Q&A: College savings strategy

Dear Liz: I will be 66 in May 2016. My wife is 68 and retired. She began receiving Social Security when she turned 66. I am still working, making a high six-figure income, and will continue to do so until I reach 70, when my Social Security benefit reaches its maximum. I plan to use my Social Security earnings to save for my grandchildren’s college educations (unless an emergency occurs and we need the income). I want to maximize the amount that I can give them. What is the best strategy, taking into consideration the recent change in Social Security rules relating to “claim now, claim more later”?

Answer: You just missed the April 29 cutoff for being able to “file and suspend.” Before the rules changed, you could have filed your application at full retirement age (66) and immediately suspended it. That would allow your benefit to continue growing while giving you the option to change your mind and get a lump-sum payout dating back to your application date.

Since Congress did away with file-and-suspend for people who turn 66 after April 30, that option is off the table for you. There are other ways to maximize your household benefit, said economist Laurence Kotlikoff, author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” They include:

•Your wife suspends her benefit and lets it grow for another two years, then restarts getting checks when she turns 70.

•At 66, you file for a spousal benefit. People who are 62 or older by the end of this year retain the ability to file a “restricted application” for spousal benefits only once they turn 66. That option is not available to younger people, who will be given the larger of their spousal benefits or their own benefits when they apply.

•At 70, you switch to your own, maxed-out benefit. Again, the ability to switch from spousal to one’s own benefit is going away, but you still have the option to do this.

Consider saving in a 529 college savings plan, which offers tax advantages while allowing you to retain control of the money. You can even withdraw the money for your own use if necessary, although you would pay income taxes and a 10% federal penalty on any earnings.

You should know, however, that college-savings plans owned by grandparents can mess with financial aid. Plans owned by grandparents aren’t factored into initial financial aid calculations, but any disbursements are counted as income that can negatively affect future awards. One workaround is to wait until Jan. 1 of the child’s junior year, when financial aid forms will no longer be a consideration, and pay for all qualified education expenses from that point on.

Obviously, you won’t have to worry about this if your grandchildren wouldn’t qualify for financial aid anyway. If your children also make six-figure incomes, that’s likely to be the case.

Q&A: Social Security claiming strategy

Dear Liz: Your recent article about Social Security claiming strategies may contain some wrong information. You told the woman who is 64 and had a former spouse who died that she could take her own benefit now and then switch to her survivor benefits when reaching 66. I wanted my wife to do something like this (but not the survivor part; I’m still alive), but was told by a few Social Security experts that this scenario is not possible because Social Security deems spouses to be filing for the spousal benefit and their own retirement at the same time. Once they’re deemed to have filed for both benefits, they get the larger of the two and can’t switch later. Please print a clarification.

Answer: Let’s clarify that you are still breathing and the ex-spouse in the original letter is not. The fact that you’re alive makes a world of difference, not just to you and your loved ones but to the Social Security benefit system.

When you’re alive, your spouse (or ex-spouse) may receive spousal benefits. When you’re dead, your spouse or ex-spouse may receive survivor benefits. Survivor benefits would essentially equal your benefit, while spousal benefits are capped at half of your benefit. Both spousal and survivor benefits are reduced if they’re started before the recipient’s full retirement age (currently 66).

There are other differences. Survivors can remarry at age 60 or later without losing their benefits. They also can switch from their own benefit to a survivor benefit, or vice versa, at any time.

Spousal benefits paid to a divorced person, by contrast, end if that person remarries at any age. Also, there’s the deeming issue you mention. When people apply for spousal benefits before their own full retirement age, they’re deemed or considered by Social Security to be applying for both spousal and their own retirement benefits. They’re given an amount equal to the larger of the two, and they lose the option of switching to their own benefits later, even if it would have been larger.

Those who wait until full retirement age had the option of filing a restricted application for spousal benefits only, which would allow them to switch later. Congress recently eliminated that option for those who haven’t turned 62 by the end of this year.

Q&A: Public pension and Social Security

Dear Liz: I am one of the thousands of adjunct faculty who teach in our nation’s colleges. We are paid on an hourly or per-class basis. We therefore earn a fraction of what tenured faculty earn. I am covered by a state teachers pension, but my anticipated benefit, even after 30 years of teaching, will not exceed $1,500 per month. I have qualified for a modest Social Security benefit of perhaps $1,000, accrued through years of part-time work as a student and graduate student. I have been told that my Social Security will be reduced because of my teacher’s pension.

Surely this cannot be correct. I understand that if I were collecting a generous state or military pension, I would not need Social Security. However, without my Social Security, my teacher’s pension will not even lift me above the poverty level. Isn’t there some sort of “means testing” before they slash your Social Security benefit?

Answer: You were informed correctly. When you receive a pension from a job that didn’t pay into Social Security, any Social Security benefit you did earn may be reduced (but not eliminated).
Before the creation of the Windfall Elimination Provision, people who received pensions based on earnings not covered by Social Security often got a proportionately larger benefit than those who paid into the system their entire working lives.

The Social Security site has a chart and a calculator to help you understand how your benefit might be affected. The chart shows that if you reached age 62 this year and you had fewer than 20 years of so-called “substantial earnings” covered by Social Security, your monthly benefit could be reduced by up to $413 or half of your teacher’s pension, whichever is less. Limiting the offset to half protects people who get small pensions from having too much of their Social Security benefit wiped out. Substantial earnings are wages equal to or above a certain amount each year ($22,050 for 2015) from jobs that paid into Social Security.

Based on the information you provided, your pension and Social Security income would total just over $2,000 a month. That’s not a lot, but the average Social Security check in 2015 was about $1,300. The poverty threshold in 2015, meanwhile, was $980 per month for a one-person household and $1,327.50 for a two-person household.

Q&A: 401(k) followup

Dear Liz: Your reply about what to do with a 401(k) after someone leaves a job was off base, in my opinion.

You advised the questioner to leave the 401(k) with the former employer until it could be rolled over to a new 401(k) with a new employer. Wouldn’t it be better to roll over the old 401(k) to an IRA? An IRA offers more control and better investment options than a 401(k).

Answer: More is not necessarily better. Some people appreciate the chance to diversify their investments by using a rollover IRA. Many others, however, have no need for thousands of investment options and in fact could be paralyzed by so many choices.

The investment options available for IRAs also can be more expensive than what’s typically available in large company plans. These 401(k)s often offer institutional funds with low expense ratios that are unavailable to retail investors.

Finally, 401(k)s have better protection from creditors than IRAs if the worker is sued or files for bankruptcy, although that won’t be an issue for the vast majority of savers.

People can protect an unlimited amount of money in a 401(k), while IRA protection is limited to $1,245,475.

Keeping an account with an old employer, or rolling it over to a new one, won’t be the right solution for everyone. But neither is an IRA rollover—despite what brokerage houses that profit from IRA rollovers may tell you.

Q&A: Brokerage accounts

Dear Liz: I have some questions regarding my brokerage accounts. What happens to my investments there if the brokerage company goes out of business? How much of my investments will I be able to recover and how? Also, does it matter if my accounts are IRAs, Roth IRAs, or conventional brokerage accounts?

Answer: Most brokerages are covered by the Securities Investment Protection Corp., which protects up to $500,000 per eligible account, which includes a $250,000 limit for cash.

Different types of accounts held by the same person can get the full amount of coverage. IRAs, Roth IRAs, individual brokerage accounts, joint brokerage accounts and custodial accounts could each have $500,000 of coverage.

So with an IRA, a Roth and a regular brokerage account, you would have up to $1.5 million in coverage.

If you have a few traditional IRAs at the brokerage, though — say, one to which you contributed and one that’s a rollover from a 401(k) — those two would be combined for insurance purposes and covered as one, with a $500,000 limit.

In addition to SIPC coverage, many brokerages buy additional insurance through insurers such as Lloyds of London to cover larger accounts.

It’s important to understand that SIPC doesn’t cover losses from market downturns. The coverage kicks in when a brokerage goes out of business and client funds are missing.

SIPC is commonly compared to the Federal Deposit Insurance Corp., which protects bank accounts, but there’s an important difference between the two.

The FDIC is backed by the full faith and credit of the U.S. government. SIPC has no such implicit promise that if it’s overwhelmed by claims, the government will come to the rescue.

Q&A: Social Security survivor’s benefits

Dear Liz: I am 64 and have been divorced over 22 years. My former husband passed away two years ago at the age of 62. Our marriage lasted more than 10 years and neither of us remarried. I went to the local Social Security office after he passed away, but the official there said I was not entitled to any claim for benefits on my ex’s work record. From what I have been reading, that may not be true. Are you able to clarify this for me? I am not able to get any firm answers, even from my financial advisor. My ex worked for a private employer his whole career, so he would have paid into Social Security. I recently lost my job, so the money would be helpful.

Answer: You qualified for benefits — but what the official may have meant was that you wouldn’t receive anything.

If you were still working at the time you inquired, any Social Security check would have been reduced by $1 for every $2 you earned over a certain amount ($15,120 in 2013). In other words, your benefit could have been wiped out had you earned enough. The earnings test ends at full retirement age (currently 66).

Survivor’s benefits are based on the amount that the deceased worker had been receiving if he’d started benefits or, if he hadn’t, what he would have received at full retirement age. The amount is reduced if survivors start benefits before their own full retirement age.

These benefits are available to both current and divorced spouses starting at age 60, or 50 if they’re disabled, or at any age if they’re caring for a child under 16 who is getting benefits based on the former spouse’s work record. To qualify for divorced survivor’s benefits, the marriage must have lasted 10 years. Your ex’s remarriage would not have affected this benefit. Neither would your own, since you were over 60 when he died.

Survivor’s benefits have more flexibility than spousal benefits or divorced spousal benefits, which are typically about half what the worker receives. You can switch from survivor’s benefits to your own retirement check, or vice versa, even if you start early. With spousal benefits, an early start typically locks you into a permanently reduced check.

You can start survivor’s benefits now or you can start your own benefit and switch to the survivor’s benefit at 66, if that would be larger, said economist Laurence Kotlikoff, who runs the claiming strategy site MaximizeMySocialSecurity.com.

You also need a new financial advisor — one who can be bothered to answer your questions. People who are retirement age should find advisors who are willing to put clients’ needs first and to educate themselves about Social Security claiming strategies.

Q&A: More on Social Security rule changes

Dear Readers: The changes Congress made to the “claim now, claim more later” Social Security strategy generated so many questions from readers that I’m devoting a second column to answering some of those queries. Next week, we’ll get back to the usual mix of personal finance topics.

Dear Liz: I am divorced after being married for 27 years and have not remarried. I was planning to file for early retirement benefits at 62 (I’m 58 now) on either my own or my ex-spouse’s record.

Then at full retirement age, I would switch to the other record, depending on which would be a larger monthly amount. Do the new rules affect early retirement claims the same as they affect suspended benefit claims?

Will I be able to file for early retirement benefits on the smaller payout, then change to the larger at full retirement age using the divorced spousal filing for one of the times?

Answer: The rules never allowed you to do what you’re proposing to do.

If you file for benefits before your own full retirement age, you’re deemed to be applying for both your own retirement benefit and a spousal benefit, and essentially given the larger of the two.

Your benefit would be permanently reduced because of the early start and you wouldn’t have the option to switch later.

The “claim now, claim more later” strategy that Congress targeted involved waiting until full retirement age (66 to 67, depending on your birth year) and then filing a restricted application for spousal benefits only.

That allowed you to collect an amount of up to half the benefit earned by your spouse or ex-spouse. Then you could switch to your own benefit at age 70, when it maxed out, if that benefit was larger.

The rules have now changed so that people who haven’t turned 62 by the end of this year, like yourself, will no longer be allowed to file that restricted application.

Dear Liz: I turn 66 next year. My wife is 63 and receiving Social Security benefits. When I turn 66, can I file a restricted application for spousal benefits?

Answer: Yes. People who are 62 or older by the end of this year still have the option to file a restricted application for a spousal benefit.

That is as long as the “primary worker” (in this case, your wife) is receiving benefits or was able to “file and suspend” before the May 1, 2016, deadline.

Filing for retirement benefits and then immediately suspending the application meant the filer’s benefit could continue to grow while still allowing the spouse to claim a spousal benefit.

Dear Liz: I was married for 23 years and divorced in 2009. I was told by the IRS about a year ago that when I turn 66, as long as I am still working I can collect half of my former husband’s Social Security until I turn 70. Is that still true with the new rules? I am 62.

Answer: You shouldn’t be asking the IRS about Social Security strategies. They have a hard-enough time answering people’s questions about taxes.

Your employment status has nothing to do with being able to get a spousal benefit.

When being employed matters is when you start Social Security benefits before full retirement age. If that’s the case, your check will be reduced by $1 for each $2 you earn over a certain amount (which is $15,720 in 2015 and 2016). That “earnings test” ends when you reach full retirement age (which in your case is 66).

Now, on to heart of your question — and the weird incentive Congress just gave people to get divorced.

Since you’re 62, you’ll still be allowed to file a restricted application for spousal benefits at 66.

If you’re still unmarried at that point, your spousal benefit will be based on your former husband’s earnings record. If you remarry, though, your spousal benefit will be based on your current husband’s record.

If you remarry, your husband will have to be receiving benefits or have filed and suspended by May 1 for you to receive spousal benefits. If you don’t remarry, your ex just has to be old enough to receive Social Security — 62 or above.

So married couples now have an incentive to split up, said economist Laurence Kotlikoff, coauthor of the book “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

If they divorce, one of them can put off starting Social Security benefits, but the other can start spousal benefits — something he or she couldn’t do if still married.

To qualify for divorced spousal benefits, the marriage had to have lasted at least 10 years, the divorce must be at least 2 years old, and the person applying for spousal benefits must not be remarried.

Q&A: The end of “claim now, claim more later”

Dear Readers: Congress just killed the Social Security strategy known as “claim now, claim more later” that allowed married couples to boost their benefits by tens of thousands of dollars.
The changes, which were part of the budget deal signed into law last week, also eliminated the option of getting a lump-sum payout if you suspended an application for benefits and later changed your mind. Today’s column will focus on those changes.

Dear Liz: My husband is 68 and drawing Social Security. I will be 62 in the spring and plan to retire. May I file for spousal benefits at 62 and delay filing for my benefits until my full retirement age of 66?

Answer: No.

Even before Congress changed the rules, you would have had to wait until age 66 to file for a spousal benefit first if you wanted to switch to your own benefit later (typically when it maxes out at age 70).

When you apply for benefits before full retirement age, you are deemed to be applying for both spousal and your own benefits and essentially given the larger of the two. Only when you reached full retirement age did you have the option of filing a “restricted application” for spousal benefits only.

If you were just a few months older, you would still have that option.

Congress has eliminated restricted applications for people born after 1953.

People who are 62 and older before the end of this year will still be able to file a restricted application at 66 and get spousal benefits, but only if their partners are either receiving benefits or were able to “file and suspend” — to file an application and suspend it before May 1, 2016.

That’s when the law’s grace period ends, eliminating people’s ability to file-and-suspend in order to trigger benefits for a spouse or child.

The potential payouts from using these two techniques, which together were called the “claim now, claim more later” strategy, were so great that advisors typically recommended that people tap their retirement accounts early if that was the only way they could delay their Social Security applications long enough to benefit.

Now that these strategies are off the table, people will need to take another look at their retirement strategies to see what makes sense.

In general, couples should try to maximize the larger of the two benefits they get, since that will be the amount the survivor has to live on.

Dear Liz: I am 65 years old and my wife is 63. We have enough savings so neither of us needs to start taking Social Security.

My plan is to file and suspend when my part-time job ends, which could happen starting a year from now. I believe my wife can file for spousal benefits then. Assuming we don’t need the money but at the same time wish to maximize our benefits, what’s the best way to proceed?

Answer: You may be one of the few couples who can still take advantage of the “claim now, claim more later” strategy, or at least the restricted application part.

If you’ll turn 66 before May 1, you can file and then suspend your application. That will preserve your wife’s ability to claim a spousal benefit when she turns 66 while allowing your own benefit to grow until it maxes out at age 70. Then she can switch to her own benefit at 70, if it’s larger than her spousal benefit.

If you’ll turn 66 after May 1, consider putting off your application until your wife turns 66. Once you start receiving benefits, she’ll be able to file a restricted application for spousal benefits only and then switch to her own benefit at 70.

Another possibility is that you could be the spouse to file a restricted application, but your wife would need to start her benefits early, which could stunt the amount you get overall.

Consider using Social Security claiming strategy software to evaluate your options, but make sure it’s been updated to reflect the recent changes.

At this point, most calculators seem to be using the old rules, although MaximizeMySocialSecurity.com, one of the leading options, promises to be updated by Nov. 16.

Dear Liz: I’m single and was never married long enough to qualify for spousal benefits. This change doesn’t affect me, right?

Answer: Wrong. File-and-suspend also could function as a kind of insurance policy for people, whether they were married or single.

Those who wanted to maximize their benefits could file and suspend their applications at full retirement age. If they later changed their minds, they could get a lump-sum payout back to the date of those applications.

But not for long. That option won’t be available to people who haven’t filed and suspended before May 1.

Q&A: 401(k) and job changes

Dear Liz: I had to resign from my job as a phlebotomist at a hospital. Did I lose the money that was in my 401(k) or do I still have it? How do I find out?

Answer: Any money you contributed to a 401(k) is yours.

Money contributed by your employer may be subjected to vesting rules that could limit how much you can keep. Company matches may vest over time, giving you access to a portion of what’s contributed each year, or they may vest after a certain number of years, giving you access to all the money.

Say your match vests at 20% each year starting with the second year. You would get nothing if you quit after the first year. After the second year, you would get 20% of the match balance (the company’s contribution thus far plus or minus any gains). After the third year, you would get 40% of the match balance, and so on until you are entitled to 100% of the match balance after the sixth year.

You should contact your company’s human resources department to find out what your options are for your account. You may be able to leave it where it is to grow, which may be your best option until you find another job.

At that point, your next employer may allow you to roll the account into its retirement plan. If you can’t keep the money where it is, open an IRA and have the 401(k) provider send the check directly there.

What you don’t want to do is withdraw the money, since you’ll lose a big chunk to taxes and penalties. Even having the check sent to you to deposit into the IRA is a bad idea, since 20% will be withheld, and you’ll have to come up with that cash from another source to avoid taxes and penalties.

Q&A: Missing 401(k) plan

Dear Liz: I have two 401(k) plans that have vanished into the night. They are both more than 20 years old and the companies I worked for have been bought, sold, merged, spun off, and nobody knows anything anymore. Between them, the accounts are worth six figures. Do you know of any way I can find out what happened to my money (and hopefully retrieve it)?

Answer: There’s no central repository for missing 401(k)s as there is for missing pensions, which typically can be found at the Pension Benefit Guaranty Corp. So tracking down your money can be tough.

If you still have paperwork from the missing accounts, you might check with the plan providers — the financial services companies that provided the investment choices.

If that’s a dead end, the U.S. Department of Labor’s Abandoned Plan Database shows plans that have been or are about to be terminated, typically with contact information for the plan administrator.

It’s possible that your money was turned over or escheated to a state unclaimed property department. You can check at Unclaimed.org, the official site of the National Assn. of Unclaimed Property Administrators. NAUPA also endorses the site MissingMoney.com.

Another place to check is the National Registry of Unclaimed Retirement Benefits, which is run by a private company called PenChecks that says it’s the largest private processor of retirement checks.

If you do find your money, understand that you may still have missed out on a lot of growth. Your investments may have been converted to cash, which has earned next to nothing in the last two decades, particularly after inflation.

Leaving a 401(k) account in an old employer’s plan can be a convenient option, but only if you’re willing to keep track of the money — and let the administrator know each time you change your address. If that’s too much work, you should roll the account into a new employer’s plan or into an IRA. Your retirement may depend on it.