Q&A: How Social Security survivor benefits work

Dear Liz: Will my wife, after I’m gone, be able to claim one half of my Social Security benefits because she is the surviving spouse? I am concerned and confused, because her monthly Social Security benefit is much larger than mine. Does that affect this aspect of the available benefit?

Answer: If by “gone” you mean “dead,” then no, that’s not how survivor benefits work.

When one member of a married couple dies, the surviving spouse does not continue to get two benefit checks. The survivor is given the larger of the couple’s two benefits. If she’s already receiving much more than you, then she will continue taking her own benefit and your checks will end.

The “one half” benefit is the spousal benefit, which is paid out while the primary earner is still alive. Typically when married people apply for Social Security, the retirement benefit they earned is compared with their spousal benefit, which is up to one half of what the other spouse has earned. (The amounts are reduced if the person applies for benefits before his or her own full retirement age.) The applicants get the larger of the two checks.

Spousal benefits also are available to divorced spouses, if the marriage lasted at least 10 years.

Q&A: Procrastination can mean estate-planning disaster

Dear Liz: My husband and I own all our assets as joint tenants. Because we have no children, we did not want to rush into making a will. But for the past few years, my husband’s older sister has been pressuring him to write a will benefiting her 60-year-old daughter.

His sister has gone so far as to ask my husband to send her a notarized list of all our assets, including bank accounts. He’s declined but she does not take “no” for an answer. He no longer communicates with her. It is our wish to benefit only the organizations and institutions that we already support. Although family members and relatives will not be named in the will, I wonder if his sister or anyone else can still try to claim an inheritance.

Answer: If you don’t stop procrastinating, everything you own may be inherited by that pushy sister-in-law. So get a move on.

Your jointly owned assets should pass to the other spouse when one of you dies, but when the survivor dies the property would be distributed according to your state’s laws if you don’t have a will or other estate plan. The laws of intestate succession typically put any children first in line, followed by parents. If you don’t have kids and your parents are dead, then siblings usually inherit.

People who would have inherited in the absence of a will typically have the “standing” or legal ability to challenge a will. Given your sister-in-law’s extreme sense of entitlement, you should count on her doing so. You should enlist an experienced attorney to help set up a will that can survive such a challenge.

Q&A: You need a planner for personalized advice

Dear Liz: I have five questions. I have enclosed five sheets of paper with each question printed at the top. Please feel free to simply write your advice on each page, and then insert them into the addressed and stamped envelope I have enclosed. This is my attempt to make it easy for you to respond.

Answer: Thank you, but it’s not the lack of paper or a stamp that prevents columnists from replying to private inquiries. Questions of general interest may be answered here, but you’ll need to seek out a financial advisor for personalized advice.

You have many options for finding fiduciary, fee-only advisors. Fee-only advisors accept fees only from clients rather than accepting commissions or other compensation based on products the advisors recommend. Fiduciaries are advisors who promise to put clients’ best interests first. The following organizations can connect you to fee-only advisors who are fiduciaries:

—The National Assn. of Personal Financial Advisors. NAPFA advisors must be certified financial planners (CFPs). Many NAPFA planners charge a percentage of the assets they manage (called an “assets under management” or AUM fee) and have minimum asset requirements, although some charge hourly or retainer fees. A typical fee is around 1% of assets under management.

—XY Planning Network. Advisors must be CFPs and offer the option of flat monthly fees, although they may offer other arrangements including hourly or AUM fees. Monthly fees are typically $100 to $200, with some planners charging an initial fee of $1,000 to $2,000.

—The Garrett Planning Network. Planners must be CFPs or on track to get the designation, or CPAs who have the personal financial specialist (PFS) credential. Hourly fees usually range from $150 to $300.

—Assn. for Financial Counseling and Planning Education. This group offers two credentials for advisors: accredited financial counselor (AFC) and financial fitness coach (FFC). Both focus on helping middle- and lower-income people get a handle on the basics, including budgeting, debt management and retirement planning. Counselors work with clients in financial crisis or who need help with spending plans, eliminating debt, building savings and improving financial stability, said Rebecca Wiggins, the association’s executive director. Coaches focus more on helping clients understand how effective money management can help them achieve life goals, with a focus on changing financial behavior using goal setting, accountability and monitoring, Wiggins says. Many counselors and coaches work for the military, credit unions or other organizations and offer their services free or at reduced cost. Coaches and counselors who have private practices typically charge $100 to $150, but many work on a sliding scale.

Q&A: A large foreign bequest could trigger U.S. taxes

Dear Liz: I have received an inheritance of $445,000 from a relative who died out of the country. Do I have to pay income tax on this money?

Answer: If you inherited from someone who was a U.S. citizen who lived abroad, then that person’s estate may be subject to U.S. estate taxes. The estate would have to be quite large, though. In 2017, estates worth less than $5.49 million per person were exempt from the tax. In 2018, the amount was raised to $11.18 million.

If you had paid any taxes on your inheritance to a foreign government, you could take a tax credit on your U.S. tax return for that amount.

Otherwise, you probably won’t owe any taxes. The federal government and most states don’t levy inheritance taxes on people who receive bequests. The exceptions are Iowa, Kentucky, Nebraska, Maryland, Pennsylvania and New Jersey, which do levy taxes on inheritances. All exempt spouses, and some exempt other immediate relatives.

Q&A: The dark side of reverse mortgages

Dear Liz: I have had a reverse mortgage on my condo since 2009, due to financial necessity. The interest rate on my mortgage keeps going up. Could the interest rate be reduced by changing lenders or would there be exorbitant fees involved in the process? My financial standing is not good, and I am in credit card debt. However, I do pay the minimum payment each month on each card. Being retired, I need some guidance on relieving the financial pressure I am currently experiencing.

Answer: Please consult a bankruptcy attorney.

Changing reverse mortgage lenders would indeed involve considerable expense and wouldn’t relieve any financial pressure because you don’t have to make payments on this kind of loan. (For those who don’t know, reverse mortgages allow people ages 62 and older to tap their equity in a lump sum, through a stream of monthly checks or via a line of credit. The debt grows over time, typically at a variable interest rate, but the borrower doesn’t have to make payments. The loan is repaid when the borrower moves out, sells the home or dies.)

If you can pay only the minimums on your credit cards, you probably have more debt than you’ll be able to repay. Some people manage to dig themselves out of such debt, often by working two jobs and dramatically cutting their expenses. They may use a debt management plan offered by a credit counselor to reduce their interest rates. Sometimes they sell their homes and use the equity to pay off the debt.

You can explore these options, of course, but chances are they won’t be a solution for you.

You may not be able to find a job, or have the stamina to work. Selling your home to pay off the debt would leave you without a house in your old age and may leave you without income, if you’re getting monthly checks from your reverse mortgage. If you borrowed a lump sum instead, your debt may have grown to the point where you don’t have much equity left anyway.

Your situation is one of the reasons many financial planners are leery about reverse mortgages. They can be an extremely helpful tool in retirement, but sometimes people use them as a way out of a financial jam without addressing the spending or other issues that got them into the jam in the first place.

Q&A: Credit scores come in many forms

Dear Liz: I am now getting my credit score from three different places: my bank, one of my credit cards and a free online site. Why are all three of the scores always different?

Answer: You don’t have one credit score, you have many and they change all the time. Furthermore, you’re probably looking at scores created with different formulas that may be using information from different credit bureaus.

The FICO 8 is the most commonly used score, but the number you see may vary depending on whether the data is drawn from Equifax, Experian or TransUnion credit bureau and when the score was created. Your scores will change as lenders update the information in your credit report. FICO scores may also be tweaked for different industries, such as credit cards or auto loans, and be on a 250-to-900 scale rather than the 300-to-850 scale of other FICO scores. FICO scores also come in different generations, so your FICO Bankcard Score 2 may be different from your FICO Bankcard Score 5.

Free sites typically offer VantageScores, created by the three bureaus to be a rival to FICO. These scores are also used by lenders, but not to the same extent as FICO scores.

Q&A: Here are some tips for getting more retirement money into accounts with tax advantages

Dear Liz: My wife and I are about 35. I’m self-employed and contribute to a SEP IRA. My wife contributes to a workplace retirement plan. We don’t qualify to contribute to Roth IRAs. In order to get more money into retirement accounts, would you recommend doing back-door Roth contributions? What else is there to do to get retirement money into accounts that will have a tax benefit now or later?

Answer: Roth IRAs don’t provide an upfront deduction, but withdrawals are tax-free in retirement. That makes them especially enticing to people who expect to be in the same or higher tax bracket in retirement — mostly higher-income people and good savers.

People who earn more than certain limits, however, are prohibited from contributing directly to a Roth IRA. For 2018, direct Roth contributions aren’t allowed for people whose modified adjusted gross incomes exceed $199,000 for married couples filing jointly or $135,000 for single filers.

Several years ago, however, Congress eliminated income limits on who was allowed to convert a regular IRA to a Roth IRA. That change created the back-door Roth strategy, in which a high-income taxpayer contributes to a regular IRA and then converts the money to a Roth.

The strategy works best for people who don’t already have a large IRA filled with pre-tax contributions and earnings. When you convert all or some of an IRA to a Roth, you have to pay a proportionate amount of income taxes on the conversion based on all of your IRA holdings. If you don’t have an existing IRA and don’t deduct the IRA contribution, you’ll owe little if any taxes on the conversion.

The IRS hasn’t specifically blessed or banned the back-door Roth strategy, so it remains somewhat controversial. Many investing and brokerage sites promote it. Some proponents, however, recommend letting several months pass between the contribution and the conversion. The idea is to avoid IRS scrutiny by making the transactions appear to be separate decisions rather than one clearly meant to get around the contribution limits.

If you want to stay out of gray areas and potentially contribute more cash to your retirement, consider setting up a solo 401(k). This version of the popular workplace plan is meant for self-employed business owners with no full-time employees other than themselves and their spouses. Plan participants under age 50 can contribute up to $18,500 a year. Those 50 and older can contribute up to $24,500. The plan can have a Roth and an after-tax contribution option in addition to a pre-tax option. In addition, the business can make a 25% annual profit-sharing contribution (or 20% if the business is a sole proprietorship or single member LLC). The combined maximum of participant and business contribution is $55,000 for those under 50 and $61,000 for those 50 and older.

If you’re able to contribute more than these amounts each year, consider a traditional defined-benefit pension. Those involve considerable set-up and ongoing costs, so consult a tax pro to see if it’s a good fit.

Q&A: Identify the goal for rolled-over account

Dear Liz: I retired from civil service in 2014. Upon retirement, I requested that my Roth IRA funds be sent to a bank. The funds have been earning 0.6% interest. Is it possible to move the funds to another bank or elsewhere to earn a higher rate? Or, should I leave the funds at the bank until an unforeseeable emergency occurs?

Answer: It’s not clear from your letter whether you withdrew money from your Roth or simply had the whole thing transferred from one custodian to another (the bank). Either way, you’re free to move your money elsewhere. If the money is still inside the Roth, you’d move the Roth. If it’s outside, you’d just move the funds.

Before you do anything, though, figure out your goal for this money. If it’s your emergency fund, then it needs to be kept safe and liquid. An FDIC-insured bank account is likely the best bet, and many online banks are offering somewhat higher rates than you’re getting now.

If you want this money to grow, however, you’ll need to take more risk with it. That typically means investing a portion of it in stocks and bonds. If that’s your goal, look for a discount brokerage or low-cost mutual fund provider. If you’re new to investing, books such as Kathy Kristof’s “Investing 101” or Eric Tyson’s “Investing for Dummies” could be helpful.

Q&A: At retirement, should you roll your 401(k) into your IRA? Think about these factors

Dear Liz: I turned 70 last week and therefore I am leaving my part-time job after about 13 years. No big deal, but now that I am retiring I have a 401(k) worth about $60,000 and an IRA that is somewhere around $50,000. Should I roll my 401(k) account into my IRA or just let it sit there collecting dust? I do understand that at age 70½ I am supposed to start withdrawing some of the funds, but am not sure how much. It seems 70 years creeped up on me.

Answer: Years have a nasty habit of doing that.

You mentioned that you’re retiring because you’ve achieved a certain age. Few jobs have mandatory retirement ages, though. If you don’t retire, you can continue putting off required minimum distributions from your 401(k). You would still have to take minimum distributions from your IRA, unless your employer allows you to roll that money into your 401(k) plan.

But we’ll assume you’re happy with your decision. Rolling your 401(k) into your IRA isn’t necessarily the best option. What you should do next depends on the details of both accounts.

Most large-company 401(k)s allow retirees to take regular distributions, including required minimum distributions, from the plans. These plans also tend to offer low-cost institutional funds that may be a much better deal than those you can access as a retail investor with an IRA. If you’ve got a good 401(k) that allows retirement distributions, there may be no need to move your money.

If your employer’s plan doesn’t allow such distributions, don’t automatically assume your current IRA provider is the best choice, especially if it’s a full-service brokerage or insurance company. Compare the fees of the investment options with what’s available from a discount brokerage. Transferring all your retirement money to a lower-cost provider can help you keep more money in your pocket.

Calculating your required minimum distributions isn’t difficult. The IRS has tables on its website, and in Publication 590, to help you figure out how much money to withdraw. Various sites have calculators as well.

One caveat: If you keep your IRA and 401(k) separate, you’ll have to calculate required minimum distribution separately for each account and withdraw those amounts from each account, says Mark Luscombe, principal analyst for taxes and accounting at Wolters Kluwer. That’s different from the rules when you have multiple IRAs. When you have more than one IRA, you calculate the required minimum distribution based on the total of all your IRAs but are allowed to take the distribution itself from any one of them.

Q&A: How to cut back after spending a windfall

Dear Liz: I inherited a substantial amount of money when a relative died. I put most of it in retirement funds, but as a few stray accounts were found, sometimes I just deposited them in my bank account and lived comfortably on $1,000 to $2,000 over my normal income. I have no debt, but I’ve grown accustomed to this extra cash. What’s the best way to reel back into a lifestyle I can afford on my $62,000 annual salary?

Answer: Those windfalls represented a substantial increase to your regular income, so cutting back may be painful. It’s so much easier to ramp up our lifestyles than to crank them back.

Start by tracking your spending. Once you understand your patterns, you can figure out where to cut back.

Don’t automatically assume that the luxuries you were able to buy with the extra money are now off limits. If you traveled more and enjoyed it, for example, that should still have a place in your budget. You could cut elsewhere to make sure travel is part of your life. If some of your spending didn’t bring you much joy, though, pay attention to that as well. You may have started eating out more only to find your health suffered, or you didn’t enjoy it that much, and you’d be fine doing that less often.

Your goal with any spending plan should be identifying which expenditures are important to you and which aren’t — then reducing the latter so you can have more of the former.