the new age 72 rule, and your first RMD will be for the year 2022, with the first year’s deadline being April 1, 2023.

Life expectancy tables to use

Although there is an effort under way to make changes to the current IRS life expectancy tables, these have not been published yet. So you would continue to use the applicable life expectancy table as in the past. Table I (Single Life Table) is primarily for inherited IRAs, Table II (Joint and Last Survivor Table) is for taxpayers who are married to someone more than 10 years younger, and Table III (Uniform Life Table) is for everyone else. Most folks will use Table III to determine their RMDs for their common, non-inherited IRAs and other retirement plans. You can find these tables in IRS Publication 590B, Appendix B.

The Outrageous Effect of Taxation of Social Security Benefits

central park by Seamus Murray(jb note: Astute reader JH pointed out an error in the calculation below, which I’ve corrected. The end result of the taxation increase is the same, but there was a problem in the calculated taxable income in the previous version.)

As you may be well aware, Social Security retirement benefits can be taxable to you, depending upon how much other income you have. What you may not be aware of is how this can seriously increase your tax rate for small amounts of additional income.

Provisional Income

So – in order to calculate how much of your Social Security benefit is taxable, it is necessary to determine the amount of your “provisional income” – which is your Modified Adjusted Gross Income (MAGI) plus 1/2 of your Social Security benefit plus any tax-exempt income you’ve received. If you are married and filing jointly (MFJ) and this amount is greater than $32,000, at least part of your Social Security benefit is taxable. The lower limit for all other filing statuses – single, head of household, qualifying widow(er) and married filing separately while living apart from your spouse – is $25,000. If your filing status is married filing separately and you continue to live with your spouse, the lower limit is zero.

The amounts mentioned above are just the first limit – if your provisional income is above those levels, up to 50% of your Social Security benefit is taxable – that is, added to your gross income. If the provisional income is above $44,000 and your filing status is MFJ, then up to 85% of your Social Security benefit becomes taxable. For all other statuses, provisional income above $34,000 triggers up to 85% taxability on your Social Security Benefit. It’s actually not always fully 85%; rather, it’s 85% of the amount that you’re over the limit or 85% of your Social Security benefit, whichever is less. (see the example below)

The Effect

Where this really hurts folks is when provisional income is just barely above the upper limit.  See the example below – this is a married couple who earn a total of $40,000 in income (MAGI), plus  a total of $16,000 in Social Security benefits:

Modified Adjusted Gross Income $40,000
Plus 1/2 of Social Security Benefit $8,000
Provisional Income $48,000
Less base amount $44,000
Excess above base $4,000
85% of excess $3,400
Plus 50% of the excess above the first base ($6,000) $9,400
85% of Social Security Benefit $13,600
To include in gross income (lesser of previous two above) $9,400
New Gross Income $49,400

So now watch what happens if these folks earn $1,000 more:

Modified Adjusted Gross Income $41,000
Plus 1/2 of Social Security Benefit $8,000
Provisional Income $49,000
Less base amount $44,000
Excess above base $5,000
85% of excess $4,250
Plus 50% of the excess above the first base ($6,000) $10,250
85% of Social Security Benefit $13,600
To include in gross income (lesser of previous two above) $10,250
New Gross Income $51,250

Normally, when someone of this income level (12% tax bracket) increases their income by $1,000, their tax would only increase by $120 – as you might expect. But with this provision to tax Social Security benefits based upon the provisional income that you bring in, when they add $1,000 to their annual income, their gross income is effectively increased by $1,850. As a result, this $1,000 increase in income has caused an increase in tax of $222 – for a rate of 22.2% on that $1,000 increase!

As you can see, for folks that are right in the edge of these taxation limits, this can be an outrageous impact on financial livelihood. If you happen to be in this position, it might be helpful to plan income (if you can) so that in one year you might not be impacted as much by this taxation, and then take the tax hit the following year. This can only be accomplished if you are somewhat in control of when you earn income or recognize gains.

As your MAGI increases, this effect becomes less and less, but it still is worth paying attention to – if you can plan around it, you might save yourself some extra tax!

Holiday Gifting Ideas for Kids

With the Holidays coming up and the giving spirit in full motion, I wanted to share something I heard on a radio show regarding giving that stuck with me.

It’s common for people to have a budget for the Holidays and the best laid plans to stick to it. Often, those plans get blown to bits as emotions come into play and wanting to give as much as they can to their kids. I’ve been guilty of it myself.

Here’s what the show recommended: give a total of four gifts per child.

  1. A gift they want – this could be something your child has been asking about quite often such as a toy, pet, etc.
  2. A gift they need – this could be music, dance, karate lessons. Or something practical and useful for school, college, etc.
  3. A gift they can wear – not a ton of explanation here.
  4. A gift they can read – a good book can go a long way. Additionally, a magazine subscription based on their interests, or age may also be beneficial.

You may also consider a combination of gifts from the above. You could combine the something to wear with something they want – such as a designer piece of clothing, etc.

Though not fool proof, this may help as a guide to not overspend this Holiday Season.


IRS warns of gift card scam

Recently there has been a new scam going around, with a twist – the caller, impersonating an IRS agent, requests payment in the form of gift cards. The IRS recently released a Tax Tip (2019-167) regarding this scam and what you should do about it. The complete Tip is listed below.

Taxpayers should watch out for gift card scam

Taxpayers should always be on the lookout for scams. Thieves want to trick people in order to steal their personal information, scam them out of money, or talk them into engaging in questionable behavior with their taxes. Scam attempts can peak during tax season, but taxpayers need to remain vigilant all year.

Gift card scams are on the rise. In fact, there are many reports of taxpayers being asked to pay a fake tax bill through the purchase of gift cards.

Here’s how one scenario usually happens:

  • Someone posing as an IRS agent calls the taxpayer and informs them their identity has been stolen.
  • The fake agent says the taxpayer’s identify was used to open fake bank accounts.
  • The caller tells the taxpayer to buy gift cards from various stores and await further instructions.
  • The scammer then contacts the taxpayer again telling them to provide the gift cards’ access numbers.

Here’s how people can know if it is really the IRS calling. The IRS does not:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer.
  • Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
  • Demand that taxpayers pay taxes without the opportunity to question or appeal the amount they owe. All taxpayers should be aware of their rights.
  • Threaten to bring in local police, immigration officers or other law-enforcement to have the taxpayer arrested for not paying.
  • Revoke the taxpayer’s driver’s license, business licenses, or immigration status.

People who believe they’ve been targeted by a scammer should:

  • Contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their IRS Impersonation Scam Reporting web page. They can also call 800-366-4484.
  • Report phone scams to the Federal Trade Commission. Use the FTC Complaint Assistant on They should add “IRS Telephone Scam” in the notes.
  • Report an unsolicited email claiming to be from the IRS, or an IRS-related component like the Electronic Federal Tax Payment System, to the IRS at The sender can add “IRS Phone Scam” to the subject line.


More information:
IRS Impersonation Scam Reporting
Consumer Alerts
Report Phishing
Phone Scams

Information on Umbrellas

Most of us know that umbrella policies cover us in the case of exceeding the liability limits in our auto or home insurance policies. While this is true, there are other reasons to hold umbrella insurance.

Umbrella insurance provides excess liability above and beyond the coverage amounts on underlying policies. That is, if we are liable for damages in excess of what our policies provide, the umbrella provides the excess.

In addition to auto and home policies, umbrella insurance also provides coverage on motorcycles, boats, ATVs, as well as a second home, land, etc. Naturally the more items that are insured under the umbrella, the more the premium increases.

What about coverage for things not covered by an underlying policy?

Less thought about but still covered under umbrella policies are occurrences such as libel, slander, certain lawsuits, and personal liability. This could include dog bites or defending yourself from personal injury (self-defense). Umbrella insurance will also provide for your legal defense in a lawsuit – assuming it’s covered under the policy.

An umbrella policy does not negate the necessity for high liability limits on your underlying policies. For example, an individual may think that they can reduce the liability on their auto or home insurance because they have $1 million in umbrella coverage. This would be a mistake.

What would happen in this situation is the policyholder would be responsible for the difference between the coverage they should have had, and what they currently carry. For example, let’s assume that an umbrella policy requires $300,000 of liability on the home insurance policy and the policyholder reduces the limit to $100,000 to save a few bucks.

The policyholder then has a loss where they are liable for $500,000 worth of personal injury. They are required to have liability of $300,000 on the home before the umbrella kicks in, yet they only have $100,000.

The insurance company will require the policyholder to personally cover the difference between what they have and what they should have – in this case the difference between $300,000 (required) and $100,000 (current coverage) – $200,000. This is a significant amount; and not worth the few dollars saved by reducing the liability on the original policy.

Should you have questions about specific events or coverages/exclusions, it never hurts to ask your insurance provider. Certain activities or events may require supplemental insurance coverage or a standalone policy.

Survivor Benefits Do Not Affect Your Own Benefits (and vice versa)

survivorI’ve had a few questions about this topic over the years, so I thought I’d run through a few examples and explain it.

When you eligible for a Social Security Survivor Benefit and a Social Security retirement benefit based on your earnings, you can maximize your lifetime benefits by coordinating the two and planning out your strategy for taking each benefit.

As we’ve covered in other articles, it often is best to delay receiving your own benefit as long as possible. This is because you will receive Delayed Retirement Credits (DRCs) for every month after you’ve reached your Full Retirement Age (FRA, which is age 66 if you were born between 1943 and 1954, and increasing gradually up to age 67 if you were born in 1955 or later).  This DRC amounts to 8% per year, or 2/3% per month.

In addition, it can be beneficial to delay receiving a Survivor benefit past the earliest age it is available (age 60, or age 50 if permanently disabled) as this benefit can be reduced to as little as 71.5% of it’s potential amount if started early.

Plus – this is the really important point to note – neither benefit has an impact on the other.  I’ll illustrate this below in a couple of examples.

Survivor Benefit is Less Than Own Benefit

John, age 60, just lost his wife Priscilla at her age 66. Priscilla had just started receiving her Social Security benefit in the amount of $1,000 per month. John has a PIA of $2,000 per month available to him – meaning he will receive $2,000 at his FRA, age 66. He could otherwise file early to begin receiving his own benefit at age 62, in the amount of $1,500 due to the early start reduction.

Since John is 60 years old, he is eligible to receive a Survivor Benefit based upon Priscilla’s record. John could receive $715 per month in Survivor benefits beginning right now, and continue to receive this amount until he decides to draw benefits based on his own record. So this means John could receive this amount for 6 years, and then file for his own benefit at the $2,000 per month level. Using the delay option, he could wait while receiving the Survivor Benefit for up to 10 years, and then file for his own benefit at age 70, for the DRC-enhanced amount of $2,640 (32% increase for 4 years of delay).

It’s important to note that John isn’t required to begin receiving the Survivor Benefit at age 60, he could delay to age 62 (for example) and then the benefit would be approximately $810 per month. If he waits until he is age 66, the Survivor Benefit would be $1,000.

Survivor Benefit is Greater Than Own Benefit

Lucy, age 58, just lost her husband David, who was 65. David had not begun to receive his Social Security benefits as of his date of death. Had he lived to age 66 (his FRA) he would have been eligible for a Social Security benefit of $1,800 per month. Lucy is due to receive a Social Security benefit of $1,500 per month at her age 66.

When Lucy reaches age 60 she has a choice: if she files for the Survivor Benefit, it will be reduced to $1,287 per month (71.5% of David’s full benefit of $1,800). She could receive this amount until she decides to file for her own benefit ($1,500) at a later date. On the other hand, if she waits until she is age 62, she could receive her own benefit in the amount of approximately $1,113, due to the reduction factors. She could receive that amount until she reaches age 66, at which point she could begin receiving the Survivor Benefit at the maximum rate, or $1,800.

Going back to the first hand, Lucy could file for the Survivor Benefit right away at age 60, receiving $1,287 per month, and then wait to age 70 to file for her own benefit. This would give her the maximum benefit based on her own record, of $1,960, greater than the maximized benefit from David’s record. If she has the resources, she could wait until age 66 and file for the Survivor Benefit at the $1,800 rate and then at age 70 file for her own benefit at $1,960.

Because taking one type of benefit or the other has no impact on the other benefit, she can choose which strategy works best for her own situation. She cannot, however, file for one benefit, switch to the other, and then switch back. The switching between benefits can only be done once.

Hope this helps to clear up some of the confusion around these benefits.

529 Plan Beneficiaries

Owners (usually parents) of 529 plans set them up for the purpose of funding future college education expenses for beneficiaries (usually their children). However, 529 plans allow for beneficiaries other than the owner’s children. Beneficiaries may be changed on 529 plans at the owner’s discretion.

Who qualifies as a beneficiary for a 529 plan? According to IRS Publication 970, the following may be beneficiaries of 529 plans:

  • The account owner.
  • Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
  • Brother, sister, stepbrother, or stepsister.
  • Father or mother or ancestor of either.
  • Stepfather or stepmother.
  • Son or daughter of a brother or sister.
  • Brother or sister of father or mother.
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
  • The spouse of any individual listed above.
  • First cousin.

529 plans only allow one beneficiary per plan. Owners with multiple children or beneficiaries will need to determine their plan of action when it comes to funding in this situation.

While it would be easy to make a blanket recommendation on what to do, it depends on the goals of the owner, the age difference between beneficiaries, and the aspirations of the beneficiaries. For example, a 529 owner could have two children – let’s say their twins. Since 529 plans can only have one beneficiary, it may make sense in this situation to fund two plans, one for each beneficiary. When the funds are needed, each beneficiary has their own account for expenses.

Another example would be an owner with two children that are four years apart in age. In this situation the owner could consider funding one plan, with one beneficiary – say the oldest child. The owner could fund the plan based on funding college for two children, yet only have one beneficiary. When the oldest child starts college, money from the plan would fund his or her expenses. Then, when the oldest child graduates, the owner can make the youngest child beneficiary and continue to use the plan money to fund his or her education.

In some situations, college may not be for everyone. An owner could have college aspirations for the beneficiary, but the beneficiary may have other aspirations after high school. While the owner may be disappointed, all is not lost. One thing the owner can do is change the beneficiary to any of the options listed above and continue to use the money to fund higher education expenses.

Are Social Security Benefits Changing in 2021?

Chances are you’ve seen an advertisement or some sort of article talking about how Social Security benefits will be changing in 2021. Usually these articles have a very dramatic headline, such as “After 2021, you’ll never be able to get as much benefits from Social Security! Act Now!” – followed by information to attend a seminar or contact a firm to help you out.

I understand a lot of folks are concerned about this, but I believe it’s misguided concern brought about by sensationalists who have something to sell. The truth is that the much ballyhoo’d changes in 2021 have been in place since 1983, and nothing you can do will avoid the application of these rules.

The Rule Change

In 1983, Congress made changes to the way Social Security works, in order to increase the probability of the system maintaining solvency. This was brought about by the crisis situation that was occurring in 1982, which was the last time Social Security’s trust fund was in danger of running short of money (as has been projected to occur 2035, per the 2019 Social Security Trust Fund Report).

At that time, the Full Retirement Age (FRA) for Social Security beneficiaries was 65. This had been the FRA since the inception of the system, and had been in place for approximately 50 years at that point. In order to help the system out, FRA was gradually increased over time. 

It started with folks who were born in 1938 – who were 45 years old in 1983. FRA increased by 2 months for these folks, and increased by another two months for the following birth years up to the birth years of 1943 thru 1954. The FRA for these folks was set at 66 years. Beginning with birth year 1955, FRA is increased again by 2 months. For each subsequent birth year after that, FRA is increased by another 2 months, until it reaches 67 for folks born in 1960 or later.

In 2021, the first people born in 1955 will be reaching their FRA – which for the first time in 11 years has increased. These people reach FRA at age 66 years and 2 months. But this isn’t new! These rules have been in place since 1983.

No rules are changing in 2021. There are different factors being applied for folks who reach FRA in 2021 and thereafter, but the rules have been in place since 1983.

The Rules

Here’s how the rules apply – for everyone: For all birth years after 1943, the Delayed Retirement Credit is 2/3% per month, which works out to 8% per full year of delay. The reduction calculation for starting benefits before your FRA is also the same for all – 20% (5/9% per month) for the three full years (36 months) closest to your FRA, and 5% per year (5/12% per month) for any months more than 36 before your FRA.

First, a quick definition: PIA – Primary Insurance Amount – This is the unreduced (and not increased) benefit that you will receive if you file at your Full Retirement Age.

Let’s look at each year of birth in order. Here are the factors used to calculate your benefits:

Birth year 1943-1954
– FRA is age 66
– minimum benefit is 75% of your PIA (48 months of reduction)
– maximum benefit is 132% of your PIA (48 months of delay increase)

Birth year 1955
– FRA is age 66 years, 2 months
– minimum benefit is 74.17% of PIA (50 months of reduction)
– maximum benefit is 130.67% of PIA (46 months of delay increase)

Birth year 1956
– FRA is age 66 & 4 months
– minimum benefit is 73.33% of PIA (52 months of reduction)
– maximum benefit is 129.33% of PIA (44 months of delay increase)

Birth year 1957
– FRA is age 66 & 6 months
– minimum benefit is 72.5% of PIA (54 months of reduction)
– maximum benefit is 128% of PIA (42 months of delay increase)

Birth year 1958
– FRA is age 66 & 8 months
– minimum benefit is 71.67% of PIA (56 months of reduction)
– maximum benefit is 126.67% of PIA (40 months of delay increase)

Birth year 1959
– FRA is age 66 & 10 months
– minimum benefit is 70.83% of PIA (58 months of reduction)
– maximum benefit is 125.33% of PIA (38 months of delay increase)

Birth year 1960 and thereafter
– FRA is age 67
– minimum benefit is 70% of PIA (60 months of reduction)
– maximum benefit is 124% of PIA (36 months of delay increase)

Practical Application of the Rules for YOUR Situation

Perhaps it might help to visualize a timeline of the 96 months between age 62 and age 70. For folks born between 1943 and 1954, the FRA point is at age 66. At that point, there are 48 months to the left of FRA (maximum number of months before FRA that you can file, therefore 48 months worth of reductions can be applied). On the right of FRA, there are 48 months before age 70, so that there are a maximum of 48 months’ worth of increases by delaying. See below:

FRA 66 timelineHowever, for someone born in 1955, the FRA point is at 66 years and two months. This leaves 50 months to the left, and 46 months to the right. So the decreases are greater at the minimum filing age, and the increases are less at the maximum filing age. See below:

FRA 66y 2m timelineSince increases and decreases are based on how many months before or after FRA that you file, when there are more months to the left the maximum decrease will be greater. Likewise when there are fewer months to the right the increases will (at maximum) be less.

To calculate the minimum benefit for 1955 birth year, as indicated above there are 50 months of possible reductions. The closest 36 months determine a 20% decrease, and the remaining 14 months (at 5/12% per month) determine an additional 5.83% decrease, multiplying 14 by 5/12%. Adding these two together we come up with 25.83%, so the minimum benefit is 74.17% for birth year 1955.

Calculating the maximum benefit amount for 1955 birth year is more straightforward – every month of delay produces a 2/3% increase. Multiplying 2/3% by the 46 possible months of increase results in a total maximum increase of 30.67% for birth year 1955.

Nothing is Changing in 2021

If you’re reaching FRA in 2021, these factors have applied to every calculation done to project your benefits. NOTHING CHANGES AS OF 2021, it’s already in place (since 1983), determined by your year of birth. So again I say, the year 2021 should have no impact on your filing decisions.

In fact, if you’re reaching FRA in 2021, these factors began applying to your situation in 2017, when you reached age 62. If you calculated the minimum benefit for starting at age 62, you’d have found that the benefit amount was 74.17% of your PIA – not 75%, which was the case for folks born the year before. The same applies to anyone born in or after 1955 – the minimums have been in place all along (since 1983).

Hope this clears up any misconceptions that may have arisen from the drama that is being promoted as if it were a crisis. 

Financial Recordkeeping – How Long Do I Keep This??

put your records on by Hryck.I often get the question – how long should I keep my _________ (fill in the blank)? So I thought I’d put together a list of the most common types of documents with some guidelines as to how long you should keep those documents. I’ll try to keep this as simple as possible – but obviously, if you have other documents that I have not covered here, please contact me and I can give you a recommendation for your particular situation.

Keep in mind that these are only guidelines. If you have a special situation, such as a lawsuit (even if it’s been settled) or a sticky inheritance or insurance claim situation, you should probably keep that sort of documentation forever plus 1 day. You just never know when it will be necessary to dredge up that information again to prove how it was handled, when it was handled, or who was involved, as well as the circumstances.

With litigation and insurance claims especially, it is helpful to put all of the pertinent documentation into a larger folder, envelope, or other self-contained filing apparatus, along with a brief description (in your own words) of the circumstances and the outcome. This information would go in your permanent file. Unless the documentation takes up too much space, you can get a fairly inexpensive fire-proof safe to hold this kind of information, along with the permanent documents that I’ll list below.

In addition, given that identity theft is so pervasive any more, it probably makes good sense to put your most sensitive information behind lock and key, or better yet, scanned onto an encrypted hard drive. Otherwise, if everything is in a simple file cabinet in your home, a thief can help themselves to all of your information quickly and easily, and make your life hell in the process.

The Financial Stuff Organizer (FSO)

If you’d like a head start on gathering and organizing all of this information, I have a set of templates (written in Microsoft Word for easy editing) that you can customize to create your own Financial Stuff Organizer (FSO). A colleague of mine created these templates several years ago, and I think you’ll find the FSO pretty useful as you organize your financial documentation.


Your permanent file should either be stored in a fire-proof safe in your home or place of business, or in a safe deposit box at your bank. In your permanent file, you’ll want to keep the following documents:

  • Social Security card(s)
  • certified copy of your birth certificate(s)
  • passport(s)
  • life insurance policies in force
  • homeowner’s insurance policies in force
  • auto insurance policies in force
  • liability insurance policies in force
  • annuity policies
  • wills and trusts, including living wills
  • community property agreements
  • prenuptial agreements
  • military discharge papers
  • marriage certificates
  • death certificates
  • divorce decrees and related paperwork
  • power of attorney documentation (healthcare and otherwise)
  • citizenship paperwork
  • copies of property deeds and descriptions, along with mortgage closing documentation, title insurance, and records of major improvements to the property
  • any litigation-related or complex insurance claim-related information as mentioned above
  • retirement plan documentation, including beneficiary designation forms (a copy of the form submitted to the custodian)
  • personal health record – including dates of any procedures or major illnesses and treatments
  • any bond, stock or other investment documents that are original certificates – such as Series EE or I savings bonds
  • any partnership agreements, buy-sell arrangements or other continuation documents
  • automobile titles
  • union cards
  • deeds to cemetery plots, along with any pre-arrangement information
  • adoption papers
  • diplomas
  • licenses that you don’t need to carry
  • documentation on any property inherited – including fair market value assessment, and any other information used to establish the basis for the inherited property

In addition to these specific documents, it is a good idea to scan copies of the front and back of your credit cards, driver’s licenses, and any other hard-to-replace documents that you carry in your wallet or purse. This way, if your purse is stolen, you have ready access to the emergency phone numbers to report the stolen information and to request replacements. The permanent file, if located in your home, is also a good place to keep the key to your safe deposit box.

If scanning documents to your computer, it might make good sense to make a copy of the files (encrypted) and put your copy in a safe deposit box as well.

file cabinet by kthyprynLong-Term (7 to 10 years)

Your long-term file will ideally be a filing cabinet in your home or office and your computer.  When you first start scanning your important documents into the computer it will take a while, but if you set aside a few hours or do it in small batches, you’ll soon have everything you need scanned. Then you can scan new documents into your computer when you receive them in the future. Your computer records should be backed up at least quarterly, as well as any time you add new information to the file. Back up the computer files onto an inexpensive flash drive and keep the flash drive in your permanent file, safe deposit box, or perhaps at a relative’s house. In general this long-term file will include the following documentation:

  • tax returns – if you use a tax preparer (like me, for example) your returns and copies of all supporting documentation will be kept for at least three years by law, and the really good preparers (like me, for example) will keep all of your documentation permanently
  • documentation used to create the tax returns, including:
    • W2’s
    • 1099’s
    • canceled checks and bank statements
    • credit card statements (if used for deductible items, such as charitable contributions or medical expenses)
    • year-end brokerage statements
    • rental property documentation
    • self-employed business documentation
    • major home improvement documentation
  • health insurance records – claims, policy information, premiums paid and reimbursements
  • home insurance records – policy information, payments, and claims
  • home repair bills and contracts for major repair/remodel projects
  • warranty documents and manuals for all home appliances (keep until you no longer use the appliance)
  • realty and personal property tax assessments
  • rental agreements
  • receipts for high-dollar items (keep these until you dispose of the item)

Short-Term (1 to 3 years)

Your short term file can also be a filing cabinet – and in general these documents won’t need to have a computer scanned copy, although if you’re a belt-and-suspenders type, go ahead and scan these as well. This sort of documentation can be readily re-created if necessary, and has a much shorter useful life. Keep the following information in your short-term file:

  • loan payment records (non-mortgage)
  • pay stubs – keep the last one from each year, for a reference to compare with your W2 if necessary.
  • year-end bank and brokerage statements.  These are usually available from the company, but this way you’ll have the document on hand when you need it.
  • budgets and actual results – many folks don’t track their expenses very closely, but if you do, it’s a good idea to save previous years’ final results to compare and see how you’ve done with regard to the budget over the years.

binders by sidewalk flyingClose At Hand (Reference file)

It’s also a good idea to have a ready binder that has some critical information documented for your family members in the event of your incapacitation. The FSO (mentioned earlier) is a good start for this information. Depending upon the nature of the information that you keep in your Reference File, you might want to store this folder with your permanent files. Keep the following information in the close at hand Reference file:

  • health-care providers, including phone numbers and specific health matters dealt with
  • financial professionals – accountant, insurance professionals, attorneys, financial planners, bankers, tax preparers, stock brokers, etc.
  • emergency instructions for death or disability, including who to contact to deal with various situations
  • all family names, addresses, Social Security numbers, birth dates, and driver’s license numbers
  • contents of your safe deposit box and/or permanent file – including where the file is located, how to access it, etc..
  • a brief “What’s Where?” document which explains how to locate various documents that may be required in the event of your incapacity
  • description of and passwords to your various computer files relating to important documentation
  • any loan documents – including personal “word of mouth” loans made to or by you by or to others
  • current and past resume’s

What You Don’t Need to Keep

We often keep lots of extra “stuff” around that we just don’t need to keep. Hopefully this list will help you to eliminate some of the excess junk and open up space for some of the really important stuff. I would get a paper shredder that you can use to destroy these documents, as you don’t want even the smallest amount of personal information floating around in these days of rampant identity theft. You can eliminate the following documents from your personal “paper farm”, keeping only three months’ worth:

  • utility bills (unless you need them for tax documentation)
  • credit card bills
  • bank statements
  • pay stubs
  • bank deposit slips and ATM slips
  • receipts for small items (check against your credit card or bank statement, then pitch)

There you have it. Don’t let the length of this article cause you to throw up your hands in despair at the size of the task – it doesn’t have to be daunting. You probably have much of this information pretty well organized already. Just go at it in batches and get everything in it’s place. And start with a copy of the FSO I mentioned earlier to help you with the process (linked earlier).

Three Reasons You May Not Want to Convert to a Roth IRA

There’s been a lot of press surrounding the concept of Roth IRA conversions, specifically in the coming 5-6 years with our historically-low income tax rate structure. Given the low tax rates presently, and the presumed increased tax rates after the expiration of the current tables after 2025, a Roth Conversion may make a lot of sense for a lot of folks these days. However, there are a few reasons why this might not be the best idea for a lot of folks. Here are three really good reasons why you probably should reconsider…

Three Reasons You May Not Want to Convert to a Roth IRA

david byrne by alterna2

    1. “Same as it ever was…” Several factors must be considered when determining if a Roth conversion makes sense for you:
      1. your conversion tax rate
      2. the amount that you withdraw from the Roth account (after conversions)
      3. the date that you begin withdrawing that amount from the Roth account

      If you would have begun taking the withdrawals on the same date (C) regardless of the account (traditional or Roth), in the same net (after tax) amount (B), and the tax rate at that time is the same as your conversion rate (A), and your investments returned the same rate – assuming your earnings would be the same either way – there is no advantage to the Roth conversion.

      In order for there to be a benefit to the conversion, one or more of the following must happen:

      • the date you begin taking distributions must be later;
      • the amount you would take as a distribution must be less (considering the tax already paid); and/or
      • the tax you pay on the distribution would have been higher than the conversion rate.

      So, if the tax rates increase as we assume they will, it can make sense, but only if your conversion rate is less than the rate you might pay in the future. For example, if you converted $100,000 in 2020, at a marginal tax rate of 32% (due to your other income), your conversion has cost 32%. If you would otherwise take distributions from your traditional IRA in smaller increments such that the marginal rate on the distributions was only 25%, you’re losing $7,000 by converting. If the future tax rate turns out to be more than the conversion tax rate (for example, 35%), then it is in your favor to convert (per the example).

    2. A downward spiral. If the value of the investments in the account actually reduce in value, or if the tax rates decline, you’ll be in a worse position if you convert to a Roth IRA.For example, if your IRA was worth $100,000 when you converted it, if your tax rate was 25% the tax cost of the conversion is $25,000. If the value of the account subsequently falls to $50,000 – now the overall rate that the conversion cost you has inflated to 33%. By the same token, if (heaven forbid) the tax rates are lower in the future, it doesn’t make any sense for you to do a Roth conversion. The more likely event is that your personal tax rate might be a lot less – especially possible if in retirement you have a pretty low-cost lifestyle with few fixed resources like a pension.
    3. The game changes. What happens to you if Congress decides that this Roth deal is just too good? Maybe they’ll start requiring distributions of the original account owner – or restrict the amount of time that your heirs can stretch payments (this one is actually pretty much a foregone conclusion)? It’s really impossible to guess what Congress might do – but given the potential cost of lost tax revenues from Roth accounts, it’s not hard to believe that the rules could be changed to have a negative impact on your converted account.

Of course, this is not an exhaustive list – just a few good reasons why you really need to think this over before you do a Roth conversion. In general, if you can convert funds from traditional IRAs to Roth IRAs at a marginal rate of 24% or less, it’s likely a good idea to do this, for at least part of your traditional IRAs.

In addition, if it is your intention to never distribute a significant portion of these retirement funds, converting to Roth can make good sense. This is especially true if there will be a very long period of time for the converted money to grow from investments. If you plan on living a long time (and don’t need the money from the IRAs), a Roth Conversion might be a good plan for you.

You must be mindful, if nearing the age for Medicare (or already participating in Medicare), is that a Roth Conversion could temporarily make you subject to an IRMAA (Income-Related Monthly Adjustment Amount) increase to your Medicare Part B and Part D premiums. These adjustments occur based on your AGI from two years previous to the current year, so a large Roth Conversion at any time during or after your 63rd year could cause IRMAA Part B & Part D increase. Also, keep in mind the additional Net Investment Income Tax that may apply if your overall AGI is greater than $250,000 for a married couple.


hold backEvery day we are bombarded with information. It can be difficult to wade through this sea of data and pick out the material that means anything to us. Of course, it doesn’t help that the existence of 24-hour news channels, social media outlets, and the scuttlebutt around the water cooler make it difficult to avoid.

So how do we filter all the noise and get only the information we really need? I’ll offer a few suggestions that have worked for me. Perhaps they can help you.

Turn off the news. This was one of the biggest mood lifters and time savers that helped me. I made this decision about 4 months ago and decided to make a conscious effort to not watch the morning and evening news. I also cancelled my newspaper subscription (it wasn’t that great anyway).

Consider reducing or elimination your social media usage. This can be hard to do, given the fact that social media engages areas of the brain that encourage rewards as well as addiction. Start slow by turning your phone off at night or other times, or only allow yourself a specific time frame to be on social media. For the biggest impact, consider eliminating it altogether.

Most news is sensationalized – designed to lure watchers and readers to sell more ad space. This is especially true when it comes to news about the markets. Most days market news is uneventful. Generally, the media will sensationalize an event in order to make headlines and try to explain why the market behaved in a certain way.

For example, when you hear the phrase, “The market plunged 400 points today”, it sounds dire, but it’s just noise. The market moved just 1.5%. But 1.5% doesn’t sell; a 400-point plunge does. Ignore the noise.

Look at the news like I did when I was a kid – boring. If it’s truly important, you’ll find out about it. When it comes to noise around the markets, keep in mind your goals, time horizon, and plan for your money. The rest is noise.

The same is true with social media. Most of what you see is noise – a “friend” or colleague posting what they did that day to keep up with the Jones’s. Consider filtering out the information that really matters. Use the extra time to spend with your family, building relationships, enhancing your life. Focus on the things you can control, and you can free up time to do things that will bring you and others joy, less stress, and better quality of life.

Ignore the noise.

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.

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