Q&A

Q&A: Approaching retirement? Don’t count on rules of thumb

July 15, 2025 By Liz Weston Leave a Comment

Dear Liz: I have a few questions about my income taxes during my upcoming retirement. I would like to know if doing a Roth IRA conversion will be worth it for me since I might be in a higher tax bracket when I retire. Is there a rule of thumb in regards to doing this conversion? I’m also getting considerable income from my tax-free municipal bond and money market fund. Will that income be taxable when I retire and will it count toward how the government calculates my Medicare premiums?

Answer: Rules of thumb can be incredibly helpful in many areas of personal finance. Guidelines such as “spend less than you earn” and “pay yourself first” apply to virtually everyone. Even more specific recommendations, such as the 50/30/20 budget, can apply to many if not most situations. (The 50/30/20 budget recommends limiting “must have” expenses to 50% of after-tax income, leaving 30% for wants and 20% for savings and extra debt repayment.)

As you enter retirement, though, you’ll be making decisions that may be irreversible. It can be much harder to rebound from mistakes and you’ll have fewer years to do so. That’s why it’s important to get individualized advice from pros you can trust.

Converting a regular retirement account to a Roth IRA can make sense if you expect to be in a higher tax bracket in retirement and can pay the taxes on the conversion without raiding the account. But the conversion also can trigger higher Medicare premiums.

The same is true for municipal bond interest. Muni bond interest typically avoids income tax, but will be included in Medicare premium calculations and may cause more of your Social Security benefit to be taxable as well.

A tax pro can advise you about these issues and offer strategies to lower your lifetime tax bills.

Q&A: What to do if you don’t trust your trustee?

July 15, 2025 By Liz Weston Leave a Comment

Dear Liz: I own several properties. I have a living trust that names my two minor children as beneficiaries. I’ve told my attorney that I want to transfer the properties to my children using the county form. This will give my children who are under 10 years of age ownership as tenants in common with the right of survivorship. I believe this avoids any tax consequences. I will still keep my living trust and make some adjustments per this change. My attorney states I will lose the step-up in tax basis if I do this. As I see it, this may not be a concern as my primary goal is to give my children these properties in the event of my passing. I do not trust anyone whom I name as trustee to my living trust. I do not care about the step-in-basis as doing it this way avoids delays, assures ownership and avoids possible fraud. The trustee could sell the properties and spend the money. Keep in mind my children are minors as of this date. Sure, they could file a lawsuit, but you need money to file an action and once the money is long gone, good luck in getting it back. This way it gives immediate ownership to my children, and I avoid these problems that may occur.

Answer: If you really don’t know anyone you can trust to look after your children’s interests, then you’ve got quite a dilemma.

Your children are too young to legally own real estate in their own names, so some kind of guardian or trustee would need to be involved in managing the property, notes Jennifer Sawday, an estate planning attorney in Long Beach. Plus, you have no idea now whether your kids will be able to responsibly handle such an inheritance once they’re legally allowed to take over at 18 or 21 (depending on the age of majority in your state). Few people that age are ready for such a big responsibility. If a child develops an addiction or spendthrift tendencies, they could quickly waste their inheritance.

Plus, transferring property can have huge tax consequences, including the loss of step-up in tax basis that your attorney mentioned as well as property tax reassessments. (In California, such transfers avoid reassessment only when a primary residence is transferred and the child continues to live in the home. Commercial property, rental property and vacation homes get reassessed upon transfer.)

If you have no friends or relatives who are ethical, honest and trustworthy, then you’ll need to consider hiring a professional fiduciary or trustee. Your attorney can discuss your options.

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

July 7, 2025 By Liz Weston Leave a Comment

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

July 7, 2025 By Liz Weston 1 Comment

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

July 1, 2025 By Liz Weston 2 Comments

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.