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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
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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


Image by London Permaculture via Flickr

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.

Sam, You Made The Pants Too Short!

high water pants by TimWilson With apologies to the writer and performers of the original “Sam, You Made The Pants Too Long!”… This article is about what happens when your IRA declines substantially in value and you’ve put a 72t Series Of Substantially Equal Periodic Payments plan (SOSEPP) into play – and the decline in value has brought your IRA to a point where the balance will no longer support your Equal Payments.

What Happens When Your IRA Will No Longer Support Your SOSEPP?

Here’s an example: You’ve set up a SOSEPP in your IRA, beginning at age 50. As we all know (see this post for details) you have to keep the payments going until you reach age 59½. During that time, many things can happen, both positive and negative. In this case, the IRA began with a balance of $100,000, and your annual payments are $3,000. Things go fine for the first few years, although your account doesn’t seem to be growing. So, you decide to take a leap and invest it all in a wild-eyed fund – some Madoff fellow’s running it. Then, lo and behold, one morning you wake up and find that your IRA balance has become – $12 total. You’re 56 years old, so you have three and a half more years that you are supposed to be taking this regular payment of $3,000 from your account! What do you do? You’ve read about the crazy penalties for busting a 72t payout plan – yikes!


Calm down. Take a breath, it’s really not so bad. There are several options: You could rollover funds from another account into the IRA, either from another IRA account or a 401(k). You could also choose to make your one-time change to your SOSEPP plan. Or, you could choose to let it die, and go on with your life. The best option is probably the last one – it allows you to be as flexible as you can be.

If you chose the first option, it certainly would work – and your SOSEPP would just continue on as originally planned. But what if you have decided at this stage that you really don’t need that series of payments anyway? And it’s just a pain in the rear keeping up with the paperwork and remembering to take the payment each year…?

The same holds true for the one-time change to the RMD method. If you did that, now you’d have to re-calculate your payment each year on a very small balance. Once again, a pain in the rear – so why not just take the third option?

Let it die

If you go ahead and take the last payment out of your account (the remaining $12) and close the account – your SOSEPP is no longer in effect. You now have the option of starting a new SOSEPP from another IRA account, or just discontinuing the idea of the 72t payout. If you chose to start a new plan, you’d have to start over with a new five-year or (since in the example, you’re age 56) for three and a half more years until you reach age 59½.

What’s key to understand in this is that, for SOSEPP’s, the IRS considers each IRA account separately – yeah, I know, for everything else, all IRAs are considered as one. What can I say? They don’t want you to get too comfortable and start predicting how they’ll move – just when you think they’re gonna zig? They zag. So with that in mind, if one account (the one with the SOSEPP attached) runs dry, there’s no penalty if you just drop it and move on with your life.

That’s literally all there is to it. No penalty, no muss, no fuss.

Guaranteed Income (Annuitization)

Annuities sometimes get a bad rap. The distaste people have for annuities may be based on a bad experience with a salesperson, the fear of “the insurance company getting all your money when you die”, or just plain misinformation.

Annuities can be a great choice for your retirement. That is, after annuitization an annuity provides a guaranteed income stream to you and or your spouse for the rest of your lives. Think of this as your own defined benefit pension. In fact, if you don’t have a defined benefit pension, you may consider the guaranteed income a private annuity provides. The guarantee comes from the insurance company providing the annuity. To date, no insurance company as ever defaulted on its annuity obligations.

So why can annuitization be a good thing for you? Let’s look at an example.

Let’s say you’ve determined when you retire that your annual expenses are $115,000. This sum includes your living expenses, taxes, and doing fun things in retirement (such as travel, dining out, and hobbies). You’ve determined that Social Security will provide $30,000 per year which leaves $85,000 to be covered with other retirement savings.

It’s safe to say that Social Security is providing $30,000 (inflation adjusted) per year in guaranteed income. In other words, you know that at the very least you’ll always have $30,000 per year for income, or $30,000 of expenses will always be covered. But maybe you’re uncomfortable with knowing only $30,000 is guaranteed. This is where the annuity can help.

Depending on the amount of money you have saved for retirement, you could purchase an annuity to provide a guaranteed income stream that meets 50, 75, or even 100 percent of your needed income – for the rest of your life! The amount you choose to annuitize will be dependent on several factors such as retirement savings, other income, RMDs, and estate goals (gifts and inheritances).

The flip side, however, is what can happen if you die before your life expectancy. It is true that in some circumstances the insurance company keeps your money (if you had a single life annuity) and this money goes back into the risk pool of other annuitants. But there are options to make sure that this doesn’t happen such as joint and survivor annuities, period certain annuities, and refund annuities. 

Annuitizing a portion of your retirement income shouldn’t be readily dismissed. Guaranteeing some of your income can reduce stress, meet certain retirement expenses, and ensure you never run out of money. Should you need help navigating your options, consider working with a fiduciary – preferably one who doesn’t sell annuities.

Your Account(?) at Social Security

forget-me-not social security by swanksalotOne of the biggest misconceptions about Social Security is that each individual has a specific “account” which holds all the money you’ve had withheld from your paycheck over the years. Nothing could be further from the truth… as we’ve mentioned before on this blog, the Social Security system is a pay-as-you-go system (largely) where withholding today is used to pay benefits for current recipients.

It is for this reason that much consternation has been brought about in recent years with regard to the question of the Social Security system’s running out of money. You see, for quite a while the Social Security system has had a surplus over current expenses, with the surplus amounts being placed in the trust fund. In 2020 it is expected that current benefits being paid out will become greater than the payroll taxes are bringing in, so the difference will come from the trust fund.

No Pile of Money

The point is – there’s not a pile of money sitting somewhere with your name on it, although your “contributions” are tracked through the years, as a matter of adminis-trivia. There is no guarantee at any point in time that the money you’ve put into the system will ever be returned to you, but then again you may receive far more in benefits than you paid in.

For example, if you were single with no dependents and worked all your life paying in to the Social Security system but died just prior to starting to receive your Social Security retirement benefit, it would all be for naught (for your benefit). There’s no residual that goes to your estate.

On the other hand, to consider an extreme example at the other end of the spectrum:  Ida May Fuller, the individual who received the first ever Social Security benefit check in January of 1940, had worked for only 3 years under the Social Security system, paying in a total of $22.54 in Social Security taxes during that time. Mrs. Fuller lived to age 100, and she received benefits in the amount of $22,888.92 over the course of the 35 years.

Inherited 401k plan

An inherited 401k plan isn’t necessarily a different kind of retirement plan from a regular 401k plan in the hands of the original participant. However, the rules around an inherited 401k plan are unusual enough to warrant their own review.

When an individual inherits a 401k plan, generally this individual must begin taking minimum distributions from the plan, on a preset schedule. There are a few things to consider, the first of which is whether the beneficiary is the spouse of the original owner, or another person (non-spouse).

If the beneficiary is a spouse, special options are available for handling the inherited 401k plan. As a spouse-beneficiary, you have 3 primary options to choose from:

  1. You can leave the money in the 401k plan.
  2. You can rollover the money from the 401k plan to an inherited IRA.
  3. You can rollover the money from the 401k plan into an IRA in your own name (not the same as #2).

If you inherit a 401k plan from someone other than your spouse, you are limited to either #1 or #2 above. We’ll go over the three options in detail next.

Leave the money in the 401k plan

If you choose to leave your inherited 401k in the original account, you now have to figure out the Required Minimum Distribution for the account.

If the original owner was over age 70½ and already taking RMDs from the account, you must continue with those same distributions based on the lifetime of the original owner. You can choose to take out more each year, but you have to at least take out the minimum that applies as if the original owner were still living.

These same rules apply if the original owner was still employed past 70½ and not subject to RMDs. The RMDs must begin in the year following the original owner’s death, in this case, and will use the original owner’s age to determine the amount of each RMD.

If the original owner was younger than age 70½ at his or her death and therefore not subject to RMDs, the rule is different if you are the spouse or a non-spouse beneficiary.

If you are the spouse of the original owner you have the option of delaying until the original owner would have been 70½ years old before taking the RMDs. In this case, the RMDs would be based on the decedent’s assumed age (had he or she still been living) in each year of distribution.

If you are a non-spouse beneficiary, the default rule is that you must withdraw the entire amount of the 401k account by December 31 of the fifth year following the year that the original owner died. You can take some money out each year, or take it all at once, it just has to be withdrawn before the end of the fifth year.

Some plans (although these are relatively few) have another option for the non-spouse beneficiary: to stretch RMDs out based on the beneficiary’s lifetime. This is similar to the option described below in the case where you rollover the account to an inherited IRA. It’s more often the case that the rollover is undertaken to enable stretching payments, as few 401k plans include a stretch feature.

In all cases, you have the option of taking more than the minimum out of the account each year. In none of these cases will you have a 10% penalty applied for early distribution, but you will owe income tax on all pre-tax money withdrawn.

Rollover the inherited 401k to an inherited IRA

If you choose instead to rollover the inherited 401k to an inherited IRA, you have a bit more flexibility, but only a bit. Not all plans allow this rollover option – some plans are more restrictive and force only the 5-year complete payout option detailed previously.

As before when leaving the money in the 401k account, if the decedent original owner was already taking RMDs (or would have except for being still employed and over age 70½), you must at a minimum continue those RMDs based on the lifetime of the original owner.

However, if the original owner was under age 70½ and therefore not taking RMDs, by rolling over the account to an inherited IRA you have the option of “stretching” the IRA distributions. If you’re younger than the original owner was, you can start taking RMDs based on your age, which will result in a longer timeline for distribution of the funds as compared to using the original owner’s age.

Rollover the inherited 401k to your own IRA

This option is only available for a spouse beneficiary.

As a spouse, you have the option of rolling over the 401k plan to an IRA in your own name (not an inherited IRA). This action can cause restrictions that you may not want, but it could open up flexibility as well.

If you are under age 59½ and are the spouse beneficiary, rolling over the inherited 401k plan to your own IRA will eliminate your ability to withdraw funds from the account without penalty, unless you meet one of the exceptions. Once you reach age 59½ or an exception applies, you will be able to access the money without penalties. It’s important to note that this rollover action does completely eliminate your ability to withdraw funds without penalty before age 59½.

If you’re between 59½ and 70½ years old, rolling over the inherited 401k to your own IRA can give you more flexibility. By doing this action, if your late spouse was already subject to RMDs, you can delay RMDs now until you reach age 70½. This is because the account is no longer associated with your late spouse – it’s your IRA. You also can freely withdraw any amount for any purpose and only pay ordinary income tax on the distribution, no early withdrawal penalty will apply.

If you’re over age 70½ and you rollover the inherited 401k plan to your own IRA, you must take RMDs based on your lifetime and the account balance in your IRA.

As before, except for the case where you’re under age 59½ (when penalty-free withdrawals are not allowed), you are allowed to take more than the minimum distribution each year, but you must at least take the minimum.

Roth Conversion of Inherited 401k

One of the provisions that is available to the individual who inherits a 401k or other Qualified Retirement Plan (QRP) is the ability to convert the fund to a Roth IRA.

This gives the beneficiary of the original QRP the option of having all of the tax paid up front on the account, and then all growth in the account in the future is tax free, as with all Roth IRA accounts.

What’s a bit different about this kind of conversion is that, since it came from an inherited account, the beneficiary must immediately begin taking distribution of the account over his or her lifetime, according to the single life table. This means that, in order for this maneuver to be beneficial, the heir should be relatively young, such that there will be time for a lengthy growth period for the account – making the tax-free nature of the Roth account worthwhile.

A downside to this move is that the heir should also be in a position to pay the tax on the conversion from other funds, otherwise the tax pulled from the account (and therefore not converted to Roth) will reduce the funds that can grow tax-free over time.

If the heir has an IRA of his or her own that could be converted, and there are only enough other funds for paying tax to enable the conversion of one account or the other, the IRA should be converted rather than the 401(k). This is because the IRA has a much better chance for long-term growth than the inherited QRP due to the requirement for distribution of the account (as discussed above).

This is yet another reason that an individual might want to leave funds in a 401k plan rather than rolling it over to an IRA – since the heir does not have this Roth conversion option available if the money is in a traditional IRA. This option is only available for an inherited 401k.

Inherited Roth 401k

If the account that you’ve inherited is a Roth 401k, if you leave it in the original Roth 401k account, you’ll need to take RMDs from the account each year, based on your age and the account balance.

You could also rollover the Roth 401k to an inherited Roth IRA (similar to the conversion described previously). This is a tax-free event since the money is coming from an account that has already been treated as Roth with contributions.

As a spouse, you further have the option of rollover of the account to a Roth IRA in your own name (not an inherited Roth IRA). This would eliminate the RMD requirement during your lifetime.

Deemed Filing

Many times the question comes up – Since my spouse has filed for Social Security retirement benefits, can I file for only the Spousal Benefit?


This is a complicated question with two answers, depending on your date of birth. This is because there are two different rules: one that applies if you were born before 1954 and one if you were born in 1954 or after. These rules came into effect in 2016, after passage of the Bipartisan Budget Act of 2015.

It is certainly possible for the individual born before 1954 who is at or over Full Retirement Age (FRA). This is a common circumstance that many folks employ, although the number of people who can employ this is diminishing. One spouse files for benefits and the other, hoping to achieve the full Delayed Retirement Credits (DRCs) while still receiving a benefit, files for the Spousal Benefit only. This is a perfectly allowable method, but only for folks born on or before January 1, 1954.

If you’re under FRA (no matter when you were born), the option for filing solely for a spousal benefit is not available. This is because, prior to FRA, if you file for the Spousal Benefit, you are deemed to have filed for your own benefit as well. This is known as “deemed filing”, and it applies in all circumstances when you’re under FRA. The result of this action is that your own benefit will be permanently reduced, as will the Spousal Benefit that you’re filing for early as well. The reverse is true as well: if you file for your own benefit before FRA and you’re also eligible for a spousal benefit, you are deemed to have filed for both benefits at the same time. If you are not eligible for the spousal benefit at the time of your filing for your own benefit, as soon as you become eligible for the spousal benefit, deemed filing requires that you have automatically filed for the spousal benefit.

The group of people born before 1954 will all be at or older than FRA by January 1, 2020, so this group’s decision process is coming to an end. Let’s look at how deemed filing works for folks born in 1954 or later.

For anyone born on or after January 2, 1954, deemed filing has a very absolute application. In any case where you’re eligible for both a spousal benefit and your own retirement benefit, deemed filing will require that any application for benefits is an application for both benefits. No matter whether you’re over, under, or exactly at FRA, you can no longer separate these benefits.

If you are not eligible for a spousal benefit when you first file for your own retirement benefit, of course you’ll only be filing for the benefit that you’re currently eligible for. But as soon as you become eligible for a spousal benefit (because your spouse filed for his or her own benefit), you are deemed to have filed for the spousal benefit in the first month of your eligibility.

Deemed filing only applies to your own benefit and the spousal benefit. If you are eligible, for example, for both your own benefit and a survivor benefit, you can separate these two benefits in your filing, regardless of your age and date of birth. You could file for your own benefit at one age (perhaps before FRA) and delay the survivor benefit until you reach FRA (when it is maximized). The reverse is also true: If you’re eligible for a survivor benefit, you could file for the survivor benefit only and delay filing for your own benefit until as late as age 70, when your retirement benefit is maximized. The earlier filing for either benefit has no impact on the later filing for the other.

Turns Out You CAN Be A Little Bit Pregnant

surprise by PinkMoose Remember back in junior high (or whenever it was) during health class (or sex ed, or whatever they called it for you) – how it was explained that pregnancy is a black or white thing: “nobody gets just a little bit pregnant” was the story my health teacher gave us to remember. As it turns out, there are many other absolutes in life that are similar. However, in a totally characteristic move, the IRS gives us a way that takes something that you think would be absolute, and twists it so that you can, in fact, be a little bit pregnant (or rather, a little bit taxable, a little bit tax free, in this case).

Confused yet? Sorry, that wasn’t my intent… some people refer to this as the “cream in the coffee” rule. With this analogy, it is explained that once you put cream in your coffee, you can’t take out just some of the coffee or just cream, you have to take out both cream and coffee. Oh bother, with the analogies! Let’s get into this.

IRA Funds – Part Taxable, Part Tax-Free

If you’ve made after-tax contributions to your traditional (non-Roth) IRA, you’re likely expecting that at some point you can take those contributions out again, tax free. And you’re right to expect that, because that’s exactly what you can do. However (and there’s always a however in life, right?), if the after-tax money you have in your IRA isn’t the only money in ALL of your IRAs, any money that you take out will be partly taxable and partly tax-free. (this was where the “little bit pregnant” thing comes in)

Here’s how it works: Let’s say you have two IRAs, each worth $5,000. One is a traditional deducted (pre-tax) IRA, and the other is a traditional non-deducted (after-tax) IRA. If you wanted to take $100 out of either account, the IRS considers all of your IRAs as one account. Any money taken out of either account is considered pro rata, partly taxable and partly non-taxable. So in the $100 that you take out, $50 will be tax-free, and $50 will be taxed.

Let’s do another example, a little more real world:  You have two IRAs, one worth $5,000, which is made up exclusively of a $3,000 deducted contribution and $2,000 worth of growth and interest; the second is made up of a $4,000 deducted contribution, a $5,000 non-deducted contribution, and $1,000 worth of growth and interest, for a total of $10,000. You would like to take a distribution of $1,500 from one of the accounts. In the IRS’ eyes, you are taking out $500 which is non-taxed, and $1,000 which will be taxed. This is because, out of the total of $15,000 in the two accounts, only $5,000 was “after tax” funds. Everything else, the growth, interest and the deductible contributions, is considered taxable.

How To Get Around It (or How You Can NOT Be A Little Bit Pregnant)

Don’t lose faith, though, there is one way around this dilemma. The IRS allows you to roll over funds from your IRA into a Qualified Retirement Plan (QRP) such as a 401(k) – but ONLY the taxable portion may be rolled over to the QRP. If there are commingled funds in your account(s). So, in this case, the IRS goes along with the absolute (go figger – they treat the same money two different ways!) and requires that no after-tax contributions be rolled over into the QRP.

So, if you have a 401(k) plan at work, or an existing 401(k) that you haven’t rolled over into an IRA, you can use this account to split out your taxable IRA money from the non-taxable IRA money. Then you could do a tax-free conversion of the non-taxed IRA money into a Roth IRA if you wished, for example, as long as you fit all the other criteria.

Going back to our example above, you would rollover to your 401(k) plan the $10,000 from the two IRAs that represent the deductible contributions plus the growth and interest. This leaves you with $5,000 in non-deductible contributions from the one IRA. You could take a withdrawal as you had planned at this point, with no tax or penalty.

In addition, since your only IRA now only holds non-deductible contributions (no growth or deductible contributions), you could convert the IRA to a Roth IRA – also with no tax or penalty. This is a strategy that many have used to separate the cream from the coffee to make the Roth conversion painlessly.

The Earnings Test is Specific to the Individual

all thats left by adonis hunter ahptical

This topic comes from a reader, J., who asks the following question:

My wife is 62 and she works a part-time job earning around $23k per year. She is planning to retire in June, and so her total earnings for the year will be approximately $11,500. She would like to begin taking Social Security benefits right after her retirement.

The question is this:  will her earnings test be based upon her “individual” earnings, or on the higher combined earnings of the two of us (I am still working, earning in excess of the earnings test amount)? Since her earnings of approximately $11,500 are under the $17,640 earnings limit, her earnings would not be reduced – but if the earnings test is based upon both of our earnings combined, her earnings would definitely be reduced. How does this work?

My Response

Each person’s earnings record is specific to that individual – the only time the spouse enters into the equation is in calculating spousal or survivor’s benefits. Therefore, the only earnings considered for the “earnings test” for your wife – are those of your wife, and not the household (not including your income, in other words). Actually one other time that the household earnings are considered is when you file your tax return: at your household income level, her benefit might be included as taxable at as high as the 85% rate.

In addition, there is a special rule that applies to the first year of retirement, when a person retires mid-year: the retiree who retires in mid-year is eligible for a full benefit (however reduced by age, in your wife’s case) for any whole month that the person is considered retired, regardless of total yearly earnings.

“Considered retired” when at less than Full Retirement Age is defined as having earned $1,455 (monthly) or less and not performing substantial services in self-employment. “Substantial services in self-employment” is defined as more than 45 hours per month in a business or more than 15 hours to a business in a highly skilled occupation (e.g., brain surgery or writing a blog about Social Security and financial planning).

So, with this in mind, your wife would be eligible for her age-reduced benefit for the remainder of the year after her retirement, with no reductions due to earnings tests (as long as she doesn’t pick up another job).

Roth Conversions for Inherited Retirement Plans

monkey typing by pdimages-com If you have an IRA or a 401(k) that you’ve inherited, you may wonder if it is possible to convert that account over into a Roth IRA. After all, you’ve got to take RMD (Required Minimum Distributions) from the account since it’s inherited, why couldn’t you just pay all the tax upfront and roll it over?

Well, there are two answers to this question, one for inherited IRAs, and one for inherited qualified retirement plans (QRPs, such as 401(k) or 403(b) plans). And like many other things in this wonderful tax code of ours, the two kinds of plans are treated differently today, but may be subject to change in the future.

It should be noted that we’re talking about non-spouse beneficiaries here. A spouse has pretty much the same rights as the decedent (original owner, now deceased) had, so if the decedent was eligible for a Roth conversion, the spouse most likely is as well.

Inherited IRA

For an inherited IRA, current law does not allow you to convert the funds to a Roth IRA. This is pretty much cut-and-dried, with no interpretation necessary.

There is a great deal of conjecture about whether or not Congress will specifically change this ruling to match the QRP rule, although most of that discussion has dried up over the past several years. However, with recent proposed changes threatening to change the inherited retirement plan landscape, we may see a change in this rule sometime soon, you never know. Until a change is actually put in place, this rule will continue to apply.

Inherited QRP

If you’ve inherited a qualified retirement plan (QRP), this account IS eligible for conversion to a Roth IRA. The new Roth IRA (and it must be a new account) must be titled as inherited, just the same as if you were rolling over the QRP funds into a traditional inherited IRA. The new Roth IRA would continue to be subject to RMD, however tax would have been paid up front during the conversion, so future RMD would be tax-free.

In the year of the conversion, you still have to take your regular taxable RMD from the QRP, but the remainder of the account is eligible for Roth conversion. Keep in mind that this conversion has to be a direct (trustee-to-trustee) conversion, and also must be a direct conversion into the Roth IRA (without rolling over to a traditional IRA first, as was the former method for QRP to Roth conversion).

Don’t Leave Money On The Table!

social security benefits taxedMany individuals are offered an employer-sponsored savings plan though work such as a 401(k) or 403(b). Employers who offer these plans may provide a company match. This means that the employer will add money to the employee’s account, if the employee saves a certain percentage of income. Some employers will even provide money even if the employee is not saving.

If you’re employer offers a match on your contributions, take full advantage of it. Don’t leave money on the table! This is free money – and it’s unwise to not take it.

Let’s look at an example.

Sam and Betty (both age 45) have a 401(k) and their employer offers a 50% match on employee contributions up to 5% of their salary. They both earn $80,000 annually. Sam decides to save 1% of his salary and Betty decides to save the maximum she can for 2019 of $19,000. Since the match is 5% of their salary, they both qualify for a maximum employer match of $2,000 (50% of 5% of $80,000).

Sam’s contribution is $800, and his employer matches $400 for a total annual savings of $1,200. Betty’s contribution is $19,000, and her employer match is $2,000 for a total of $21,000. Sam has left $1,600 on the table. However, he’s leaving a lot more than that over time.

Assume that Sam and better will work another 20 years to age 65. Let’s also assume they invest in the same assets mix – a portfolio of 60% stocks and 40% bonds. Let’s also assume a return of 5% over 20 years.

In 20 years, Sam has a sum of $39,679. Betty has nearly eighteen times Sam’s amount at $694,385. Granted, Betty saved more – she’s smart. But what if Sam would have at least contributed to get the full employer match?

By saving 5% of his salary, Sam would have contributed $4,000, thereby qualifying him for the full employer match of $2,000 – saving a total of $6,000 annually. Over 20 years at 5% compounded Sam would have had $198,395. This is over $158,000 more than if Sam only saves 1% of his salary.

He left money on the table. A lot. We also assumed no raises, bonuses, etc. that would add to these amounts.

If you’re saving to a Roth 401(k) or 403(b), the match from your employer will be added to a pre-tax account. As you may know, contributions to Roth accounts are made with after-tax money, and qualified withdrawals are tax-free. Employer matches made with pre-tax money will be taxed when withdrawn at your ordinary income tax rate.

This shouldn’t discourage you from taking the full match. It’s still free money. Think of it this way. Would you rather be taxed on zero money, or a pre-tax amount given to you for free from your employer – allowed to grow and compound over time?

And, the employer match is added on top of employee contributions. Recall Betty’s scenario. Betty is maximizing her employee contributions this year at $19,000. Employer contributions are added to this amount. It’s possible to save even more than the employee maximums each year if you have an employer match.

Finally, many employers have strings attached to their matches via vesting schedules. This means that for the match to be completely yours, you must work for your employer for a certain length of time. Common vesting schedules include 2 to 6-year graded vesting (where a portion of the match becomes yours over the 2 to 6-year time frame), or 3-year cliff vesting where all the match becomes yours after three years of employment.

Your employer match is free money. Don’t leave any on the table.

IRA Trick – Eliminate Estimated Tax Payments

the old cat trick by wstryder Retirees: don’t you get tired of making those estimated tax payments? January, April, June and September, like clockwork, you have to hand over tax money, just because you’re receiving a pension, retirement funds, and/or Social Security benefits. What if there was a way to send this money off one time, and then you wouldn’t have to remember it every few months?

There is.

IRA Trick – Eliminating Estimated Tax Payments

When you receive money throughout the year, the IRS expects withholding payments or estimated payments to coincide with your receipt of the money. So when you receive a monthly pension check, you should either have some tax withheld out of each payment. On the other hand, you could send in an estimated tax payment, at four intervals throughout the year, which is treated equivalent to check-deducted withholding.

These estimated payments, often wrongly referred to as quarterly payments, are due each year on April 15, June 15, September 15, and January 15 of the following year. If you don’t make these payments in a timely fashion and you don’t have other withholding occurring with your receipt of money, the IRS may penalize you for underpayment of tax when you file your tax return.

A little-known fact about IRA distributions is that when you have taxes withheld from the distribution (which are then sent directly to the IRS), the withheld money is considered to have been received throughout the year – even if it is received late in December. Using this fact to your advantage, you could figure out how much your total estimated tax payments should be for the year sometime in early December, and then take a distribution from your IRA in that amount. Here’s the trick:  Instead of taking the distribution yourself, fill out a form W-4P (or use your custodian’s form) to direct the total amount of the withdrawal to be withheld and sent to the IRS. Voila! You’ve now made even payments to the IRS for each of the four quarters, on time with no penalties!

The downside to this plan is that, in the event of the taxpayer’s untimely death before the annual distribution is made, the estimated payments will be considered as unpaid up to the date of death, and therefore the estate will be responsible for paying the underpayment penalty. Other than that shortcoming, this trick could provide you with several months’ additional interest/return on your money, plus remove the hassle of the quarterly filings.

But Jim, what if I’m retired and under age 59½? Won’t there be a penalty?

There doesn’t have to be, although I’d place this particular move into the “higher degree of difficulty” category of tricks – not to be taken lightly.

Pre-59½ Retiree: How to Avoid Penalty?

Same situation as before, but now you must take another step:  once you’ve taken the distribution and properly filed the W-4P (or custodian form) to have the distribution withheld as tax – execute a 60-day rollover, placing the same amount of money either into the same IRA or another IRA… effectively, you’ve pulled the old switcheroo with the IRS on this: you’ve paid tax with a distribution that didn’t happen!

How can this be?  Well, the IRS allows you to replace (or rollover) money from any source back into your IRA, so it doesn’t matter that your original distribution was used for withholding. So you have made up for missing all those quarterly estimated payments (no underpayment penalty now) plus by rolling over the funds you’ve avoided the 10% early withdrawal penalty as well.


I mentioned that this last trick fits into the “higher degree of difficulty” category of tricks. The reason I say this is because using your account in this fashion (essentially a 60-day loan) can be hazardous – the primary reason is that 60 days is all you have, and 60 days can be a relatively short period of time. Plus, the IRS HAS NO SENSE OF HUMOR ABOUT THIS. If you miss the rollover period by one day, you’re outta luck.

In addition to the 60-day period, there is also the limitation of only one 60-day rollover per 12-month period. Again, remember: no sense of humor at the IRS. This is especially true if it’s clear that you’ve been pulling a fast one on them with a scheme like suggested above. It is for these reasons that this rollover trick should only be used in the most dire of circumstances – such as if you completely forgot to make quarterly payments and are facing a stiff underpayment penalty, for example. Otherwise, I’d suggest leaving this one alone. By all means, you should not try this trick year after year. It shouldn’t be a problem if you’re over age 59½, though.

Medicare is Not Automatic

automatic electric monophone 40 by alexkerheadIf you’re nearing age 65, there’s something you need to know: unless you’re currently receiving Social Security benefits (having filed early), you need to take action to make sure you receive your Medicare benefits in a timely fashion.


What this means is that you can sign up for Medicare up to three months prior to your 65th birthday. You must sign up within the period from three months before until four months after your 65th birthday, or you’ll face possible penalties. By signing up during that seven month period, your coverage will be on-time and you’ll begin being billed for Medicare Part B.

If you fail to sign up during that seven month window, you’ll have to wait until the next general enrollment period, which is January 1 through March 31, and your benefits won’t begin until the following July 1. Signing up late, you will be assessed a 10% penalty on your Part B premium for each year that you’ve delayed signup.


If you happen to still be employed and are receiving your medical coverage at least as good as Medicare (known as a creditable plan), you’re not required to enroll and won’t be penalized for delaying. After your employment ends (and thereby the medical coverage), you have a special eight month enrollment period when you can sign up for Part B without penalty.

If you sign up while still covered by the employer plan or in the first month after the coverage ends, your benefits will begin on the first day of the month that you enroll. If you enroll at any time after that but during the following seven months remaining in the special enrollment period, your coverage will begin on the first of the following month.

Just like the other enrollment period, if you delay until after it has expired you’ll need to wait until the next general enrollment period to enroll and your coverage won’t begin until July afterwards.

If you are actively receiving Social Security benefits when you reach age 65, you will be automatically enrolled in Medicare. But don’t leave it to chance: you should check with SSA in the 2 to 3 months before your 65th birthday to make sure you have coverage coming to you. In addition, you’ll want to check out the other coverage(s), such as Medigap, Medicare Advantage, and/or Medicare Part D, prescription drug coverage.

Integrating Roth IRA With Social Security Benefits

social security by Fabricator of Useless ArticlesThere are some great benefits to be had from converting funds from a traditional IRA or a 401k to a Roth IRA. But that doesn’t mean that everyone within earshot should just willy-nilly go off and convert their IRAs to Roth IRAs. One factor that many folks likely haven’t thought about is integrating Roth IRA with Social Security to reduce taxes.

Taxation of Social Security

As you may be aware, depending upon your “provisional income”, various amounts of your Social Security benefits may be taxable. At this time, for example, if your provisional income is more than $34,000 (or $44,000 for a married couple), then up to 85% of your benefits would be taxed. Less than $34,000 ($44,000 for a married couple) but more than $25,000 ($32,000 for marrieds), up to 50% of your Social Security benefit is taxable. Less than $25,000 ($32,000 for a married couple) and your Social Security benefit may be untaxed.

Provisional income is your adjusted gross income (AGI, the amount in line 7 of form 1040) plus tax-exempt interest earned for the year, plus ½ of the amount of your Social Security benefit. So the trick is to limit your AGI, in order to reduce the amount of Social Security benefits that are taxed, if possible. One way to do this is to generate income from a Roth IRA, which is not only tax-free, but isn’t counted toward the AGI.

A Tale of Two Taxpayers

Two taxpayers, Stevie and Christine, both age 62 and retired, have vastly different outcomes for their tax situations. For simplicity’s sake, we’ll say that both women are single, and are collecting identical Social Security benefits of $20,000, and that each has a total income requirement of $60,000 each year. In addition, each of the women has a pension available, which will either pay out a $40,000 payment each year, or is available as a lump sum for rollover at the amount of $600,000.


Stevie decides to take the pension payments of $40,000 per year. Come tax time, she learns that she will have to pay tax on 85% of her Social Security benefit ($17,000) because her provisional income adds up to $50,000, which is above the $34,000 limit mentioned above. So the tax on this amount ($40,000 pension plus 85% of SS, or $17,000) is $5,714, or roughly 9.5% of her total income. Assuming that nothing changes about the situation, Stevie can count on paying around 9.5% of her income in tax for the rest of her life.

Christine – Option 1

Christine, on the other hand, takes a look at the numbers and decides that it might make more sense to attack the situation differently. She takes the lump-sum payout from her pension plan and rolls the money over into an IRA. If Christine were to simply leave things this way and start taking a distribution of $40,000 each year, she would have exactly the same tax treatment that Stevie is getting. However, if Christine should decide to do a conversion of the IRA to a Roth IRA in 2019, she would be paying tax of approximately $188,000, leaving her with a net balance in the Roth account of roughly $412,000.

Now Christine pays no tax (under current laws) for the rest of her life! Given that her provisional income cannot be more than the limits, her Social Security benefit will never be taxed. And since all of her income comes from the Roth IRA, there is no tax owed at all. But this is a very high price to pay up front – roughly 1/3 of her IRA account. Christine would need to take this tax-free income for around 32 years, as long as income tax rates stay the same. If the income tax rates rise, the break-even time would be less, of course.

Christine – Option 2

But what if Christine instead took her income requirement each year (the same as Stevie), paying the roughly 9.5% tax, but then took an additional amount from the IRA and converted it to a Roth? If she converts $50,000 in the first two years, the additional tax would amount to roughly $11,200 each year. Having done this for two years, Christine can take (for example) $5,000 of her required income from the Roth. The result is to reduce the amount of her provisional income to only $45,000, thereby reducing the amount of her Social Security benefit that is taxed each year to approximately 70%. Now Christine’s annual tax would be reduced to $4,204, a savings of $1,500 per year in taxes.

Christine – Option 3

What if Christine did the conversion of $50,000 for five years in a row, paying a total of $56,000 in tax? Her provisional income is now only $40,000, reducing the amount of her Social Security benefit that is taxed each year to approximately 50%. The difference, $10,000 each year, is taken from the Roth IRA at no tax impact. Now Christine’s annual tax is reduced to $3,094, a savings of $2,700 per year in taxes.


There’s a lot of math going on in this article! The point was to show how this Roth IRA conversion activity isn’t just a question for the rich. It can have an impact on folks at all levels of income. It can be very costly to do nothing! On the other hand it can be quite lucrative to do some planning for integrating Roth IRA with Social Security. As always, talk to your financial professional before making any dramatic moves, just to make sure you’ve got it right.

Note – for the purpose of illustration, I used current tax rates throughout the examples. I realize that rates are likely to increase in years ahead. This will only make the illustrations I’ve done here look better for the Roth conversion early on at our historically low rates (in most cases).

Saving for College

If you’re a parent or plan to be one, chances are you are considering ways to pay for your child’s college education. You may have a goal of sending them to public or private school, with the hope of helping them graduate college with little, if any debt.

Whether or not your goal is to fully fund your child’s education or to help as best you can, there are some options to consider saving as much as you can to reach or education savings goal.

One option to consider is a 529 college savings plan. 529 plans allow money to be contributed specifically for many of the costs of higher education. Money that goes into the account grows tax-deferred, and money withdrawn for qualified college education expenses (tuition, room & board, books, fees) is tax-free.

Many states sponsor their own college savings plans, and some allow a state tax deduction for contributions. Currently, there are no federal tax deductions allowed for 529 contributions. 529 plans also have no income limits – meaning that regardless of income, anyone can contribute to a 529 plan.

Additionally, 529 plans have very high lifetime contribution limits ranging from about $300,000 to $400,000 in total, depending on the state plan. However, the maximum annual contribution limited is $15,000 which is the annual gift tax exclusion. This amount is $30,000 for couples who file jointly. States may also limit the amount of your state tax deduction on contributions.

There is an exception to the annual limit rule which is exclusive to 529 plans. Individuals can make a 5-year pro rata contribution totaling $75,000 (the $15,000 per year exemption multiplied by 5). For married couples filing jointly, the amount is $150,000 (the $30,000 per year exemption multiplied by 5). These numbers are for 2019 and are usually increased annually.

529 plans allow only one beneficiary per 529 plan. The beneficiary may be changed at any time. For example, parents with two children may own one 529 plan with the oldest child named as beneficiary, and then simply change beneficiaries to the younger child when the oldest graduates. Parent can also own one 529 plan for each child. If you’re not a parent yet but want to get started, you can open a 529 plan, name yourself beneficiary, and then simply change the beneficiary to your child when he or she is born.

The money in your 529 plan can be invested according to your risk tolerance or timeline. Many plans have predetermined portfolios of stock and bond mutual funds based on your child’s age, or they allow you to choose your own allocation based on the funds available.

If the money in a 529 plan is used for non-qualified education expenses the earnings become taxable at your ordinary income tax rates and are also subject to a 10% penalty. States may also recapture any tax deductions taken on contributions.

Exceptions to the 10% penalty include if the beneficiary dies, becomes disabled, or receives a scholarship. It’s important to note that in these exceptions, only the 10% penalty is waived. The earnings are still taxable when withdrawn.

Finally, when the time comes to apply for financial aid (grants or student loans) you will likely find yourself filling out the Free Application for Federal Student Aid (FAFSA®). This form essentially determines how much you can contribute toward the costs of college by determining your expected family contribution. 529 plans are considered an asset of the parent (assuming the parent owns it) and the percentage for inclusion in the expected family contribution is much less than assets owned by your child.

4 Ways You Can Make IRA Contributions – Without a Job!

this guy can make ira contributionsIf you know the rules, you must know that one of the main requirements for making contributions to an IRA is that you must have earned income. For most folks, that means you have a job… but it doesn’t have to. Below are four ways that you can have “earned income” without a job – plus a few ways to make contributions without having paid ordinary income tax on the wages. These exceptions are for either kind of IRA: traditional or Roth.

Four Ways to Contribute to an IRA Without a Job

  1. If your income is solely from exercising non-qualified stock options. When you exercise non-qualified stock options, the taxable component of the option exercise is considered taxable income, and therefore is eligible for contribution to an IRA.
  2. Alimony. If you receive alimony, it is taxable as ordinary income, which is eligible for IRA contribution. This only applies to alimony from a divorce that occurred before 2019 – alimony from a divorce in or after 2019 is not considered taxable income, and therefore could not be used to fund an IRA if that’s your only income.
  3. Scholarships and Fellowships. If these are taxable, reported in box 1 of a W2 form, they’re considered earned income for contribution to an IRA.
  4. Spousal contribution. If your spouse has earned income (and you have none or not enough to make a maximum contribution), you are eligible to make an IRA contribution based on your spouse’s income. The limit is that the total of all IRA contributions (yours and your spouse’s) cannot exceed the earned income of the working spouse.

A Few Ways to Make Contributions Without Paying Tax on the Income

  1. Non-taxable combat pay. If reported in box 12 of your W2 form, this no-tax money also eligible for contribution to an IRA or Roth IRA.
  2. Exempt students. If a student has exempt earnings from a job, that income can be used to make IRA or Roth IRA contributions.
  3. If your income is less than your deductions or the standard deduction. In this case, effectively you are not paying tax on the earnings – but the IRA contribution is based upon your Modified Adjusted Gross Income, so you can still make an IRA contribution with the non-taxed funds.

In the above 3 examples, unless circumstances dictate otherwise, you should strongly consider contributing the non-taxed income to a Roth IRA. In either case you wouldn’t likely have a need to deduct a traditional IRA contributions from your income (since none of your income is taxable), and so the Roth IRA makes the most sense. The contributions and any growth on them will always be tax free (under current law).

Are you leaving Social Security benefits on the table?


It happens more often than you think. Without a good understanding of the rules, you might make a move that results in leaving Social Security benefits on the table.

There are a couple of ways this can happen. Let’s start out by identifying the types of benefit we’ll be covering in this article: 

  • retirement benefits based on your own working record (RIB)
  • spousal benefits based on your spouse’s or ex-spouse’s working record (SRIB)
  • survivor benefits based on your late spouse’s or late ex-spouse’s working record (WIB)

Our first example of leaving Social Security benefits on the table relates to the interplay between the retirement benefit, which we’ll shorten to RIB, and the spousal benefit, which we’ll refer to as SRIB. (These acronyms stand for Retirement Insurance Benefit and Spousal Retirement Insurance Benefit, respectively.)

Ben and Anita are age 70 and 74 respectively. Anita has been collecting her RIB since she reached Full Retirement Age (FRA, age 66), but Ben has been delaying receipt of his benefit until he reaches age 70, which allows him to accrue the delayed retirement credits of 8% per year of delay.

The problem is that Ben and Anita didn’t know about the restricted application option available to folks born before 1954. Since Ben was born in 1949 (reaching 70 in 2019), he could have been collecting a SRIB (spousal benefit) from his FRA (also 66) while continuing to delay his own benefit to age 70. Because Anita had already filed for her own RIB at her age 66, when Ben reached age 66 he could have started collecting an SRIB equal to 50% of Anita’s benefit, with no affect on his future RIB.

Since they weren’t aware of this option, unfortunately it’s gone forever for them, now that Ben has reached age 70. It’s possible to retroactively file for the SRIB up to 6 months prior – which is something Ben should do ASAP. But that’s all the farther back he can go to correct this oversight. So he’s left 3 1/2 years’ worth of SRIB on the table.

If we go back in history to four or more years ago and educate Ben and Anita, we could ensure that Ben, having been born before 1954, files a restricted application for spousal benefits. Then he’ll begin to collect the SRIB, while still delaying his own RIB filing to age 70.

This same option is available to Ben if he and Anita were divorced, as long as their marriage lasted at least 10 years. 

Unfortunately, this type of restricted application is only available to folks who were born in 1954 or earlier – so if you (or your spouse) are not at least 65 in 2019, this example won’t apply to your situation.

The second example of leaving Social Security benefits on the table deals with the coordination of your own retirement benefit (RIB), with the survivor’s benefit, which we’ll refer to as WIB (WIB stands for Widow(er)’s Insurance Benefit).

Karen is a widow, her husband Leon died five years ago at the age of 63. Leon had not started collecting Social Security benefits at the time of his death. Karen will turn 62 in July of this year, and she’s planning to retire at that time. She called the local SSA office to set an appointment to find out about her benefits.

When Karen meets with the Social Security folks, they ask her about her marital status, and Karen provides Leon’s identifying information. It turns out that, if Karen was to file for the WIB (survivor benefit) based on Leon’s record, she could receive an additional $10 per month! Karen’s RIB at this point is $1,000, and the WIB is presently $1,010. Of course, Karen says yes, she’d like to receive that extra $10 (in the words of Geddy Lee, “Ten bucks is ten bucks!”).

The problem is that the Social Security folks didn’t tell Karen that she could have started receiving her own RIB at age 62, and then later, upon reaching Full Retirement Age she could switch over to the WIB, which would have increased by an additional $230 per month by that time! In the meantime, she’d be collecting the RIB (that was $10 less than the WIB at that point), but then later she could bump up her total monthly benefit by $230.

This is accomplished by another type of restricted application – an application restricted to retirement benefits only. In this case, Karen would tell the SSA folks that she only wants to file for her RIB, delaying filing for the WIB until later. 

This could also be deployed in the opposite manner – Karen could choose to restrict her application to only the WIB, and then later file for her own RIB. Assuming she waited until her FRA, using our fictitious example, her RIB would have increased to $1,333 by FRA. During the intervening four years, Karen would continue to receive the $1,010 WIB every month.

The critical point here is that Karen must know two things when she files for benefits: 1) which benefit will eventually be the larger, so that she can delay that one and collect on the other; and 2) that she must restrict her application at her present age to only the benefit she’s collecting at that point.

If Karen doesn’t take care to restrict her application, SSA will process the application as if she was applying for all available benefits at that point. You might think it’s a trivial thing, but the problem is that unless Karen restricts her application at that stage, she will be unable to apply for the other benefit later. In other words, upon reaching Full Retirement Age, Karen could not apply for the RIB (since she’s been collecting the larger WIB) if she did not restrict her application to only the WIB when she first applied. SSA will tell her that she cannot apply for RIB at this point because she applied for all available benefits back when she was 62. And there’s no “do-over” for this problem, much the same as in the first example.

SSA doesn’t tell you this – you have to know it on your own. SSA staff are famous for not providing advice when you are consulting with them. It seems that their primary objective is to get you the largest benefit possible at that given point in time – even if a greater benefit could be had later, by taking the time to restrict the application to only the benefit currently being received.

It’s up to you to know how this all works, and to be your own advocate as you go through the application process. Otherwise you may be leaving Social Security benefits on the table.


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