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Maintaining Your Resolve During Time of Uncertainty

7cdfzmllwom-william-boutLife is full of uncertainty and sometime unexpected events can cause us to overreact, make impulse decisions, and behave in a way that would otherwise run counter to our long-term goals, dreams, and habits.

Surprise events such as a market crash, loss of a job, a spouse, divorce, or other traumatizing events can have the effect of instilling apathy towards our goals and bring the temptation to deviate from our plans.

The following are some ways to maintain resolve when life happens – and the urge to give up on goals is high.

  1. Review your plan and goals. Whatever the plan or goal, be it financial, life, occupational, etc., take a moment to review the goal you’ve created. If not yet in writing, write the goal down, quantify it, visualize it and remind yourself why it’s a goal in the first place. Picture yourself having achieved the goal. How do you feel? What did you overcome to get there?
  2. Grit, or sometimes called perseverance, drive, or dedication means continuing to do something even when you don’t feel like it. There’s a saying that nothing good comes easy. Sometimes this is true. If everything came easy, life would be full of mediocrity. Choosing to push through and having grit to stick to your plans will keep you focused and on the right path, despite wanting to give up.
  3. Take some time to reflect and think about your plans, goals and aspirations. Can they be improved? If so, how? The answer might not come right away, but often when we think and reflect on our plan we can generate new ideas to make achievement come faster, more efficient, or both.
  4. Having perspective means being able to look at your situation from another point of view. This alternate point of view may arise while reflecting, or it may come because of putting yourself in another individual’s shoes and looking at your situation from the outside.
  5. Talk to a professional. Whether it’s life, financial, business, or personal, talking to a professional who has expertise can help keep you focused. A professional may present some additional ideas, perspective, and guidance on how to handle a situation. Additionally, it may also help you if you’re feeling anxious (say, about market volatility) to talk to a professional and review your goals, plans, and why you may be having feelings of doubt. Bouncing your feelings off another individual can help keep you relaxed and focused on what you can control, and what you cannot.

Be grateful. Having an attitude of gratitude can help boost your mood, keep you focused, and clear your thinking. Think about what you have accomplished with your goals or plans, what you overcame in the past, and what life has given you. Being grateful directs our attention to the positives in life, while removing focus on the negatives.

Social Security Retirement Benefits – For Your Child?

tangible and intangible benefits for a childIt may not be all that common, but if you’re eligible for and drawing Social Security retirement benefits and you have a child (or children) under age 18 – did you realize that your child (or children) is eligible to receive a benefit from Social Security as well?  This is in addition to the “child in care” benefit that your spouse is also eligible to receive upon your filing for benefits – subject to a Maximum Family Benefit, which is usually between 150% and 180% of the Primary Insurance Amount or PIA that you, the primary beneficiary have earned.

The same holds true for the child of a parent who is receiving Social Security disability benefits.

It’s true.  When you begin receiving Social Security retirement benefits (even if it’s early and therefore reduced), your child (or children) under age 18 is eligible for a monthly benefit equal to 50% of your PIA (not the reduced benefit).  This benefit is payable until the month the child reaches age 18.

In a much more common situation, the same may hold true for grandchildren under the care of their grandparent, in the case where the grandparent is providing the household’s income (or a majority of the household’s income) and is receiving Social Security retirement benefits.  According to recent statistics, this is a sizable and growing group – apparently around 4.5 million children are living in homes headed by grandparents.  These children may be entitled to Social Security benefits if their grandparents are receiving benefits.

A couple of things to note:

  • A child is always deemed dependent on his parent (mother or father).  The fact that the parent and child do not live in the same home is not a factor unless the child has been adopted by another person.
  • The parent’s status with regard to contributing to the child’s support is not a factor.
  • Length of time that the parents were married, if ever, is not a factor.
  • The child is considered dependent on a stepparent if 1) the stepparent is providing more than 50% of the child’s support; or 2) the child lives with the stepparent.
  • A child is entitled to benefits on a parent’s or stepparent’s record even if the marriage between his or her parents or his parent and stepparent ends.
  • The child’s benefit can be lost (at least partly) if the child works and earns more than $17,040 (in 2018).
  • The benefit ends at the child’s age 18, or if the child marries.  This may be extended to age 19 if the child is still in elementary or high school.  The benefit extends further if the child is disabled, and does not stop if the child marries. The child’s disability must have begun before the child’s age 22.

Withholding and Social Security Benefits

spewing out fire by SudhamshuMany folks find, upon filing their income tax return, that a portion (often a significant portion¹, up to 85%) of their Social Security benefits are taxable.  Upon discovering this, it’s also often a surprise that, since the benefit is taxable, there hasn’t been enough tax withheld throughout the year. This not only requires you to pay up come April 15, but it can also cause a penalty for underpayment of tax to be applied.  This underpayment penalty is likely if the amount of underpayment is $1,000 or more. You need to adjust withholding.

There are many ways to deal with this situation – it’s not required that you withhold tax from each and every source of income, as long as you have the tax withheld or timely estimated payments are made, it doesn’t matter the source of the funds.  Listed below are four withholding methods to help make sure you don’t have an underpayment penalty.

Withholding Methods

Estimated Tax Payments. This method isn’t actually withholding, but it achieves the same purpose.  On April 15, June 15, September 15 and January 15, payments are made to the IRS, often in equal amounts.  In addition, any overpayments that you made in the previous year can be applied in place of any portion of the estimated payments you’ve calculated (more on that later).  It’s important that the estimated payments are made in relatively equal portions throughout the year, otherwise you may still be subject to an underpayment (or late payment) penalty based on the timeliness of your estimated payments. IRS expects you to have made payments throughout the year (if using estimated payment vouchers) that match up with your income. So in other words, it’s not enough to make one big estimated tax payment at the end of the year, you’ve got to spread it out.

Unless you use the next method, that is…

Withholding From an IRA Distribution. This method is a little-known way to deal with meeting the withholding requirements. Essentially, when you take a distribution from your IRA (or Qualified Retirement Plan such as a 401(k) plan), you have the option to have the custodian withhold taxes and report them to the IRS.  No matter if you take a single distribution or quarterly or monthly distributions, the withholding is counted as evenly distributed throughout the year – taking timeliness of the distribution and withholding out of the picture.  For more details on this method, read “IRA Trick – Eliminate Quarterly Estimated Tax Payments”.

Withholding From Your Other Income. You probably already know this, but you can have tax withheld from many other sources of income.  Pensions, annuities, part-time work, and the like, can all be set up with tax being withheld throughout the year.  This is accomplished by filling out a Form W-4 (Form W-4P for pensions). You can set the amount of withholding to literally any amount that makes sense for your situation.

Withholding From Your Social Security Benefit. Much the same as all of your other income, you can set up your Social Security payments to have tax withheld.  This is accomplished by filling out a Form W-4V, and selecting the percentage of your monthly benefit that you’d like to have withheld. You can choose from 7%, 10%, 15% or 25% to be withheld.  You can find Form W-4V at the IRS website or by calling 800-829-3676.

How much should you have withheld?  Of course, that answer is going to be different for each person.  It’s determined by how much tax you are assessed, how much withholding you have from other sources, and the shortfall in withheld (or estimated payment) tax.  You can get the details on how to calculate the proper amount of withholding or estimated tax payments in the article “Understanding the Underpayment Penalty and How to Avoid It”.

¹ For more information on how much of your Social Security Benefit will be taxable, read “Taxation of Social Security Benefits”.

A Cash Flow Dilemma – Should I take distributions from my IRA or from my taxable account?

dilemme by Môsieur JI know, long title… but I wanted to fully describe the content of this article, which is to answer the following dilemma: I have a sizable IRA and a sizable taxable account that holds appreciated stocks.  I am in need of additional funds (above any RMD required from the IRA) – so which account should I draw the additional funds from?

Taxable account!

There is one school of thought that says you should take the additional funds from the taxable account, because at today’s capital gains rates you will save a bundle in taxes.

The capital gains on your appreciated stock will at most be taxed at 20% under present law.  When you compare this tax rate to the ordinary income tax rates, which top out at 37% for 2018, this is a bargain.  This also assumes that you’ve held the stock for at least 12 months, otherwise your gains would be taxed at your marginal ordinary income tax rate.

It’s a no-brainer, you should always take this extra money from the taxable account, right?  No, not always…

IRA account!

There is another school of thought that says, since appreciated stock receives a step-up in basis, you should leave those funds alone if you can and plan to leave them to your heirs at your death. This way the appreciated portion is never taxed.

So when you consider the concept of paying ordinary tax on your IRA distribution and zero tax on the taxable account (assuming you never need to use those funds) versus paying capital gains on the taxable account and potentially leaving your heirs with a fully-taxable IRA (because IRA funds never receive a step-up in basis), this method seems to make a lot of sense.

Conclusion

In the circumstance where you know you’re going to need most or all of the funds from both accounts, it probably doesn’t make much difference in the long run. But you would likely come out better, at least in the short run, using the taxable funds at today’s low capital gains rates first. This will hold true until changes are made the the capital gains tax rates that might make this method less desirable.

But if your holdings are large enough in either account to cover your needs for the longer term, with some planning of your distributions you might come out better with the second method.  Or rather, your heirs will come out better in the long run, since the step-up rule is unlikely to change anytime soon. (Now watch Congress make a change to the step-up rule!)

IRMAA for Medicare

I know only one person named Irma, and I think she’s a wonderful lady. Unfortunately, a namesake of hers (with a slightly different spelling) isn’t quite so wonderful. Most folks who’ve been introduced to this other IRMAA would agree.

IRMAA stands for Income Related Monthly Adjustment Amount. And if you’ve spent much time looking around at the various provisions related to Medicare, the word “adjustment” raises your “bet I’ve gotta pay more” antenna. Which is exactly right, you’re gonna pay more.

What is IRMAA?

money for irmaaWhen the Medicare Modernization Act was passed in 2003, one of the provisions in that law was to require a sort of means-testing to the premiums paid for Medicare Part B (physicians) and Part D (prescription drugs). It was determined that the subsidization of Medicare costs by the government should be in part borne by folks who have income above certain levels. The income used to determine your IRMAA adjustment is from your tax return 2 years prior to the current year. So ancient history can come back to surprise you when you least expect it.

In today’s world, the 2018 premium for Medicare Part B is $134. However, due to a provision in the law, many enrollees pay only $130 for this benefit. The provision that reduced this group’s premium is all about the annual cost of living adjustments (COLAs) that are added to Social Security benefits. Effectively, the provision says that the annual adjustment to the Medicare Part B premium cannot be more than the rate of the COLA for that year.

In some years, there is no COLA – specifically, in 2010, 2011 and again in 2016. When that happens, the Medicare Part B premium for folks who are collecting Social Security cannot increase. Also, if the COLA is very low (as we sometimes see as well as the zero years), the Medicare Part B premium can only increase by the COLA amount and no more. This is known as the “hold harmless” rule. Click the link for an excellent technical explanation of the hold harmless rule.

The people who were actively collecting Social Security and enrolled in Medicare Part B in the previous year are the ones who are potentially protected by the hold harmless rule. IRMAA then is also applied, such that if the individual’s income is above a certain limit, hold harmless does not protect them. So we have 3 groups that are not protected by the hold harmless rule:

  • those who start Medicare Part B in the current year
  • those who were enrolled in Medicare Part B but not collecting Social Security
  • those with incomes above the IRMAA limits

Part of the law requires that 25% of the projected cost of Medicare Part B is paid for by premiums paid by enrollees. Since the hold harmless rule limits participation by roughly 70% of all Part B enrollees, the remainder of the cost must be picked up by the 30% who fit into the groups above.

All of the unprotected groups start out with the standard $134 per month premium (for 2018). Then the IRMAA earnings limits apply. To make things progressive (such that the more money you make, the higher percentage of the overall cost you bear), there are five levels of adjustment that IRMAA can make:

Single Married Filing Jointly Married Filing Separately Medicare Part B Premium
$85,000 or less $170,000 or less $85,000 or less Standard $134 unless held harmless
$85,000 to $107,000 $170,001 to $214,000 Not Applicable $187.50
$107,001 to $133,500 $214,001 to $267,000 Not Applicable $267.90
$133,501 to $160,000 $267,001 to $320,000 Not Applicable $348.30
$160,001 and up $320,001 and up $85,001 and up $428.60

These levels of adjustment are adjusted for cost of living every year, and often are adjusted more than a standard COLA in order to keep the costs covered. The expectation is that the levels of income will cover expenses at the following rates:

Income level (from above) Rate of payment of Medicare Part B costs Multiplier
1 25% 1.0
2 35% 1.4
3 50% 2.0
4 65% 2.6
5 80% 3.2

To calculate these premiums in future years, given what we know about the rates are expected to cover and the fact that the “standard” Medicare Part B premium covers approximately 25%, you can multiply the standard Part B premium by the multiplier in the table to come up with the rate.

IRMAA for Part D

The IRMAA adjustment for Medicare Part D is a bit different, in that you only know how much additional premium you’ll have to pay if IRMAA impacts you.

The rules are the same, so we have the same group of roughly 70% of all enrollees who are held harmless for increased Medicare Part D premiums. And the income levels are the same as well (at least that part is kept the same!). Since Medicare Part D premiums vary by the plan you’ve chosen from independent insurers (and not a prescibed amount like Medicare Part B), at each IRMAA income level there is an increase, or surcharge, applied to whatever your monthly Part D premium is.

Single Married Filing Jointly Married Filing Separately Medicare Part D Premium Increase
$85,000 or less $170,000 or less $85,000 or less $0.00
$85,000 to $107,000 $170,001 to $214,000 Not Applicable $13.00
$107,001 to $133,500 $214,001 to $267,000 Not Applicable $33.60
$133,501 to $160,000 $267,001 to $320,000 Not Applicable $54.20
$160,001 and up $320,001 and up $85,001 and up $74.80

Appeal of IRMAA

If you have had certain changes to your income over the succeeding two years (since the IRMAA income level used for this year’s adjustments), you may have a case for reconsideration of the IRMAA adjusment. Specifically, if you have had one of these change of life factors:

– spouse death
– marriage
– divorce
– income reduction
– work stoppage (includes retirement)
– loss or reduction of other types of income such as rental income or royalties
– loss or reduction of a pension income

Other than those factors, although it is your right to appeal an IRMAA determination (read that “increase”), there’s not a lot of hope that you’ll be able to fight IRMAA. Unless there’s an error of some type, such as an incorrect tax return, most other IRMAA determinations are upheld.

Keep in mind that these IRMAA adjustments are on top of any adjustments you’re subjected to because of late enrollment in either your Medicare Part B or Part D plan.

Your IRA and Your Spouse – Or Maybe Not

IRAFor anyone who has ever had a 401(k), 403(b), or a deferred compensation (457) retirement plan, (which is a high percentage of you, I assume) – there’s a major difference to an IRA that you might find interesting and/or useful. The difference is in the legal requirements for beneficiary designation.

ERISA

The Employee Retirement Income Security Act (ERISA), passed back in 1974, set several rules in place with regard to retirement plans – known as qualified retirement plans or QRPs. QRPs include the 401(k), the 403(b), and any other CODA (Cash Or Deferred Arrangement) sort of account provided by your employer. One of those provisions is primarily to protect your spouse. When filling out your paperwork to open the account, you might have noticed on the beneficiary designation page that, in order to designate someone other than your spouse, you are required to get your spouse’s signoff. In this way, your spouse cannot be disinherited from your QRP without his or her specific consent.

I don’t know for sure of any circumstances where this has caused a major problem, but it is a restrictive provision nonetheless. The primary time that this could be a problem is if the spouses are estranged but still legally married, or when a spouse has gone AWOL and cannot be found. Nonetheless, this provision is in place for the protection of the spouse of the account holder.

Upon the death of the account holder, regardless of who is designated as the beneficiary, the spouse automatically is entitled to 50% of the QRP. If someone other than the spouse is named as a beneficiary, the spouse will receive 50% of the account. The spouse can sign a waiver of his or her 50% of the account, but generally these are only accepted if the spouse who signs the waiver is at least 35 years of age, depending on the plan.

IRA

On the other hand, an IRA account is not covered by ERISA – and as such does not carry the spousal consent provision. You are free to designate anyone you choose, including a trust or charitable entity, without the knowledge or consent of your spouse. Although this could cause a surprise for your spouse if the first time he or she learns of your beneficiary designation is after your passing – this can provide the IRA owner with a great deal of flexibility in making personal beneficiary decisions.

Don’t get me wrong, I do not advocate keeping secrets with regard to your beneficiary designations. On the contrary, I recommend that you and your spouse talk things over and agree on all things financial, IRAs and other retirement accounts especially. But this provision, or rather lack of a rule, might provide you with some additional leeway that you’re looking for in your unique circumstances.

Does It Really Cost More to Eat Healthy?

From time to time I will hear the argument that it’s expensive to eat healthy to lose weight or maintain a healthy lifestyle. What I want to do is provide some information based on my own experience that may help give a counter argument to this belief.

While I am not disagreeing entirely that eating healthy is more expensive than not, I am saying that if done carefully, it is possible to eat healthy for less than what it would cost for less heathy alternatives.

One of the arguments I hear is that individuals may be overweight due to relying on fast food menu items – especially those on dollar or value menus. And the reason these menus are relied on is because shopping for a healthy alternative is pricier.

Let’s take a look.

Consider a few value menu items from a well-known fast food provider.

Cheeseburger – $1 – 300 calories.

Small fries – $1 – 230 calories.

Small soft drink – $1 – 150 calories.

Total cost for the meal is $3. Total calories are 680.

This may be a bit extreme, but I am going to calculate this for three meals per day, for 7 days a week. This totals to $9 per day, or $63 for the week. Total calories are 2,040 for the day, or 14,280 for the week. Remember, this is off the dollar menu. Dine-in restaurants are likely much pricier.

In comparison, the local grocery store sells whole grain tortilla wraps for $4.96 a package, containing 16 wraps. This amounts to $0.31 per wrap.

One dozen eggs is about $1.99 or roughly $0.17 per egg (full disclosure: I have my own chickens, so I don’t pay for my eggs).

Simply cook two eggs, season with salt and pepper and put in the wrap. Voila!

Assuming this meal was eaten every meal, every day for a week (boring and dull, but doable) this amounts to:

Wrap – $0.31 – 100 calories.

2 eggs – $0.34 – 160 calories.

Glass of water – Free – 0 calories.

The total for each meal is $0.65, or $1.95 daily. This is $13.65 weekly. Total daily calories are 780, which is 5,460 weekly. Some readers may need to eat more, so doubling this (six small meals per day) would be 1,560 daily and 10,920 weekly calories respectively. If more is needed, simply have two wraps and four eggs (my usual breakfast).

At three meals per day, this is a weekly savings of just over $49. At six meals, it’s just over $35 saved.

Am I arguing that one should live just on wraps and eggs alone? No. The point is that with some planning and education, it can be possible to eat healthy, for less than what an unhealthy alternative would be.

Substitutions can be made for the wrap such as whole grain bread ($1.75 a loaf), lettuce ($1.99 for a pound bag) and other types of protein for the egg such as chicken, beef, venison, etc.

Don’t be afraid to experiment on your own and see what you can come up with! Let me know what you find!

Social Security Benefit Suspension

It used to be that you could suspend your benefits and collect another benefit. But this has changed. Nowadays, voluntary benefit suspension results in not only suspending all benefits you’re receiving, but also any auxiliary benefits being paid on the same numberholder’s record.

Benefit suspension

pants and benefit suspensionPreviously there could be an enhancement to the overall benefits being received by suspension of benefits. In many cases this was known as “file and suspend”. In the days before the change to the rules, one spouse would file for his or her own benefit and then immediately suspend benefits. Then the other spouse would be allowed to file for spousal benefits, while the first spouse (with the benefit suspension) could delay receipt of benefits until a later age. This was only allowed when the suspending spouse was at least Full Retirement Age.

In the same way, the individual with suspended benefits could allow for his or her children to receive child’s benefits while his or her own benefit is accruing delay credits.

Now, since the change to the rules, benefit suspension results in all available benefits based on the same record (including spousal or other auxiliary benefits).

While the obvious change is that the old school file and suspend is no longer useful. But the other change is that any other benefits that you might be eligible for would also be suspended upon voluntary suspension of benefits.

For example, Jane, age 66, was collecting her own retirement benefit in the amount of $750 per month (reduced from her FRA amount of $1,000). Her husband Michael died. Michael had been collecting a benefit of $800 per month at the time of his death.

Jane wonders if benefit suspension could apply in her case. If she suspends her own benefit, she’d be able to accrue delay credits on her own benefit, which by age 70 would increase her benefit to $990. In the meantime, she could collect the survivor benefit ($800) which Michael had been receiving… right?

Unfortunately, with the new rules, although Jane could use benefit suspension to accrue the delay credits, she cannot at the same time collect the survivor benefit.

The one type of benefit that is not impacted by benefit suspension is an ex-spouse’s spousal benefit. So in other words, if you’re divorced you cannot suspend your benefits to control the amount of spousal benefits your ex-spouse is eligible to receive.

Deductible and Coinsurance for Medicare Part B

coinsurance and deductibleWhen you have Medicare Part B, your insurance pays for doctors, outpatient care and medical equipment not covered by Part A. But Medicare Part B doesn’t cover all the costs for this care. There is a deductible and coinsurance that you have to cover. If you have a Medigap policy or Medicare Advantage (Part C), some or all of these deductibles and coinsurance may be covered as part of that policy.

Part B Deductible and Coinsurance

With Medicare Part B, the deductible much less complicated as compared to deductibles for Part A. The deductible for Part B is based on the calendar year, and it is adjusted annually. For 2018, the annual Part B deductible is $183. So you pay the first $183 of applicable, covered, doctor services, outpatient care and medical equipment expenses.

Once your annual deductible is met, you are responsible for the coinsurance payment on your additional costs. The coinsurance for Medicare Part B is 20%. There is no upper limit to the total amount that you’ll pay. That means if you have $50,000 worth of Medicare Part B covered expenses, you’ll be on the hook for $10,000 worth of coinsurance – and Medicare Part B pays the remaining $40,000.

This is 20% of the cost of most doctor services, including doctor services received while you’re an inpatient at a hospital. Outpatient therapy is also included, as is durable medical equipment.

If you’ve had any of these items (or someone you know has), you know that the costs can be astronomical, and can build up quickly. For this reason, it’s important to consider a Medigap policy – which in most cases will cover 100% of your Medicare Part B coinsurance.

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 $17,040 for 2018 if you are under Full Retirement Age for the entire year. The limit is $45,360 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 2018 if you were born after 1952 and you are receiving Social Security benefits, for every two dollars that you earn over $17,040, one dollar of your benefit is withheld.

For example, if you earn $20,000 in 2018 and your Social Security benefit is $500 per month, that’s $2,960 more than the limit. Your $500 benefit will be withheld for the first 3 months, in order to withhold the full $1,480. The extra $20 will be refunded to you at the beginning of the next calendar year.

The same would happen if you will reach FRA in 2018 and you earn more than $45,360. Let’s say you make $50,000 during the first half of 2018 and you reach age 66 on July 1. Since you’ve earned $4,640 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 $1,547, 2 months’ worth of benefits will be withheld, and the over-withheld $453 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.

Returning to our example from above, you were receiving a benefit of $500 per month beginning at age 62, and over the years 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.

Application

This reduction and payback applies to your own retirement benefit, spousal benefits, and survivor benefits. If your own benefit is withheld due to earnings over the limit, your beneficiaries’ benefits (your spouse’s or children’s benefits) will also be withheld until the reduction amount is completely covered. If you are receiving spousal benefits before FRA and are also working and earning more than the limit, only your spousal benefit is reduced due to those earnings.

Deductible and Coinsurance for Medicare Part A

deductible and coinsurance play a large part in medicare part aWhen you have Medicare Part A, this insurance pays for hospital care, including skilled nursing facilities and other institutional settings. But Medicare Part A doesn’t pay for everything – you must pay a deductible and coinsurance when you have a claim. If you have a Medigap policy or Medicare Advantage (Part C), some or all of the deductible and coinsurance may be covered as part of that policy.

The figures listed below are for 2018 – the deductible and coinsurance amounts change annually.

Part A Deductible

With Medicare Part A, the deductible is complicated. It’s based on each benefit period, not each calendar year, as most deductibles are. For 2018, the Part A deductible is $1,340 per benefit period. It is very possible (and common) to have more than one benefit period deductible payment in a calendar year. This means that, for each time (with some limits) that you are hospitalized or in a skilled nursing facility, you are subject to this deductible.

A benefit period begins with the first day that you enter the hospital or skilled nursing facility, and ends when you have not received inpatient services from a hospital or skilled nursing facility for 60 days in a row.

As you can imagine, it’s very common to have more than one benefit period for the Part A deductible in a year.

Part A Coinsurance

The coinsurance payment varies depending upon where you are in terms of the duration of each benefit period (2018 figures):
• Days 1-60: $0 coinsurance
• Days 61-90: $335 per day
• Days 91 and beyond: $670 per day until lifetime reserve days are used*
• Beyond lifetime reserve days: 100% of all costs

The third level of coinsurance refers to lifetime reserve days. Each Medicare Part A enrollee has 60 lifetime reserve days to use over their lifetime. These are used when a benefit period (hospitalized or in a skilled nursing facility) extends beyond the 90th day. These lifetime reserve days allow for a limited coinsurance for these extended days. Otherwise, after the reserve days are used up, the enrollee is responsible for all costs during that benefit period.

Of course, Medigap policies or Medicare Advantage (Medicare Part C) will provide coverage for part or all of the deductibles and coinsurance when these policies are purchased alongside your Medicare Part A.

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 $17,040 (in 2018) before the year of FRA. The Social Security benefit will be reduced by $1 for every $3 you earn over $45,360 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 age 63.  You work part-time and earn $20,000 during the year, which is $2,960 more than the earnings test.  The Social Security Administration will withhold a total of $1,480 from your benefit ($1 for every $2 over the limit). This is done by withholding your Social Security benefit for three months, January through March of the following year – for a total of $2,100 being withheld. Beginning in April you’ll receive your full $700 benefit, and in January of the next year you’ll receive $620 extra for the additional amount that was withheld above the $1,480. If you advise SSA of your income expectation in the coming year, this will be accomplished during the year of the income, rather than the following year.

If this was the year you’ll reach FRA – for example in June, and your earnings through May were $48,000 ($2,640 more than the limit), $880 would be withheld from your $8,400 benefit which is accomplished by withholding your first two checks of the year, and the additional $520 will be paid to you in January of the following year.

Alimony and Taxes, 2019 style

certificate of alimonyThe recently-passed Tax Cuts and Jobs Act (TCJA) made some changes to the way alimony is handled, tax-wise, for divorces finalized in 2019 and thereafter. Essentially the change is to eliminate the deduction of alimony paid out by the paying party, while at the same time eliminating the inclusion of alimony received as ordinary income.

So, as the paying spouse in a divorce finalized in 2019 or later, you are not allowed to deduct alimony paid to your ex-spouse. This can result in a requirement to pay additional tax on money that you don’t get to use. The good news is that this new rule doesn’t change existing alimony provisions. If you are divorced as late as December 2018, your paid-out alimony is still deductible from your income, and will remain so as long as you are paying it.

As the receiving spouse, you will not have to include as taxable income any alimony paid to you from your ex-spouse. This means that you won’t have to pay tax on alimony received if your divorce is finalized in 2019 or later.

If you’ve been following this, you might have noticed that it’s a bit unfair, when compared to the current situation. After all, the way alimony has been handled up to this point has put the tax burden on the person who receives the economic benefit of the money. With this change, the person receiving the alimony owes no tax, while the person paying it out must pay tax on that money as if they had it to spend.

Under today’s rules, the payor of the alimony agrees to the arrangement (and amount) in part because of the deduction. The recipient is agreeable to the arrangements because he or she has received the money and can use it. Often the recipient is in a lower tax bracket than the payor spouse, as well. This is likely to make changes to alimony arrangements – because both the payor and the recipient are likely to feel the pinch.

This is because, since the payor can no longer deduct alimony paid out, he or she is likely to want to pay less in order to compensate for the tax that must be paid. As a result, the recipient will then receive a lower alimony payment.

So – you’re probably wondering… is there a way around this? Turns out, there is. It’s not a panacea, but it could help.

Paying alimony, 2019 style

One way around this issue is to include retirement funds in your settlement process, rather than or along with traditional alimony.

For example, if part of the divorce agreement requires you to transfer funds from an IRA to your ex-spouse’s IRA (in lieu of alimony), you would no longer have to pay tax on money withdrawn from the IRA, but your ex-spouse would. The transfer of funds to your ex’s IRA would be a one-time event, rather than a regular payment from the IRA. This would only work when the recipient is at or near age 59 1/2, since withdrawals from the IRA prior to that age would be subject to the additional 10% early withdrawal penalty.

This sort of arrangement could be used to partly or completely offset alimony paid in the traditional sense – and would revert the tax burden to the recipient.

(You should also note that this is not the same thing as a QDRO. The rules for QDROs, which only apply to 401k and other employment retirement plans and NOT IRAs, did not change with TCJA.)

If you’re facing a divorce in 2019 or later, you will want to consult a financial planner to help make sure you’re making the right moves, no matter which side of this you find yourself in.

On the other hand, since alimony received is no longer considered earned income to the recipient, he or she will no longer be allowed to make IRA contributions based on the alimony received. If the recipient is not otherwise employed, IRA contributions will not be possible. This could be another reason that the IRA transfer process would be beneficial to the recipient ex-spouse.

Social Security Survivor Benefits

survivor by tipiroThe Social Security system has provisions for taking care of surviving spouses of workers who have earned credits under the system.  There are two particular benefits that you should be aware of – a small death benefit of $255, and  Survivor Benefits based upon the worker’s Primary Insurance Amount.  It is the latter benefit that we are discussing today.

Social Security Survivor Benefits

When a primary wage earner dies, the Social Security system has a way to help care for the surviving spouse.  Survivor Benefits are generally equal to the primary wage earner’s retirement benefit – this benefit replaces other spousal retirement benefit (the one that is equal to 50% of the primary wage earner’s benefit, available while the primary wage earner is living – see here for more detail).

The mechanics of the Social Security Survivor Benefit can apply to widows or widowers at various ages, depending upon the circumstances, as well as to the children and/or parents of the primary worker.  We’ll cover each sort of individual in turn…

Widows and Widowers

When the primary wage earner dies, the surviving spouse is entitled to receive a retirement benefit based on the primary wage earner’s retirement benefit.  Of course, if the surviving spouse’s retirement benefit based upon his or her own record is equal to or more than the deceased spouse’s benefit, the surviving spouse will continue to receive only his or her own retirement benefit.

If the surviving spouse elects to begin receiving survivor benefits before Full Retirement Age (FRA), the benefit is subject to actuarial reduction.  Since a surviving spouse is eligible to begin receiving early benefits at age 60 (instead of age 62 for regular or spousal benefits), the “usual” age table is adjusted by 2 years.  Whereas FRA for regular or spousal benefits for those born between 1943 and 1954 is age 66, FRA for a survivor benefit is 66 for those born between 1945 and 1956.  (See this article for the FRA ages for retirement benefits and this article actuarial adjustments.  Adjust the ages and years by 2 for Survivor Benefit.)  If the surviving spouse is disabled, early benefits may be received any time after age 50, with the actuarial reduction assuming benefits begin at age 60 (no further reduction, in other words).

In addition to the benefit mentioned above, there is a Survivor Benefit available to a younger spouse if there are children under age 16 that the surviving spouse is caring for, or a child of any age who has become disabled before age 22.  This Survivor Benefit is equal to 75% of the FRA benefit (the PIA, Primary Insurance Amount) of the deceased spouse – and only lasts until the child reaches age 16.  At the same time, each child under age 18 is eligible for a Survivor Benefit (more on this later) until age 18.

There is no increase from delaying receipt of the survivor benefit after FRA, so a widow or widower should begin receiving Survivor Benefits at FRA if eligible. It should also be noted that divorced spouses who survive a deceased worker are also eligible for the Survivor Benefit, as long as the marriage lasted at least 10 years before the divorce.

Children

Any child under age 18 (19 if attending high school) who survives a deceased eligible worker is eligible to receive a Survivor Benefit equal based on the PIA of the deceased parent.  This amount is 75% of the PIA of the surviving child’s parent, and this benefit will be payable until the child reaches age 18 (or 19). If the surviving child is disabled and the disability onset before age 22, there is no upper age limit for receipt of the child’s survivor benefit.

In addition to the offspring of the deceased worker, this benefit can be available to step-children, grandchildren, step-grandchildren, or adopted children of the deceased worker, if the deceased worker provided 1/2 or more support to the child.

Surviving Parents Over Age 62

In the event that the deceased worker had provided more than 1/2 of the support of one or more older parents (over age 62), the surviving parents are eligible to receive a Survivor Benefit as well.  This Survivor Benefit is based on the age of the surviving parent, and actuarial reductions apply to these benefits if received before FRA of the survivor.

Family Maximum

For the whole family of the deceased wage earner, that is, surviving children under 18, spouse and parents, there is a maximum benefit amount that applies – equal to between 150% and 180% of the deceased worker’s PIA (the calculation is complicated, using the bend point formulas).  The Social Security website has a calculator to help you understand this amount.

Bear in mind that any Survivor Benefit received by a surviving divorced spouse to not count toward this family maximum.

Choosing a Beneficiary for Your IRA

choosing a beneficiaryOne of the very important tenets of estate planning is to ensure that you’ve made an appropriate choice, or set of choices, for beneficiary(s) of your IRA account(s).  The title of this article could be a bit misleading – the point of this article is to list some of the consequences of various choices for a beneficiary of your IRA.

Don’t get me wrong – this article doesn’t suggest that the tax consequences should drive your choice of beneficiary(s).  Rather, the assumption here is that you have several beneficiaries to choose from, and other classes of assets that you can direct toward heirs that aren’t as able as others to take advantage of the tax-favorable provisions.

Following are the benefits and consequences of some of the major groupings of choices that you might make for beneficiary(s) of your IRA.

Age

Younger Individual

If you choose a young individual as the beneficiary of your IRA, your heir will be able to take advantage of long-term tax deferral using the method that provides for payout over the life expectancy of the beneficiary.  By doing so, the tax-deferred status of the account can remain in force for a considerably long time (consider a 2-year-old heir, providing for 80+ years of potential tax deferral).

Older Individual

If you choose an older individual as the beneficiary of your IRA, this heir can also take advantage of the life expectancy payout method – but the payout period will be much less (due to the age of the beneficiary).  Therefore the tax-deferral benefit will be considerably less for the older individual versus the younger individual.

Spouse (any age)

Directly

If you leave your IRA directly to your spouse by name, he or she can elect to treat the inherited IRA as his or her own IRA.  This means that your spouse will be able to defer distributions from the account until he or she reaches age 70½, and then use the Uniform Life Table for distributions.  As you may know, the ULT is much more favorable than the Single Lifetime Table, which is the one required to be used by owners of inherited IRAs.  Your spouse can also name his or her own beneficiary for any amounts remaining in the IRA at his or her death – which provides for additional deferral in the account.

In Trust

If instead, you decide to leave your IRA to your spouse via a trust (even a look-through trust), you remove the possibility for your spouse to assume ownership of the IRA (as described above).  By doing so, the account must be treated as an inherited IRA, subject to the immediate Required Minimum Distributions from the account, regardless of the age of your spouse.  Further deferral of taxes is limited in many cases, since if the spouse is younger than 70½ he or she has to take distributions now rather than delaying until age 70½.  In addition, your spouse will be required to use the less-favorable Single Lifetime Table for the distributions; your spouse also cannot name his or her own beneficiary for the account for further deferral after his or her death.

Now, if the spouse is the sole beneficiary of the trust, the account can be treated as if it were directly inherited by your spouse, as in effect the look-through trust becomes a conduit trust.  With a conduit trust, the effect is the same as specifically naming your spouse the sole beneficiary of the account – so the same rules apply as when you leave the account directly to your spouse.  The only difference is that you’ve spent extra money drafting the trust agreement.

Other Beneficiary Options

Group (versus Individual)

Leaving your IRA to a group of people instead of one person can introduce quite a bit of complexity to the situation.  Where possible you might split your IRA into separate accounts and direct each account to an individual beneficiary, saving your heirs a lot of extra headaches at your passing.  If this is not possible or you would prefer not to split your account your heirs can do it later – it’s just a lot of extra paperwork for them that you could have handled for them in advance.  See this article for additional information on splitting inherited IRAs.

Charity

As tax-exempt entities, charities do not have to pay tax on any donations.  So if you choose to name a charity as beneficiary of your IRA, there are no tax consequences on an asset that would otherwise be fully subject to ordinary income tax.  This can be a very tax efficient way to provide charitable bequests – leaving your more tax-favorable assets to non-charity recipients.

Your Estate

If you choose to leave your IRA assets to your estate – either intentionally by naming your estate as beneficiary, or unintentionally by not naming a beneficiary or by naming a non-look-through trust as your beneficiary – longer-term tax deferral benefits are lost. Estates and non-look-through trusts have no life expectancy, therefore there is no life expectancy payout option.  This is not to say that there are no good reasons to choose your estate as beneficiary of your IRA – but that’s a topic for another post…

Bottom Line

As I mentioned before, you should not cause the tax code to be the determining factor when choosing a beneficiary.  You should leave your assets to whomever you wish.  You can, however, use the information on this page to help guide your process of choosing a beneficiary, making tax-efficient choices.  Making thoughtful decisions about this process can ease the tax burden for your heirs.

Time for your paycheck checkup!

this lady did a paycheck checkup and look how happy she isEarlier this year I wrote about checking your withholding and estimated payments in light of the changes to the tax laws. When I wrote that, many of you were in the middle of finishing up your tax returns, so I imagine it probably went by the wayside. Now, since we’re 2/3 of the way through the year, is a perfect time for a paycheck checkup! Plus, if you’re retired, it’s a good time for a review of your estimated taxes as well. Since you have 4+ months left in the year, you can make adjustments if needed.

The IRS recently issued a Media Advisory urging folks do to a paycheck checkup – and I’ve included their advice and links to tools below. They also highlight those taxpayers that are especially encouraged to do the paycheck checkup, those that have a better than average chance to need to make adjustments. You can also review the earlier articles from Financial Ducks In A Row on doing your own Mid-Year Withholding Checkup or Mid-Year Estimated Payments Checkup as well.

Below is the actual text from the IRS Media Advisory:

IRS urges taxpayers to check withholding now to avoid tax surprises later; Spotlights special tools during week of Aug. 13 to help people overlooking major changes

With the year more than halfway over, the Internal Revenue Service urges taxpayers who haven’t yet done a “Paycheck Checkup” to take a few minutes to see if they are having the right amount of tax withholding following major changes in the tax law.

A summertime check on tax withholding is critical for millions of taxpayers who haven’t reviewed their tax situation. Recent reports note that many taxpayers could see their refund amounts change when they file their 2018 taxes in early 2019.

To help raise awareness for these taxpayers, the IRS is conducting a second “Paycheck Checkup” effort beginning the week of Aug. 13. During this week, the IRS is spotlighting a variety of tools – including the online Withholding Calculator – to help taxpayers learn if they need to make changes soon to avoid an unwelcome surprise come tax time.

The IRS is also encouraging partner groups inside and outside the tax community to share this important information with their members and employees. The IRS will also be holding special sessions on withholding for tax professionals and industry partners Aug. 15-16 in English and Spanish.

The Tax Cuts and Jobs Act, passed in December 2017, made significant changes, which will affect 2018 tax returns that people file in 2019. These changes make checking withholding amounts even more important. These tax law changes include:

  • Increased standard deduction
  • Eliminated personal exemptions
  • Increased Child Tax Credit
  • Limited or discontinued certain deductions
  • Changed the tax rates and brackets

Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. It can also help taxpayers avoid a large refund if they’d prefer to have their money in their paychecks throughout the year. The IRS Withholding Calculator and Publication 505, Tax Withholding and Estimated Tax, can help.

Special Alert: Taxpayers who should check their withholding include those who:

  • Are a two-income family.
  • Have two or more jobs at the same time or only work part of the year.
  • Claim credits like the Child Tax Credit.
  • Have dependents age 17 or older.
  • Itemized deductions in 2017.
  • Have high income or a complex tax return.
  • Had a large tax refund or tax bill for 2017.

Financial Counseling and Marriage

Many individuals who are dating and growing closer together learn more and more about the other person. Habits (good and bad) likes, dislikes, and traits all make themselves known at some point in the relationship.

Before getting married, many individuals choose to seek counseling. This can help answer questions about whether they are doing the right thing, religious reasons, etc. Some couples choose to continue this counseling into marriage to further strengthen the relationship.

Couples may consider seeking financial counseling before marriage as well. Many couples can be reluctant to talk about money or worse, think that the money problems will solve themselves once the marriage starts.

Issues such as debt, poor credit, spending habits (both extreme frugality and frivolous spending) are just some of the many items that should be discussed before entering marriage. They are also good discussion points if they are occurring during marriage.

As many readers know, one of the biggest stressors on marriage is finances. By getting financial matters out in the open, discussed earlier on can help both partners understand how they tick financially. This may lead to a better, smoother relationship both emotionally and financially.

Some individuals need to be prepared for some difficult conversations, and potentially, the relationship to end. However, it may be better for the relationship to end before marriage, then to deal with the emotional and financial fallout from divorce.

Couples that are currently married may also consider financial counseling. This is especially important if there are disagreements that cannot be resolved, or if the couple (one or both) feels resentment starting to build.

And if there’s nothing wrong? Consider going anyway. Why? It’s no different than maintaining your car, house, etc. Nothing may be wrong, but we still maintain and take care of the things that are important to us. Finances in marriage should be no different.

There are several books designed to help couples in need. Also, taking to a qualified professional may be beneficial (not a product pusher). Couples may not know what questions to ask, but a professional may pose questions not thought of, designed to open the lines of communication between a couple.

Good luck!

Eligible Rollover Distributions (ERDs)

beethoven by HitchsterSo, what funds can be rolled over from your qualified retirement plan (not an IRA) into another retirement plan or IRA?  Interestingly, the IRS doesn’t specifically tell you what can be rolled over – but rather, what cannot be rolled over. So the definition of eligible rollover distributions includes any monies from a qualified account that are not specifically disallowed.

Let’s look at the definition from the IRS…

Definition of Eligible Rollover Distributions

Only Eligible Rollover Distributions, or ERDs, can be rolled over, according to the IRS.  The definition that is given is really an anti-definition, explaining that any normally taxable distribution is eligible for rollover unless it fits the exceptions listed.

An ERD is defined as – a distribution that is eligible to be rolled over to an eligible retirement plan. Eligible rollover distributions include a participant’s balance in a qualified plan, 401k, 403b or 457 plan, except for certain amounts that include the following:

  • Any of a series of substantially equal periodic payments (SOSEPP) paid at least once a year over:
    • The participant’s  lifetime or life expectancy,
    • The joint lives or life expectancies of the participant and his/her beneficiary, or
    • A period of 10 years or more
  • A required minimum distribution
  • Hardship distributions
  • Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains
  • A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant’s accrued benefits are reduced (offset) to repay the loan
  • Dividends on employer securities
  • The cost of life insurance coverage

So, as long as the distribution that you take from a 401k, 403b or 457 plan doesn’t fit any of the requirements above and has a payout period of 10 years or less, your distributions can be considered ERDs, and therefore rolled over into an IRA or other retirement plan.

Understand that these distributions will be subject to mandatory 20% withholding if paid out to you, and not transferred directly to the new plan or IRA.  Plus, you must complete the rollover within 60 days when it’s not done by trustee-to-trustee (or direct) rollover.

Whenever possible, you would want to set up a rollover as a direct rollover into your IRA (or other QRP) to avoid this withholding requirement and 60-day limit.  If this can’t be done, you should make up the 20% withheld difference from other savings as you rollover the distributions in order to avoid tax and penalties. Otherwise you’ll get a tax bill for the portion that was withheld and not properly rolled over – see The Heartbreak of Withholding From Indirect Rollover for more details on the 20% withholding.

Report pension changes to SSA

When you have a non-SS-covered pension and you are receiving Social Security benefits, either WEP (Windfall Elimination Provision) or GPO (Government Pension Offset) may impact your benefits. It’s important to keep the Social Security Administration (SSA) up-to-date on your pension. You must report pension changes to SSA when there is an increase due to a COLA or any other change to the previously-reported amount. This requirement is in place so that when your pension changes, your WEP and/or GPO impact can be recalculated.

This is only required if the pension changes are for a pension that is based on your own non-Social Security-covered earnings. If you’re receiving a pension based on SS-covered earnings, or a pension from any source that is based on someone else’s earnings (such as a survivor pension), there is no need to report pension changes to SSA.

This reporting can be accomplished by sending a letter to the Social Security Administration. The letter should detail the name, address, birthdate and Social Security number of the pension recipient, as well as the change in the pension amount and the effective date of the change. This letter can be delivered to your local Social Security Administration office.

Most commonly, GPO is the calculation that is affected by a change to the pension amount. WEP is only dependent on the amount of the pension when the pension amount is relatively small – which we’ll review a bit more later. Let’s take a look at an example of the impact of a change to pension on GPO.

How pension changes impact GPO calculation

For example, Gloria is receiving a pension due to her work for the local health department, in the amount of $1,800 per month. Her husband, Edward, died this year. Before Edward died, he was receiving Social Security benefits in the amount of $2,000 per month. When Gloria filed for the survivor benefit based on Edward’s record, she was informed that GPO would reduce the survivor benefit. This is because of her pension from the local government.

The reduction is 2/3 of the amount of Gloria’s pension – which calculates to $1,200 per month. The pension is $1,800, multiplied by 2/3 equals $1,200. So the resulting GPO-reduced Social Security survivor benefit is $800.

Gloria’s pension increases by 3% each year. So in January, her pension increases to $1,854 per month. Gloria must report this increase to Social Security. When she does so, her GPO impact will be recalculated. The result is that the GPO impact is now $1,236 per month. The survivor benefit increased 2% for the year (annual COLA), bringing the unreduced benefit to $2,040. When the GPO reduction is applied, the final resulting benefit is $804.

How a change to pension impacts WEP calculation

WEP is different from GPO, in that it is only based on the amount of the pension when the pension itself is relatively small. In order for the amount of the pension to be important, the pension itself must be less than the maximum WEP impact – 50% of the first bend point, or 50% of the PIA if the PIA is less than the first bend point.

Jeff has had a limited working career due to debilitating illnesses throughout his life. Part of his career included teaching for several years before his illness took hold. This work as a teacher was not covered by Social Security, but it has generated a pension in the amount of $400 per month. In addition to the teaching time, Jeff had several part-time jobs off and on throughout his life, which has generated a Social Security retirement benefit in the amount of $800 per month.

Since WEP reduction is calculated as the smaller of either 50% of the first bend point, 50% of the unreduced Social Security retirement benefit, or 50% of the amount of the non-covered pension. In Jeff’s case, $816 is amount of the first bend point, since he reached 62 in 2014. So the smallest figure of the three is 50% of Jeff’s pension – which makes his WEP reduction $200, for a resulting Social Security benefit of $600 per month.

When Jeff’s teacher’s pension receives an increase of 4% due to pension fund experience, he must report it to SSA. This will increase his WEP impact to $208, since his pension was increased to $416. After the annual Social Security COLA increase of 2% (to $816 per month), his resulting WEP-reduced benefit will now be $608.

If Jeff’s pension was larger than one of the other WEP-reduction factor limits, it wouldn’t make any difference to the WEP calculation to reduce his Social Security benefit.

Is It Really Cheating?

In the past we’ve written about financial autonomy, spending a little on yourself, and balance between saving and spending. Although it been a while, we’ve also brought up health and fitness axioms from time to time – mainly through shameless self-promotions of my book (designed to cure insomnia while doubling as a doorstop).

Today I wanted to stress the importance of balance in your personal finances as well as your health. One of the ways I’ve found to keep me keep balance is cheating. Cheating? It’s not as bad as it sounds. Although having a negative connotation, the concept is what can help maintain balance. Here’s how.

In my book, one of the axioms I present is having a cheat day when it comes to healthy eating. What is a cheat day? A cheat day is a day you set aside (mine are usually Sundays) every week where you eat whatever you want, whenever you want, and as much as you want. It’s certainly not a concept that I invented. Many athletes and non-athletes utilize this day as part of their health and fitness regimen.

The reason why is important. For six days a week, an individual is working their butt off (maybe literally) exercising, making good food and meal choices to get into or maintain a desired level of health and fitness.

Having a cheat day allows the individual to relax a bit when it comes to eating, enjoy that dessert, buffet, never-ending-pasta-bowl, or whatever their specific indulgence is. In other words, having one day per week to eat whatever we want allows us to stay focused the other six days of the week.

It can also prevent binging – going weeks or months without a dessert or sweet, only to binge for days and then feel guilty and give up on our goals. After all, it’s only a six day wait until the next cheat day!

A similar concept is true for our personal finances. Setting aside some money every paycheck for ourselves to spend however we want, whenever we want can also help us stick to our long-term financial goals of saving for retirement, college, or getting out of debt.

Although this amount of money may not be significant, the autonomy it gives us is very powerful. Having a little money to spend on whatever we want can keep us focused mentally on the bigger picture, without feeling that we are losing control or a slave to our financial goals.

Here’s where the cheating comes in. At first, when people make great strides in their fitness and financial goals, the thought of spending on something not in the “big picture” or eating foods that they know aren’t healthy can be daunting. It seems counterproductive. It seems like cheating.

But it’s necessary. Having some financial and food autonomy is a necessary part of the plan. It allows us to stay focused on our long-term goals while allowing us the freedom to enjoy indulgences here and there without feeling guilty.

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