Q&A: File and suspend strategy for Social Security

Dear Liz: You recently wrote an interesting piece regarding the “file and suspend” strategy for Social Security benefits. I liked the possibility of getting a lump sum if I should need the money downstream.

But when I checked with Social Security, I was told that the lump sum maximum was six months of suspended payments. Am I missing something? My understanding was that I could collect all the suspended payments if need be. Is there a specific code I could reference to our Social Security office to clear this matter up?

Answer: You’re not missing something. The Social Security representative you talked to is confusing retroactive benefits with the reinstatement of benefits that were voluntarily suspended.

When you file for benefits after your full retirement age (currently 66), the maximum lump sum you can get is six months’ of missed benefits.

When you “file and suspend” your application at or after full retirement age, however, you can end the suspension at any time and get a lump sum for all the benefits you missed.

Unfortunately, the misinformation you received isn’t unusual.

Financial planners around the country have reported running into Social Security reps who insist that only six months’ of benefits are available to people who file and suspend, which isn’t true.

The procedure is outlined in the Social Security Administration’s “Program Operations Manual System” under GN 02409.130 Voluntary Suspension Reinstatement

It’s also described in plain English on Social Security’s site: “If you change your mind and want the payments to start before age 70, just tell us when you want your benefits reinstated (orally or in writing). Your request may include benefits for any months when your payments were suspended.”

The ability to file and suspend, then change your mind, is an important protection for those who understand the important role Social Security plays as longevity insurance.

The smartest course is often to let your benefit grow to its maximum amount, taking advantage of the “delayed retirement credits” that increase your benefit 8% annually between your full retirement age (currently 66) and age 70.

If you should later find yourself in need of the money, you can get a lump sum payout for the missed benefits back to the day you filed and suspended, if you want.

But opting for the lump payment means you lose your delayed retirement credits for that period. In other words, if you ask for a lump sum dating back to your initial filing, your monthly benefit is reset to the smaller amount you would have gotten then.

Q&A: Student loan forgiveness

Dear Liz: I have $105,000 in medical school loans with an interest rate of 2.875%. I have another consolidated federal loan at 6%. I’m making $180,000 in the private sector and like my job.

Should I consolidate everything, try to get a public sector job, and apply for loan forgiveness after 10 years while paying as little as possible? Or should I accelerate my loan payments?
I would be able to pay almost the full amount after 10 years. I’m also trying to save for a house in a high-cost area. I have about $110,000 in savings and stocks.

Answer: Why would you upend your life to qualify for help you don’t need?

Loan forgiveness and federal income-based repayment programs are intended for those struggling to pay their education debt. These programs are available only for federal student loans, by the way.

The low interest rate on your medical school loans indicates that those are private student loans, which wouldn’t qualify for the relief programs or for a federal consolidation loan, for that matter.

So the question really is whether you should pay your loans off over time or try to retire them as quickly as possible.

A slower repayment schedule could allow you to buy a home sooner and save more for retirement, which are both worthy goals. Faster repayment could lower the overall cost of the debt and leave you less vulnerable to rate hikes, since the interest rates on private student loans are typically variable.

There’s no single right answer, but it’s a good question to discuss with a fee-only financial planner who can assess your entire financial situation and explain your options.

Q&A: Credit scores and new accounts

Dear Liz: My spouse signed up for a store credit card to receive a discount on a large purchase. As she has no strong interest in maintaining a line of credit there, is there a simple way of discontinuing this account without affecting our credit scores, given that we may apply for a mortgage in the near future?

If not, is it critical we maintain some frequency of use on this account?

Answer: First, let’s correct a popular misconception that marriage somehow combines your credit records. Assuming she applied for the card in her name alone, this account won’t show up on your credit report or affect your scores.

Should you apply for a mortgage together, however, her scores could affect the interest rate and terms you get. Opening and closing accounts can ding scores, so it’s best to avoid both when you’re in the market for a major loan.

Issuers vary in their policies on closing inactive accounts, so it’s hard to predict how much activity would prevent the card from being shut down. Typically, though, a small charge every two to three months is enough to keep an account open.

Q&A: Social Security spousal benefits

Dear Liz: I started my Social Security benefits at 66 and am now 70. I was married for 23 years and have not remarried.

When I ask about spousal benefits, I am told that my own monthly benefit is too high to get benefits based on my ex’s work record. My monthly benefit is only $1,509, my 401(k) has tanked, and I am surviving on less and less available part-time work.

I was told further that I can apply once my ex passes away and then it won’t matter how high my income is. Could that be correct? What is the exact cut-off amount to get spousal benefits?

Answer: Many people misunderstand the way spousal benefits work, and they think that they can get an additional check on top of their own retirement benefit. That’s not quite how it works.

Essentially, Social Security compares the amount of your retirement benefit with what you would get as a spouse or divorced spouse and gives you the larger of the two. Spousal benefits are up to half of what your spouse or ex receives.

If your ex’s benefit is $2,000 a month, for example, your spousal benefit could be $1,000, which is less than you’re getting now. If your ex dies, however, you can apply for a survivor benefit that equals what he or she received — in this example, $2,000 a month.

Q&A: Debt collection

Dear Liz: I am trying to help my daughter deal with enormous student loans.

She is a doctor and very busy and simply cannot deal with the stress of almost $350,000 of education debt. I want to help her refinance, but to get the best rate I would like to help her improve her credit score (even if it is already 712).

She had three small debts turned over to a collection agency after a visit to an emergency room a couple of years ago. We plan to pay them off. Do I have to ask the collection agency to erase them or contact the original creditor?

Answer: You mention that your daughter has a 712 score, but she actually has many credit scores that change all the time. Small medical collections can have an outsize impact on those scores — or they can have no effect at all. It depends on what credit scoring formula the lender happens to use.

The latest version of the leading credit score, FICO 9, ignores paid collections and treats unpaid medical debt less harshly than other types of collection accounts. The most commonly used version, though, is FICO 8, which ignores only those collections under $100 and doesn’t differentiate medical from other collections.

Some lenders still use older versions of the formula that punish people for even small collections.

FICO also has a rival, the VantageScore. The latest and most-used version of that formula, VantageScore 3.0, also ignores paid collections.

You can contact the lenders you may use to refinance the debt to find out which scores they use, and which versions. That could help you decide how hard to push to get these collections erased.

If paid collections aren’t counted, you can just pay them off and be done with it. (You’ll of course want to keep the paperwork showing the debts have been paid and have your daughter check her credit reports to make sure the accounts reflect a zero balance.)

If the accounts could hurt her even if they’re paid, you have a couple of options.

One is to ask the hospital to take back the accounts, since medical bills are often placed with collection agencies on consignment rather than being sold to them outright. Then you can pay the hospital, and the collections should disappear. (Although, again, your daughter will need to follow up to make sure.)

Another option is to try to negotiate a “pay for deletion” — which means the collection agency promises to stop reporting the account in return for payment. You’ll want this agreement, if you can win it, to be in advance and in writing.

Q&A: IRS direct pay

Dear Liz: Regarding the reader whose tax payment never made it to the IRS: I agree that electronic payments are the best and safest, but you might want to emphasize that the payments should be done directly through the IRS website.

I made the mistake of scheduling a couple of payments through my online banking, and a month later I received a notification from the IRS that I was in arrears, although the bank statement indicated that the payment has been debited.

It took several months of correspondence before the IRS acknowledged that the money was received. Luckily, the penalties and interest were only about $20, so I didn’t have to go through the additional hassle and filling out forms to reclaim it. The IRS website is very easy to use, and I haven’t experienced any problems since.

Answer: The IRS’ Electronic Tax Payment System, which was designed primarily for businesses, has been around for nearly two decades, but the agency only recently added a “Direct Pay” option expressly for individuals to make estimated tax payments and pay bills.

These methods and others, including electronic funds withdrawal when you e-file your return, are explained at http://www.irs.gov/payments.

Q&A: Electronic Federal Tax Payment System

Dear Liz: I’m often required to make estimated quarterly payments and was always concerned I would miss one of them.

A few years ago, I came across the Electronic Federal Tax Payment System (EFTPS) that is offered by the U.S. Treasury. The beauty of the system is that once it is set up, there is nothing more for me to do. I set up all the payments I need to make and the system takes care of it.

I just have to set it up each year at the time I file my tax return. I have been using the system for several years and have had no issues whatsoever with it.

Answer: Thanks for sharing your experience with EFTPS. While that system allows you to schedule payments up to 365 days in advance, the Direct Pay option for individuals allows scheduling only up to 30 days in advance.

Q&A: Retirement savings for freelancers

Dear Liz: I am a freelancer. I don’t consider myself a small-business owner, just someone who gets the work done on time and gets paid. I max out my IRA every year, but would like to save more in a tax-advantaged account.

I checked out SEP and SIMPLE IRAs, but they don’t have a Roth option. Am I eligible to start an Individual 401(k)? What administrative duties would be involved? I pay self-employment tax and my clients send me 1099s, not W2s.

Answer: You may not consider yourself a small-business owner, but that’s essentially what you are. And small-business owners should have tax pros to help them answer questions like this, since you have so many options.

As a sole proprietor, you should be able to set up a solo or individual 401(k) account. That would allow you to make either pre- or after-tax “employee” contributions of up to $18,000 in 2015 — plus an additional $6,000 if you’re 50 or older.

As your own employer, you can contribute an additional 25% of your net earnings (a contribution that would be deductible as a business expense). Your total contribution, employee plus employer, can’t exceed $53,000 in 2015.

Individual 401(k)s are somewhat more complicated to set up and administer than Simplified Employee Pensions (SEPs) or Savings Incentive Match Plan for Employees (SIMPLEs). But many discount brokerages are eager to help you with the paperwork and have low or no set-up costs.

You have many other ways as a self-employed person to reduce your taxes, but the rules can be complicated. A certified public accountant or an enrolled agent can help advise you of your options. You can get referrals to tax professionals from the American Assn. of CPAs at http://www.aicpa.org and the National Assn. of Enrolled Agents at http://www.naea.org.

Q&A: Creating a will

Dear Liz: I’m a 58-year-old man. I want to make a will just in case something happens to me. I have about $500,000 in stock and cash. I have a life partner and her son. I would like to split my assets between her and my sister. Any suggestions on how to go about this?

Answer: Just in case you turn out not to be immortal, having a will is a very good idea. Otherwise, your assets would be distributed according to state law, which means your lady friend probably would get nothing.

You also may want to consider probate, the court process that typically follows death. While probate is fairly simple in most states, in others — including California — it can be expensive and slow, making a living trust a worthwhile option.

You can prepare a will or living trust using do-it-yourself online legal sites and software such as Quicken WillMaker. If your relatives are likely to contest your will or your situation is otherwise complicated, you should consult with an estate planning attorney for help.

You could provide additional protections and advantages to your partner by getting married. As your wife, she could receive spousal and survivor benefits from Social Security based on your work record. You both would have visitation rights if the other were hospitalized and be empowered to make financial and health decisions if the other were incapacitated.

Marriage can have many other legal, financial and tax benefits as well. If you opt to remain unmarried, please talk to an attorney about available ways you can protect each other’s rights.

Q&A: Breaking even with Social Security

Dear Liz: This is in regard to the reader who created a spreadsheet that he thought showed the advantage of taking Social Security early. I retired at age 62 and am now 69 and have not yet started drawing my benefits. I have never done a spreadsheet to determine the relative advantage in waiting to draw on my personal benefits; I’ve simply assumed there is no advantage or disadvantage, actuarially. That is, whether I took benefits beginning at age 62 or waited, as I’m doing, the total amount I would receive would be the same if I lived an average life expectancy. Given the fact that my wife would be drawing my benefit if I die first, however, it’s clear that my waiting to age 70 to draw my benefits works to our joint advantage. Am I right?

Answer: In the past, the Social Security Administration advised people that they would receive roughly the same amount by starting reduced benefits early as they would by waiting to receive larger amounts, assuming they lived an average life expectancy.

These days, though, longer life expectancies at age 65 mean that most people will live past the “break even” point where waiting for enhanced benefits results in more money over a lifetime than starting early. The break-even point is in one’s late 70s. Men have a 60% chance of living to age 80 and women have a 71% chance, according to the Society of Actuaries.

When you’re married, you need to think in terms of two life expectancies, because the chances are even better that one of you will live past the break-even point — perhaps well beyond.

With married couples, there’s an 88% chance at least one of you will live to 80, a 72% chance of at least one spouse living to 85 and a 45% chance one will live to 90.

Because a surviving spouse will have to get by on just one Social Security check — either her own or one equal to what her spouse was getting — maximizing at least one benefit makes a lot of sense.

There’s also the idea that Social Security should be used as a kind of longevity insurance. The longer you live, the more likely you are to use up all your other assets, so a bigger check can mean a much better standard of living.