Social Security for “Under the Table” Work?

Q: A good friend of mine is quickly approaching retirement age but has always worked “under the table” as a housekeeper or nanny. She hasn’t been able to save much over the years and she’s getting a little too old to scrub floors or chase after toddlers. Is there any way she could qualify for Social Security benefits?

A: If she’s married and her spouse has paid into Social Security for at least 10 years, she could claim a benefit based on his work record. If she’s not married now but was married for at least 10 years to someone who paid into the system, she could also qualify.

Otherwise, she’s pretty much out of luck.

This is why workers–and household employers–should avoid under-the-table arrangements like the plague. The short-term savings on taxes have real and long-term implications for people’s lives.

529 as Tax Shelter?

Q: I was confused about a statement you made regarding penalties on withdrawals from 529 college savings plans. You mentioned a 10% penalty on withdrawals that aren’t used for qualified education expenses but didn’t say whether the penalty applies to the entire withdrawal or just the earnings.

If it’s just the earnings, why should I care about the penalty? Even if I don’t use the money for education, I’d still be ahead because the money had a chance to grow tax-deferred.

A: That would be a heck of a loophole, wouldn’t it? But, alas, it doesn’t exist.

It’s true that only the earnings in your 529 are subject to the penalty, not your original contributions. But you’ll also have to pay regular income taxes on any gains that you withdraw.

The combination of taxes and penalties effectively eliminates the 529 as a tax shelter for most folks unless the money is used for education — or unless they’re in a much lower tax bracket when they withdraw the money than they were during the years in which the gains were accrued.