Ask Liz Weston

Get smart with your money

Liz Weston

Delay collecting Social Security for a bigger benefit

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Dear Liz: My spouse started collecting Social Security in 2002 at age 63. I am 59, and not working, so my future benefits are unlikely to increase very much, even if I wait until age 70. If he dies before I do, will I get same amount he would be collecting at that time? If I collect Social Security at 62, would Social Security combine our records to calculate my benefit? In other words, should I try to wait or just start collecting at 62?

Answer: Your presumption that your benefit wouldn’t increase much by waiting is incorrect. Even if you aren’t working now, your benefit amount will grow the longer you can wait to apply. That’s true whether you ultimately get benefits based on your own work record or your husband’s.

When you apply, the Social Security Administration will compare your earned benefit with your spousal benefit and give you the larger of the two. Your spousal benefit starts at half of what your husband’s benefit would have been at full retirement age. That amount is reduced significantly if you apply for benefits before your own full retirement age (which is 66 for you, although it rises to 67 for anyone born after 1959).

Also, if you apply for spousal benefits before your full retirement age, you wouldn’t have the option of switching to your own benefit later, even if your benefit grows to a larger amount than what you’re receiving based on your husband’s record.

When your husband dies, you can switch to survivor’s benefits, which equal what he was receiving. Since he started benefits early, however, his checks have been permanently reduced to reflect that early retirement. In other words, if he had waited longer to retire, you would have been entitled to a larger survivor’s benefit.

The Social Security system is designed to reward people for delaying retirement, which is why it often makes sense to do so.

Get advice before transferring house deed

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Dear Liz: My mother will be 88 in August. She owns her own condo, which is worth about $95,000, and has $5,000 in life insurance. She is in good health and lives comfortably on a monthly pension. She wants to put her condo in the names of my brothers and myself. What is your advice?

Answer: This is probably a bad idea for a couple of reasons. You and your siblings wouldn’t get the “step up” in tax basis that would be available if you inherited the property. In other words, you might owe capital gains taxes when you sell that could have been avoided if you had inherited the property rather than received it as a gift.

A potentially bigger issue: Medicaid look-back rules. If your mom needs nursing home care, her eligibility for the government program that pays for such care could be compromised by such a transfer. Many elderly people transfer their homes to children hoping to “hide” the asset from Medicaid, but all such transfers typically do is delay the older person’s eligibility for help.

Before she does anything, take her to an elder-law attorney who can help her — and you — plan sensibly for her future. You can get referrals from the National Academy of Elder Law Attorneys at http://www.naela.org.

How to settle old debts

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Dear Liz: I defaulted on my credit cards starting in 2003 because my business was failing. The last account was charged off in 2007. My business is now back and doing well, and I am expecting a nice little windfall in a couple of months. Should I pay these amounts I owe to the collection agencies that have been calling me, or should I contact and pay the creditors from which I obtained the credit cards?

Answer: You can try contacting the original creditors, but most likely they will refer you to the collection agencies. The original creditors have long since taken a tax deduction for their losses and sold the debts to those collectors, so they typically can’t accept payment for these accounts.

The collectors probably paid pennies on the dollar to buy your debts. The older the debt, the less they probably paid. Keep that in mind as you’re negotiating settlements of these debts, because you don’t have to pay 100 cents on the dollar for the collection agencies to realize a considerable profit.

As part of your negotiations, you’ll want to make sure to get the collector’s promise — in advance of any payment from you, and in writing — that it will not resell any unpaid portion of the debt. You may still face a tax liability on this unpaid debt, however, because debt forgiveness is typically considered taxable income.

You also should try to get the collector’s assurance — again, in advance and in writing — that it will stop reporting the collection accounts to the credit bureaus. This won’t eliminate the damage the unpaid debts are having on your credit scores, because the missed payments and charge-offs will remain on your credit reports for seven years and 180 days from when the accounts first went delinquent. But eliminating the collection accounts could boost your scores a bit.

Be aware that in many states, your debts are too old for creditors to sue you in court over them–unless you do something like make a partial payment that can restart the so-called statute of limitations. You can read up on how statutes of limitations work at sites such as DebtCollectionAnswers.com, and learn how to conduct such negotiations without inadvertently restarting the statute.

Get a second opinion before buying annuity

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Dear Liz: Our advisor recommended that we convert our rollover IRA to an annuity. We are having difficulty researching this. Any suggestions?

Answer: Unless your advisor is a complete numskull, he probably didn’t mean you should cash out your IRA to invest in an annuity. That would incur a big, unnecessary tax bill.

The idea he’s trying to promote is to sell the investments within your IRA, which wouldn’t trigger taxes, and invest the proceeds in an annuity.

The devil is in the details — specifically, what type of annuity he’s suggesting. If he wants you to buy a variable deferred annuity, you should probably find another advisor or at least get a second opinion. The primary benefit of a variable annuity is tax deferral, which you’ve already got with your IRA. The insurance companies that provide variable annuities, which are basically mutual fund-type investments inside an insurance wrapper, tout other benefits, including locking in a certain payout. Those benefits come at the cost of higher expenses, which is why you want a neutral party — someone who doesn’t earn a commission on the sale — to review it.

If he’s suggesting you buy a fixed annuity, which typically provides you a payout for life, you still should get that second opinion. A fixed annuity creates a kind of pension for you, with checks that last as long as you do. There are downsides to consider, though. Typically, once you invest the money, you can’t get it back. Also, today’s low interest rates mean you’re not going to get as much money in those monthly checks as you would if rates were higher. Some financial planners suggest their clients put off investing in fixed annuities until that happens, or at least spread out their purchases over time in hopes of locking in more favorable rates.

You can hire a fee-only financial planner who works by the hour to review your options. You can get referrals to such planners from Garrett Planning Network, http://www.garrettplanningnetwork.com.

Watch out for tax refund theft

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Dear Liz: My cousin had his house broken into a little over a year ago. A lot of things were taken, but insurance replaced most of what he thought was missing. This year after he filed his return he was contacted by the IRS, which told him that a return using his information had already been filed and the refund check cashed. The IRS is investigating the situation now, but I really worry about what is going to happen to his Social Security in the future if someone else is using his numbers or those of his children. Do you have any information on what steps he should take?

Answer: Theft of tax refunds is a growing problem. In fact, tax identity theft is the No. 1 fraud on the IRS’ list of Dirty Dozen Tax Scams of 2012.

The fraud is often perpetrated by organized criminal gangs that con, steal or buy people’s personal information to create bogus returns. Some people fall right into the bad guys’ hands by responding to emails that purport to be from the IRS. (The IRS doesn’t email people to request personal or financial information.)

If the problem isn’t resolved within a few months, your cousin should contact the agency’s Identity Protection Specialized Unit at (800) 908-4490.

Since the criminals already have his Social Security number and other important financial information, he also should put security freezes on his credit reports at all three bureaus. Links to the bureaus and other information for identity theft victims can be found on the IRS’ site at http://www.irs.gov.

Don’t pay grandson’s credit card bills

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Dear Liz: I hope you can offer me some advice regarding a large credit card debt. My 28-year-old grandson is currently enrolled in college part-time and is employed. Over the last few years, he was not in school and unable to find work. He has, consequently, accumulated a total debt of $7,000 on his three credit cards. What would you advise him to do? He is paying the interest only on his debts as that is all he can afford.

Answer: Today’s minimum payments require credit card borrowers to repay a portion of principal along with the interest owed that month. If he truly is paying only interest, then he’s paying less than the minimum required and his credit scores have probably taken a big hit.

Let’s assume that he’s actually paying the minimums on his cards. He needs to increase his payments if he wants to work his way out of debt faster. That will require earning more income (by working more hours or taking a second job), cutting expenses or both.

Seven thousand dollars is not an insurmountable amount of debt, and certainly not something he should file bankruptcy over. But he may want to talk to a legitimate credit counselor about budgeting strategies or, if he’s really in a bind, a debt management plan that would allow him to pay the debt off over time at lower interest rates. He can get referrals from the National Foundation for Credit Counseling at http://www.nfcc.org.

What you shouldn’t do is offer to pay this debt, even if you can. Struggling to repay this debt could teach him not to carry balances in the future. If you pay the debt, the only thing he learns is that he can count on Grandma to bail him out of his own messes.