Ask Liz Weston

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Q&A

Q&A: Why Social Security imposes an earnings test

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Dear Liz: I am under full retirement age, collecting Social Security and working part-time. I just received a letter from Social Security telling me I earned over the $22,320 limit and now have to pay back some of my Social Security. I was aware of the limit, so the letter was not unexpected. What I’m curious about though is what is the rationale behind the earnings limit? Once you’re eligible for Social Security, why do they care how much you earn? Are they trying to discourage applying before full retirement age? Also, and more importantly, I think I read that somewhere down the line, I will get back what I had to pay back. Can you clarify that for me?

Answer: Social Security was designed as insurance for those who could no longer work, and a retirement earnings test has been a part of the system from its creation in 1935. Back then, the test was all-or-nothing: Any earned income would preclude your getting a benefit.

Over time, the test was modified so that people could earn some income without losing all their benefits. The age at which the earnings test no longer applies has changed as well. In the 1950s, it was set at 75. In the 1960s, the age was lowered to 65. In the 1980s, it was adjusted so that the current “full retirement age,” when the test no longer applies, is 67.

The current test withholds $1 for every $2 earned over a certain limit, which in 2025 is $23,400. Once you reach full retirement age, the withheld amounts will be added back into your benefit.

What you won’t get back, however, is the larger benefit you could have earned by delaying your initial application. Most people are better off waiting at least until full retirement age to collect Social Security, if they possibly can.

Q&A: Should you keep more than $250,000 in one bank?

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Dear Liz: You recently wrote that it’s easier to have one bank than many, but I worry about FDIC insurance limits because I have more than $250,000 in savings.

Answer: You may be able to get more coverage at one bank than you think. FDIC insurance is per depositor, per ownership category, per bank. Ownership categories include single accounts, joint accounts, certain retirement accounts such as IRAs and trust accounts, among others.

If you’re married, for example, a joint account would be covered up to $500,000, or $250,000 for each owner. If each of you had single accounts, your total coverage for the three accounts would be $1 million ($500,000 for the joint account, plus $250,000 for each individual account). If you each had an IRA as well, you could have up to $1.5 million in coverage at a single institution.

Adding beneficiaries to your accounts turns either joint or single accounts into trust accounts, for FDIC insurance purposes. Each owner of a trust account is covered up to $250,000 per beneficiary, to a maximum of $1.25 million for five or more beneficiaries.

Q&A: Why living trusts are a good option, most of the time

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Dear Liz: My goal is to avoid probate and allow simplified access for my heir, who is also my executor. I have no family. I have chosen payable-on-death and transfer-on-death accounts instead of putting all financial assets in my trust, against the wishes of the attorney who drew up the trust for my condo. I am 79, with about a million in financial assets, with no debt or mortgage, and I am self-insured for long-term healthcare. Is the decision to use these accounts appropriate for me?

Answer: Please take the advice you paid for. The trust you have is probably a living trust, a flexible estate-planning device that avoids probate. Living trusts generally allow a smoother, more organized settlement of the estate than other probate-avoidance options.

The person who settles your estate is called your successor trustee and will perform much the same duties as an executor. But typically your successor trustee also can handle financial and other matters should you become incapacitated.

As covered in previous columns, payable-on-death and transfer-on-death accounts can be appropriate solutions for people with few assets who can’t afford to pay for a living trust. For more complex estates like yours, however, a living trust is the more appropriate option.

Q&A: Widow may be eligible for home sale tax relief

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Dear Liz: My late husband and I bought my present home in 1969. I am now 80. From what I understand, my widowed status does not make any difference in regard to the home sale exemption. His death means that when I want or need to sell the house, I lose out on half the $500,000 home sale exemption we otherwise would have received. I have not discovered any exceptions for the elderly widow or widower. Does such a relief exist?

Answer: If you sell the house within two years of a spouse’s death, you can qualify for the full $500,000 home sale exclusion, assuming you meet the other criteria for this tax break, such as owning and living in the home as your primary residence for at least two of the past five years, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. This assumes the surviving spouse has not remarried and neither spouse claimed the exclusion within two years before the sale.

If more than two years have passed, you still may get more tax relief than you think. In most states, when a spouse dies, one-half of the home gets a favorable “step up” in tax basis to the current market value. In California and other community property states, both halves of the house get this step up.

Let’s say you and your husband bought your home for $25,000 in 1969 and spent $75,000 on home improvements over the years, creating a tax basis of $100,000. Let’s further say the house was worth $600,000 when he died. In most states, your half of the house would retain its tax basis of $50,000. His half would be stepped up to $300,000, or half the then-current market value. Together, the tax basis would be $350,000. If you sold the house for $650,000, your home sale profit would be $300,000. You could subtract the $250,000 exemption from that, leaving you with a $50,000 capital gain.

If you live in a community property state, however, your tax basis would be $600,000 after your husband died, since both halves got the step-up. If you sold for $650,000, your exemption would more than offset the $50,000 profit and you would owe no capital gains taxes.

Q&A: The pros and cons of rewards cards with high interest rates

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Dear Liz: I expect to travel to Europe in the next few months. I applied for a new credit card to take advantage of its “no foreign transaction fees” policy. With a credit score of 740, I figured I would get a decent rate. Today I learned that I’m approved with a rate of 29%, which seems very steep. I want to turn this down rather than pay that rate. How do I do that, and what will the effect be on my credit score?

Answer: Don’t close the card. Rethink your strategy. You most likely got a rewards card, since those are typically the ones that don’t charge for foreign transactions. Rewards cards usually have high interest rates, so the only smart way to use one is as a convenience: Charge only what you can afford to pay off when the bill comes. Ideally, you’ll have saved for this trip so that won’t be a problem.

If you do wind up with a balance, consider transferring the debt to a low-rate card. But that, too, needs to be paid off relatively promptly, since low rates are typically teaser rates that expire after a few months.

Generally it’s better to borrow only for something that can grow in value over time. A reasonable mortgage makes sense, because a home typically appreciates. A moderate amount of student loan debt can pay off in higher incomes.

If you must borrow for something that doesn’t appreciate, such as a car, opt for the shortest possible loan to minimize the interest you pay. Avoid borrowing for vacations and travel, since those should be paid for out of your current income.

Q&A: When is the right time to start simplifying your finances?

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Dear Liz: You recently answered a question about closing credit cards and mentioned the “mental load” of managing too many cards. That got me thinking about when is the right time to start simplifying my finances. I have lots of rewards credit cards and have opened several bank accounts to get bonuses, but I wonder at what age I should start consolidating so everything’s easier to track.

Answer: Simplifying our finances can allow us to better monitor our accounts, helping to avoid mistakes and fraud. Reducing the number of accounts we have also makes it easier for our trusted people to take over for us, should we become incapacitated.

But consolidating gets particularly important as we age and start to face cognitive deficits. Our financial decision-making abilities peak in our 50s, after all, and can really drop off in our 70s and 80s.

You can get ahead of this curve by consolidating accounts as you go along. When you leave a job, for example, consider rolling your old retirement account into your next employer’s plan or an IRA so that you don’t lose track of the money. If you’re thinking of opening a new bank account, consider whether there’s an old one you can close. Shuttering credit card accounts can affect your credit scores, so open new accounts sparingly and think about closing any that you’re not using, particularly if they’re newer or lower-limit cards.

Your 60s may be a good time to get serious about winnowing the number of accounts and institutions you’re juggling. Many people find it’s much easier to have one bank, one brokerage and a few credit cards than to have accounts scattered across the financial landscape.