Get smart with your money
Dear Liz: I currently have a certificate of deposit with what I consider a reasonably high balance. I’ve named a beneficiary in the event something were to happen to me. Would there be tax consequences for the beneficiary upon receipt?
Answer: There’s no federal inheritance tax, but six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — do assess inheritance taxes. Spouses are typically exempt and the tax rate is generally lower for close relatives.
Dear Liz: My husband is 75 and started Social Security at 62. I am 68 and started Social Security at my full retirement age of 66. My Social Security benefit is the higher of the two. My financial planner says the rules on survivorship have changed. She believes that if I die first, while my husband can still claim my benefit, it will be reduced since he took benefits early. I have not heard of this before. Is this true?
Answer: No. His early start won’t affect his survivor benefit should you die first, because you were the higher earner. Had he been the higher earner, though, his early start could have penalized you.
It’s the higher earner’s benefit that determines what the survivor gets. When one of you dies, the smaller of your two benefits goes away. The survivor gets the larger of the two checks instead.
Obviously, losing a benefit can mean a significant drop in income. A larger survivor benefit can really help the remaining spouse make ends meet. That’s why it’s so important for the higher earner to delay filing if possible.
Your husband accepted a permanently reduced benefit when he applied for Social Security at 62. You got your full, unreduced benefit by waiting for your full retirement age. If you’d put off your application a bit longer, though, you could have received “delayed retirement credits” that would have boosted your check — and the eventual survivor benefit — by 8% each year until your benefit maxed out at age 70.
Abundant research has shown that most people are better off delaying Social Security if they can. In a November 2022 study for the National Bureau of Economic Research, three economists found that virtually all American workers ages 45 to 62 should wait beyond age 65 to collect and more than 90% should wait till age 70.
One of the three economists, Laurence J. Kotlikoff, has also written a book for the general public about Social Security claiming strategies, “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” Make sure to get the updated version because Congress changed some claiming strategies in 2015 (but not the ones that affect survivor benefits).
You might consider getting a copy for your advisor, or at least sending her a link, because she definitely needs to strengthen her knowledge of this vital program for retirees.
This week’s top story: Smart Money podcast on when to merge finances — or Not. In other news: How fresh tax credits, rebates can launch your eco home update, having a championship savings account, and age of AI: ChatGPT, Bard and how money advice might evolve.
Smart Money Podcast: When to Merge Finances — or Not
This week’s episode starts with a discussion on the risks of merging finances with your partner.
How Fresh Tax Credits, Rebates Can Launch Your Eco Home Update
Tax credits are available now for small home updates, while larger rebates are expected later this year or early next.
Do You Have a Championship Savings Account?
Championship savings accounts earn high rates, have low or no fees and maybe even offer a sign-up bonus.
Age of AI: ChatGPT, Bard and How Money Advice Might Evolve
Money News & Moves: Without specific information, chatbots provide generic if/then answers. But then, so do humans. What’s ahead?
Dear Liz: Are spousal IRAs a good idea for a couple when one spouse is retired but the other is working? I’m 63 and work full time. My husband is 76 and retired. I have a Roth IRA; he does not. I contribute the maximum amount to my IRA. If we create a spousal IRA for him, would we be able to contribute as if it were a regular Roth IRA?
Answer: Yes. Normally people must have earned income — such as wages, salary, commissions, tips or self-employment income — to contribute to an IRA or a Roth IRA. If you’re married and working, though, you can contribute up to the maximum amount on behalf of a nonworking spouse. In 2023, the maximum contribution for people 50 and older is $7,500. As long as you earn at least $15,000 ($7,500 times two), you can max out both accounts.
There’s no special “spousal IRA” account, by the way. Just open a regular IRA or Roth IRA in his name.
When Tom Snyder coaches people in his church about how to budget, he starts by encouraging them to track their spending.
“If we don’t track, we don’t know when to stop spending,” he says. The retired engineer and financial coach in Grand Rapids, Michigan, adds that it’s easy to be bumped off track by irregular costs, such as birthday gifts or vacations.
Successful family budgeting is all about staying flexible so you can handle those irregular costs as well as unexpected challenges, including sky-high grocery store prices or rising interest rates. Financial experts like Snyder say that by using creative methods to dial in a budget and trim costs in some areas, you can often still find ways to spend on what is most important to you.
In Kimberly Palmer’s latest for the Associated Press, learn family budgeting tips that actually work.
Dear Liz: My siblings and I are considering selling a triplex. It was bequeathed to us by our mother when she died in 2007. There is no mortgage and it is fully occupied. If we sell, my wife and I (both over 50) would get roughly $200,000, and we’d like to minimize the tax impact. We own our home free and clear and have no debt. We’d like to use this windfall to help our son buy a home. We’d also give our daughter a cash gift. We have no interest in buying another investment property using a 1031 exchange. Any suggestions to minimize our tax bill given our circumstances?
Answer: Talk to a tax pro, because selling a rental property is more complicated than selling your personal home.
You’re not eligible for the $250,000-per-person home sale profit exclusion, and in addition to paying capital gains tax you also face a depreciation recapture tax of 25%. (Depreciation is the amount of wear-and-tear you wrote off during your ownership of the property; the IRS requires you to repay that tax break when you sell.)
A big capital gain could affect other areas of your finances, such as Medicare premiums, and the pro can help you plan for that as well.
A 1031 exchange would allow you to defer taxes on a rental property by buying a similar replacement property.
Another solution would be to hang on to the property, continue to enjoy the rental income and bequeath your portion of it to your children when you die. Your portion will receive a favorable step-up in tax basis so that your heirs won’t owe taxes on the capital gains that occurred during your ownership. They also won’t face the tax on depreciation recapture you would otherwise owe.
But that obviously isn’t a good solution if you no longer want to be a landlord or want the cash instead. In that case, the tax pro can help you properly account for selling costs, legal fees and improvement expenses that could reduce the tax hit and may be able to suggest other ways to manage your tax bill.