Ask Liz Weston

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Liz Weston

Q&A: Avoiding Medicare late enrollment penalties

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Dear Liz: I have taken multiple in-person and online educational classes about Medicare prior to my 65th birthday. What I learned from these classes was that the law demands people register for Medicare Part A when we turn 65 whether we are working or not. Like the woman in your column, I also work full time and do not plan to retire until 70 (at least that is my new target date). At the time of my retirement I will apply for Medicare Part B and purchase supplemental insurance.

Answer: It’s wonderful that you made the effort to educate yourself about Medicare, which can be incredibly complicated. However, you got the wrong lesson about what’s required, since there’s no law that forces people to sign up for any part of Medicare, including Part A, which covers hospitalizations and which is typically premium-free.

The reason most people should sign up at age 65 has to do with penalties. People who delay signing up for Medicare Part B, which covers doctor’s visits, or Part D, which covers prescriptions, can face permanent, lifetime premium penalties unless they qualify for certain exemptions. One of those exemptions is having qualifying health insurance coverage from a job, either your own or your spouse’s. You can find more details at https://www.medicare.gov/basics/costs/medicare-costs/avoid-penalties.

Q&A: Dealing with credit challenges

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Dear Liz: I felt you should have corrected the person who said they felt like a loser because heavy credit card usage lowered their credit scores. I went through a period of poor credit after I was diagnosed with amyotrophic lateral sclerosis (ALS). It took about nine months to get our financial footing again. My scores are on the mend now, but at no point did I feel like a loser. In fact, I am very proud of how I and my family responded to this challenge. Many people are hit with misfortune that is no fault of their own. Often they are truly winners with how they respond. I hope you take the opportunity to make a comment about how bad credit doesn’t make a person a loser. That often the best of us are revealed by how we deal with it instead.

Answer: The original letter writer was making a wry comment about their situation, writing that their husband “thinks it’s funny he has great scores and I look like a loser!”

But your point about people being more than their credit scores is well taken.

Q&A: Delaying Social Security benefits

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Dear Liz: I reached my full Social Security age (66) in December 2020. I’ve been waiting until age 70 to start benefits so I can get the 8% annual delayed retirement credits and maximize my benefit. However, if the 2023 cost of living increase will be 10.5%, should I go ahead and start benefits this year, at age 68? Does someone need to be on Social Security for a full year before being eligible for the COLA, or would one month be enough?

Answer: Your benefit will get the cost of living increase whether you’ve started receiving checks or not. In fact, it’s been getting those increases since you turned 62 and became eligible. So applying now just means giving up two years’ worth of delayed retirement credits.

Friday’s need-to-know money news

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Today’s top story: The other big student loan news: changes to repayment. Also in the news: How to prepare your money and mind for a breakup, 4 travel card perks that may not be as valuable as you think, and what California’s phase-out of fossil fuel cars could mean for you.

The Other Big Student Loan News: Changes to Repayment
Experts note that this change is likely to benefit women and borrowers of color most.

How to Prepare Your Money and Mind for a Breakup
Breaking up sucks — even if it’s necessary and you’re better off without them.

4 Travel Card Perks That May Not Be as Valuable as You Think
Some benefits of your travel credit card still pack savings, but the value might be dwindling.

What Could California’s Phase-Out of Fossil Fuel Cars Mean for You?
New state regulations would require all new cars, trucks and SUVs sold in California to be zero emissions by 2035. The impact of the changes will be felt around the nation.

Thursday’s need-to-know money news

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Today’s top story: 3 reasons not to tap your home equity right now. Also in the news: How much an abortion cost, how to tell if you’re eligible for student loan forgiveness, and what the difference between a recession and a depression is.

3 Reasons Not to Tap Your Home Equity Right Now
Borrowing against the value of your home is tempting, but consider your overall financial picture first.

How Much Does an Abortion Cost?
Abortion costs roughly $750 or less in the U.S., but access depends on factors such as where you live and how long you’ve been pregnant.

How to Tell If You’re Eligible for Student Loan Forgiveness
If you have debt from federal student loans, this is your lucky day—maybe.

What’s the Difference Between a Recession and a Depression?
There are multiple factors that contribute to these financial downturns.

Q&A: Is the ‘tax torpedo’ coming for you? Here’s what you need to know

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Dear Liz: I am pondering the best time to begin drawing Social Security. I have no debt, am 61, retired and fortunate enough to have retirement funds that are projected to last until I’m 95 without Social Security. That said, when I begin drawing Social Security, I understand I am likely to get taxed at the full 85% rate based upon the monthly income I receive. Does it make sense to hold off on applying until 67 or later knowing that I’ll be taxed more on the higher income, or should I draw sooner, understanding the tax liability would be less? Or, when I begin receiving Social Security, would I cut back on the amount of retirement funds I receive monthly?

Answer: The way Social Security benefits are taxed is somewhat convoluted and easy to misunderstand. Just to be clear: You would never lose 85% of your Social Security benefit to taxes. But if you have income outside of Social Security, up to 85% of your benefit can be taxable at your regular income tax rates.

The taxes are based on what’s known as your “combined income,” which is your adjusted gross income plus any nontaxable interest plus half of your Social Security benefits. If you’re single and your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If your combined income exceeds $34,000, you may owe tax on up to 85% of your benefits.

If you’re married filing jointly, combined income between $32,000 and $44,000 could trigger taxes on up to 50% of your benefit. If your combined income is more than $44,000, up to 85% of your benefit may be taxable.

Because of this unusual structure, people can face what’s known as a tax torpedo, which is a sharp rise and then fall in their marginal tax rates. If your income is high enough, you won’t be able to avoid the tax torpedo.

However, many middle-income people can mitigate its effects by delaying Social Security and drawing down their retirement funds instead. You can get some understanding of how this works by searching on the phrase “tax torpedo.”

For a more in-depth analysis, search for the research paper by William Reichenstein and William Meyer titled “Understanding the Tax Torpedo and Its Implications for Various Retirees.”

Consider discussing your situation with a fee-only financial planner who can model different scenarios and give you personalized advice.