Ask Liz Weston

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Liz Weston

Q&A: Paying a grandchild’s student loans

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Dear Liz: Regarding the grandparent who would like to pay off a grandchild’s student loans.

You wrote that paying off the loans would be considered a gift. However, if the grandparent paid the funds to the institution that originated the student loan, would it then not be a gift? This would exempt the grandparent from filing the gift tax return.

Answer: You may be thinking of the unlimited exception for a family member’s medical expenses or education. Unfortunately, payments made to a student lender aren’t included in this exception.

Normally, any gift that’s larger than the annual gift exclusion limit — which is currently $17,000 per recipient — would require filing a gift tax return. Gift taxes aren’t due, however, until the amount given away over the annual limits exceeds the lifetime gift and estate exemption limit (which is currently $12.92 million). Clearly, someone has to be quite wealthy, and quite generous, before gift taxes are a concern.

But even the necessity to file a gift tax return can be avoided for larger gifts if you’re paying someone else’s education or medical expenses. The unlimited exception for these expenses, however, applies only to tuition payments made directly to the educational institution and payments for medical care made directly to a healthcare provider. Payments to other parties, such as lenders or insurance companies, aren’t included in this exception.

Q&A: Pensions and Social Security benefits

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Dear Liz: I am a teacher getting ready to retire. I have been collecting a spousal benefit from my husband’s Social Security. My understanding is that once I start collecting my pension, I will be subject to the windfall elimination provision. Is there a way to continue to collect against my husband’s Social Security, which is greater than my own Social Security benefit?

Answer: Because you will be receiving a pension from a job that didn’t pay into Social Security, you’re subject to two provisions: the windfall elimination provision, which can reduce but not eliminate your own Social Security benefit, and the government pension offset, which can reduce or eliminate any spousal or survivor benefit.

If the GPO wipes out your spousal benefit, you may still get at least a portion of your own benefit. Claiming strategy sites such as Maximize My Social Security and Social Security Solutions could help you estimate the effect of those provisions.

Q&A: How to dump your broker and invest your own money

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Dear Liz: I have a mutual fund and a Roth IRA that are actively managed by a broker. The accounts have not done well. I would like to withdraw them from the broker and reinvest them on my own. How do I safely and securely withdraw them from the broker? What paperwork and fees should I expect?

Answer: Look through your records to find the agreement you signed with the brokerage when these accounts were opened. The agreement may include the steps for closing the account along with any fees. You also could try searching for the name of the brokerage and “account closure fees” to see what, if anything, you might owe.

The brokerage may give you the option to manage the account on your own, or you may want to set up accounts at a new, less expensive discount brokerage. Once the accounts have been opened, your new brokerage will help with the transfers. If any of your money is invested in “proprietary funds” — that is, investments offered only at the old brokerage — those investments probably would have to be sold first. Such a sale wouldn’t incur any tax consequences with your Roth IRA. If your mutual fund is proprietary, though, its sale may incur capital gains taxes.

7 saving strategies you may not have tried yet

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With the holiday shopping season just starting and prices of many consumer goods continuing to rise, saving money can seem impossible. But those financial pressures also make doing so even more important.

“Saving is your margin,” says Eric Maldonado, a certified financial planner and owner of Aquila Wealth Advisors. “When things happen — your car breaks down or there’s a layoff, or smaller stuff like gifts for the holidays — you have something to fall back on.” Maldonado notes that saving can also allow you to have money for fun things.

The personal savings rate for Americans has been dropping in the last few months, and as of July was 3.5%, according to the U.S. Bureau of Economic Analysis.

Maldonado recommends aiming for a savings rate closer to 20% of your take-home income. “You can live off of 80% and put 20% toward deferred gratification,” he suggests.

That guidance matches the popular 50/30/20 budget, which suggests putting 50% of your take-home income toward needs, 30% toward wants, and 20% toward savings and any debt payments. “If you’re just starting out, then it can be too daunting, but you can work toward it,” Maldonado adds.

In Kimberly Palmer’s latest for the Seattle Times, learn 7 saving strategies you may not have tried yet.

This week’s money news

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This week’s top story: The home and auto insurance crisis and how to keep your coverage. In other news: 5 options if you’re crushed by student loan and credit card debt, why Delta’s elite status changes matter, and 8 Latino financial influencers to follow in 2023.

The Home and Auto Insurance Crisis and How to Keep Your Coverage
What good is insurance if you can’t afford it? More people across the U.S. are finding out.

5 Options if You’re Crushed by Student Loan and Credit Card Debt
Make the most of the 12-month on-ramp period by coming up with a debt-payoff strategy.

Ask a Travel Nerd: Why Delta’s Elite Status Changes Matter
Delta is adopting requirements that raise the bar to earn elite status, leaving loyalists annoyed — and for good reason.

8 Latino Financial Influencers to Follow in 2023
Latino financial experts offer advice for building trust in financial systems, generational wealth and how financial institutions can better serve their communities.

Q&A: How to tap an unused 529 college savings plan without getting taxed

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Dear Liz: I opened a 529 college savings plan for our son and over the years it grew. My son was fortunate to receive a full-ride academic scholarship and therefore much of the money stayed in the plan. Recently my son became a new father to my first grandchild. I know that it is permissible to give five years’ worth of tax-free giving in setting up a new 529 plan for a child. My question is: Can I transfer five years of annual gift-tax-free giving ($85,000) to my grandchild from the account originally set up for my son without incurring a gift tax obligation?

Answer: You’re worrying about the wrong taxes.

Few people need to be concerned about gift taxes, since someone would have to give away more than the current gift and estate tax lifetime limit for any gift to be taxable. That limit is currently $12.92 million.

The annual gift tax exclusion limit is the amount you can give away without having to file a gift tax return. The 2023 limit is $17,000 per recipient, and 529 college savings plans allow you to give up to five years’ worth of annual exclusions at one time, or $85,000. (If you are married, you and your spouse can give up to $170,000.)

A 529 college savings plan can have only one beneficiary at a time, however. With few exceptions — and we’ll get to one of those in a moment — withdrawals are tax free only if used to pay qualified education expenses for the plan’s beneficiary. So the transfer you’re proposing would incur income taxes and penalties.

You can, however, change the beneficiary of the 529 plan to your grandchild. As long as the new beneficiary is a family member of the current beneficiary, there will be no tax consequences, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. The IRS’ definition of family includes the beneficiary’s spouse, children or other descendants, parents or other ancestors, siblings and in-laws, along with aunts, uncles, nieces, nephews and first cousins and their spouses.

You may want to wait a few years, however. Starting in 2024, you’ll have the option to roll up to $35,000 from a 529 to a Roth IRA for your son, subject to annual contribution limits, Luscombe said. If next year’s IRA contribution limit is $7,000, for example, that would be the maximum you could roll into the Roth for the year. Your son also would have to have earned income equal to the amount rolled over.

Taking advantage of this option could be a great way to help your son build tax-free income for retirement before you switch the beneficiary designation to benefit your grandchild.