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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

2019 Social Security Filing Strategy Survey

Please take a couple minutes to fill out the survey below. It’s completely anonymous, and your input will be very helpful as we address concerns and questions about Social Security retirement benefits. It should only take a couple of minutes to complete.

I’ll share the results here when complete, probably after the first of the year.

Thanks in advance!

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.

Social Security Earnings Test

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

Earnings Test

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

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

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

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

First Year

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

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

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

FRA Year

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

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

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

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

Earnings Test

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

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

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

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

The Payback

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

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

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


This reduction and payback applies to your own retirement benefit only. Although spousal benefits and survivor benefits are subject to reduction, there is no credit applied later for those reductions. If your own benefit is withheld due to earnings over the limit, your beneficiaries’ benefits (your spouse’s or children’s benefits) will also be withheld until the reduction amount is completely covered.

Social Security Income Replacement Rates


Image by woody1778a via Flickr

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

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


Average Lifetime Earnings
(annual, indexed)

FRA Social Security Benefit

Replacement Rate

















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

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

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

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

Sometimes the Obvious Choice Isn’t Optimal

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

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

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

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

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

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

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

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

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

Adjusting Your Withholding and Estimated Tax Payments

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

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

Withholding Water
Image by GStevens via Flickr

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

So How Do You Do It?

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

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

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

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

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

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

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

Okay, I did that. Now what?

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

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

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

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

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

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

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

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


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

Filing after restricted application


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

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

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

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

Use POMS to help your case with SSA

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

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

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

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

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

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

B. Policy – Entitlement Requirements

   1. Divorced Spouse

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

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

(I removed the parenthetical references to clarify)

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

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

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

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

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

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

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

Use POMS to help your understanding

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

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

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