Get smart with your money
Dear Liz: My dad recently passed away. He was technically married, however his wife kicked him out of their home three years prior to his passing, making him homeless. Is she eligible to receive Social Security survivor benefits?
Answer: Social Security doesn’t try to gauge how married a couple was. As long as they were legally wed, she could be eligible for a survivor benefit.
Dear Liz: I sold some stocks from a Roth IRA to pay for some bad debts. Is this going to count as taxable income for this year?
Answer: You can always withdraw the amount you contributed to a Roth IRA without owing income taxes or penalties. For example, if you withdrew $10,000 but your contributions over the years totaled $10,000 or more, then you didn’t incur taxes or penalties.
You also won’t have tax issues if you withdrew more than your contributions but are 59½ and have had the account for at least five years. If you’re old enough but haven’t had the account long enough, you’ll pay income taxes but not penalties on the part of the withdrawal that exceeded your contributions — in other words, on the earnings.
If you’re under 59½, you could be subject to taxes and penalties on any earnings you withdrew. Please consult a tax pro for details.
Dear Liz: My husband died last year and we have three credit cards in his name with me as authorized user. When applying for new credit, do I still use his name or my name now? And should I remove his name and put my name only on all accounts?
Answer: You’ll apply for new credit in your own name, using your own credit history and income. If your credit cards are joint accounts, you can simply ask the issuers to remove your husband’s name.
Here’s the thing, though: Few credit cards these days are joint accounts. Typically there is a primary cardholder and an authorized user. When the primary cardholder dies, credit card issuers usually close the account, often within a few weeks.
Issuers normally find out about the death from the person settling the estate or from the Social Security Administration. Social Security, in its turn, usually learns about the death from the funeral home or from the person settling the estate.
It’s possible there has simply been an oversight, but you’ll want to make sure your husband’s death has been properly reported to Social Security and his creditors. If you are an authorized user rather than a joint account holder, you may find the card issuers will work with you to get replacement cards although you may have to settle for a smaller credit limit if your income has dropped (which is unfortunately a common situation for survivors).
Dear Liz: I have an IRA invested in stocks, bonds and Treasury bonds. I’m 60 now and am hoping to retire in a few years. When I stop work and start pulling money from my IRA, can I withdraw a security or Treasury bond? Or must I first sell the security or Treasury bond, and then withdraw cash? I ask because I’ve recently purchased 30-year Treasury bonds (as well as Treasury Inflation-Protected Securities, or TIPS). Once required minimum distributions kick in, I’d prefer not to sell a Treasury bond or TIP, if I don’t have to.
Answer: First, you should know that you have several years before your first required minimum distributions will be due. Because you were born after 1959, the age at which you’re required to start taking minimum distributions from most retirement accounts is 75. (The RMD age used to be 72, but it’s currently 73 for those born between 1951 and 1959 and 75 for those born in 1960 and later.) You can take penalty-free distributions from retirement accounts as early as age 59½, but the increase in RMD age can be advantageous for good savers who don’t need the money and want to allow their tax-deferred retirement funds to continue growing.
Most people take their required distributions in cash, but you’re allowed to take them “in kind” — in other words, you can transfer your stocks and other investments from your retirement account to a taxable brokerage account.
There’s no tax advantage to in-kind transfers and they can be tricky because the value of investments can change day to day, unlike cash, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. If the investments’ value on the day of distribution is less than your RMD, you’ll need to make up the difference in cash to avoid penalties.
Dear Liz: My son has decided to settle abroad and wants to purchase a home. I made a gift of stock valued at $17,000, which had significant gains. My broker indicated that giving him the stock would avoid capital gains on my part, and he could cash the stock in at that value, also without accruing capital gains. Our CPA is now telling him that he will, indeed, have to pay the capital gains. What’s the real scoop?
Answer: It shouldn’t be a scoop that the person who does taxes for a living gave you the correct answer.
When you gave your son the stock, you also gave him your tax basis — essentially, what you paid for the stock. Once the stock was sold, your son owed taxes on those gains.
Dear Liz: We paid a lot for our house, and a lot to renovate it seven years ago. My banker recommended taking a low-interest loan against our assets at the bank instead of selling investments to pay for the renovations, which cost $900,000. The bank offered a rate of prime plus half a point. Up until a year ago, this loan cost me about $1,200 to $1,600 per month. However, those payments have now jumped to about $5,000 per month. I’m selling stocks and bonds, on which I will have to pay taxes, to cover this amount. We have enough to pay off the loan, which is what my banker has suggested doing since interest rates have gone up so much. However, my wife and I are reluctant to liquidate so much in stocks and bonds. We would incur the tax consequences and it would not leave us as liquid as we would like to be. We love our house and neighborhood, and we are locked in a mortgage rate of 2.65% for another six years, so we are reluctant to sell. Any advice?
Answer: Your options aren’t great, but you already knew that.
As you’ve learned, variable-rate loans are inherently risky and better for short-term borrowing than for financing long-term debt. Interest rates stayed so low for so long that many people lost sight of the risk that affordable payments might not stay that way.
Interest rates are unlikely to plunge any time soon, but paying off the loan by selling investments could leave you house rich and cash poor. If interest rates do ease, you could regret having incurred unnecessary taxes — plus the investments you sell can’t earn you future returns.
Trying for a cash-out mortgage is another potential solution with significant disadvantages, given current high mortgage rates. Selling your home could be the best option if you can’t afford the property but may be an overreaction if you can.
The right solution will depend on the details of your financial situation. A fiduciary financial advisor — someone dedicated to putting your best interests first — could help you make a more informed decision about what to do next.
Dear Liz: You recently answered a question about divorced survivor benefits. Is the survivor benefit going to be 100% of what the deceased ex-spouse was receiving at death or 100% of the ex’s benefit at full retirement age? My ex-wife is 65, the marriage lasted 34 years, it’s been two years since our divorce and she’s planning to retire at her own full retirement age.
Answer: The last part of your question indicates you’re asking about divorced spousal benefits, not divorced survivor benefits … unless you’re reaching out from beyond the grave.
Here’s a quick primer. Spousal and divorced spousal benefits are available only while you, the primary worker, are still alive. Your ex could receive up to 50% of your benefit at full retirement age, assuming that benefit is greater than her own.
The rules change once you’re dead. Should you die before your ex, she may qualify for divorced survivor benefits. Divorced survivor benefits, like regular survivor benefits, are based on what you were actually receiving or had earned at the time of your death. If you died at 69 before beginning to claim Social Security, for example, your benefit would have earned at least a couple years’ worth of delayed retirement credits. Your ex could qualify for 100% of that enhanced benefit if she applied for it at her own full retirement age.
Your ex also would have the option of starting divorced survivor benefits and then switching to her own larger benefit later, or vice versa. She also could remarry at age 60 or later and not lose her benefit. By contrast, spousal and divorced spousal benefits end with remarriage, and people typically can’t switch between those benefits and their own.
Dear Liz: I know my spouse can get up to half of my Social Security benefit amount if it is greater than her benefit. I am planning to delay starting Social Security until age 70. Will my spouse get half of my benefit at my full retirement age (which is 66 and 2 months) or half of my (noticeably higher) benefit at age 70?
Answer: The former. Spousal benefits don’t earn the delayed retirement credits that will increase your own benefit by 8% annually between your full retirement age and age 70.
Survivor benefits are a different matter. Should you die first, your wife would be eligible for up to 100% of your benefit — including any delayed retirement credits you earned.
Dear Liz: I live in California and have been married for 20 years. My spouse bought our home before our marriage and my name is not on the title as a co-owner. However, I contribute to most of our monthly financial obligations which include paying the mortgage, property taxes, etc. In the event of death or separation, how much of the current home equity am I entitled to? This is our only and primary residence.
Answer: Normally, an asset that was purchased before marriage is considered separate property even in community property states such as California. But if the mortgage is paid down with “community funds” — money earned by either spouse during the marriage — then the spouse who isn’t on the title may be entitled to some of the appreciation that occurs after the wedding.
That may not prevent you from being evicted if your spouse dies, however, or having to fight an expensive battle in court if you divorce. Consulting an attorney now could help you better prepare for either possibility.
Dear Liz: What designation or instructions should I make for assets (if any) which remain in my health savings account at the time of my death? Do any remaining funds go directly to my estate or am I allowed to name a beneficiary for this money? If “yes” to the beneficiary question, is the beneficiary subject to the same 10-year payout requirement that applies to most other retirement account beneficiaries? I assume that if the funds go to my estate, the estate would pay tax on the funds given I’ve never paid tax on that money.
Answer: Yes, you can name beneficiaries for health savings accounts. But the tax advantages of these plans often disappear at death.
HSAs, which are paired with high deductible health insurance plans, are known for their rare triple tax benefit. Contributions are tax-deductible and balances can grow tax-deferred, while withdrawals for qualifying medical expenses can be tax free. HSAs don’t have the “use it or lose it” clause that applies to flexible spending accounts; balances can be rolled over from year to year and invested for growth.
What’s more, the withdrawals needn’t happen in the same year you incur the medical costs. As long as you keep good records of unreimbursed medical expenses, you can use them to justify tax-free withdrawals years or even decades in the future.
As a result, many people who can afford to pay medical expenses with other funds use their HSAs as a kind of supplemental retirement fund. There are no required minimum withdrawals, and it can be tempting to leave balances in an HSA as long as possible.
If you’re married and name your spouse as your beneficiary, that may not be a problem. Spouses who inherit HSAs can opt to treat the account as their own, which means they can make tax-free withdrawals to pay for qualified medical expenses.
Other beneficiaries, though, will be required to empty the accounts and pay income tax on the withdrawals. These withdrawals won’t be penalized, but they also can’t be delayed. By contrast, non-spouse beneficiaries typically have 10 years to empty most inherited retirement plan accounts.
If you don’t name a beneficiary, any remaining funds in the account will be paid to your estate and taxed on your final income tax return.
Copyright © 2024 · Balance Child Theme on Genesis Framework · WordPress · Log in