Ask Liz Weston

Get smart with your money

Q&A

Q&A: Social Security windfall elimination provision

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Dear Liz: You’ve written about the windfall elimination provision, which reduces the Social Security checks of people who get a pension from a job that didn’t pay into Social Security. I am affected by this provision, but a Social Security representative told me that as long as I don’t start withdrawals from my government pension account, I am entitled to full Social Security payments. This ends when I turn 701/2 years old and must start taking automatic withdrawals from my pension. This info might help with the planning process.

Answer: Thank you for sharing this tip. The windfall elimination provision was enacted to keep people with government pensions that didn’t pay into Social Security from receiving proportionately more than people who paid into the system their entire working lives. But as you note, it’s possible to delay the provision by putting off the start of pension benefits.

Social Security can be complex, and claiming strategies that might work for one person could shortchange another. That’s why it’s important to educate yourself and seek out advisors who understand how Social Security works.

Q&A: Social Security and marriage

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Dear Liz: My partner is 69 and receives about $800 monthly from Social Security. I am 66 and receive about $1,100 from Social Security. We are not married but have been living as such for the past 10 years. We own our home together. Does it make sense financially for us to marry?

Answer: When one of you dies, the survivor will have to get by on one Social Security check. If you were married, it would be the larger of the two checks you received as a couple. Unmarried survivors keep their own checks and lose their partners’ benefits, even if the partners’ benefits were larger.

One reason not to marry would be if either of you qualified for spousal benefits based on a previous marriage, and those benefits were greater than what you’re receiving now. Many people don’t realize that divorced people can receive spousal benefits based on an ex’s work record, as long as the marriage lasted at least 10 years and the ex is at least 62. Divorced spousal benefits end, however, when the recipient remarries.

Divorced people who were married at least 10 years also may qualify for survivor benefits if their exes have died. Unlike spousal benefits, however, survivor benefits can continue if the recipient remarries after reaching the age of 60.

Q&A: Invest or pay down mortgage?

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Dear Liz: I usually finish the month with $1,000 to $2,000 left over after expenses to invest. My savings are with a money manager who has conservatively invested in a diversified portfolio. Given the uncertainty of the market, does it make any sense for me to start using that monthly excess to pay down the balance on my 15-year mortgage rather than continue to invest? The mortgage has about 91/2 years to go with a balance of just under $75,000. One added point: I would like to retire in about five years.

Answer: It’s time to talk to a fee-only financial planner who can review your entire financial situation and offer personalized advice. The planner can give you a better idea if you’re really on track to retire within five years. If you are, then paying down the mortgage may be an excellent use of the money. Having a paid-off home will reduce your monthly expenses, which in turn can reduce how much of your retirement funds you’ll need to tap.

Before you prepay a mortgage, though, you should make sure all your other financial ducks are in a row. In addition to saving enough for retirement, you should have paid off all your other debt, accumulated a decent emergency fund (at least six months’ worth of expenses) and be properly insured.

Q&A: Using Roth IRA earnings for a first-time home purchase

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Dear Liz: My 29-year-old son recently married, and as a gift I pledged $20,000 as a down payment on a house. My daughter-in-law is beginning a career as a registered nurse and I know they will not be buying for a few years. Is there any type of account that will grow tax-free or tax-deferred for a first-time buyer? Maybe I could gift this money to them into a retirement account for the time being?

Answer: You may be able to give them enough money to fund Roth IRA accounts for both 2015 and 2016. They would be able to withdraw those contributions tax- and penalty-free at any time in the future for whatever purpose they wanted.

Withdrawing earnings from a Roth can trigger taxes and penalties, but that’s not likely to be an issue in this case. Each person is allowed to withdraw up to $10,000 in Roth earnings for a first-time home purchase. If they plan to buy a home within a few years, it’s highly unlikely that your gift would generate enough earnings to cause concern.

The ability to contribute to a Roth begins to phase out for married couples filing jointly at modified adjusted gross income of $183,000 in 2015 and $184,000 in 2016. Assuming their incomes were below those limits, they each can contribute up to $5,500 per year to a Roth. The deadline for making 2015 contributions is April 15, 2016. If you give them the money now, they could fund two years’ worth of contributions at once.

Q&A: Best savings vehicle for a baby

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Dear Liz: I recently gave birth to a little boy. I am wondering about the best savings vehicle that would offer flexibility for when family gives him money. I don’t want to tie it up in a 529 college savings plan in case he doesn’t want to go to college or has other needs.

Answer: If you want your child to have a reasonable shot at a middle-class lifestyle in the future, some kind of post-secondary education will be necessary. It may not be a four-year degree; it could be a one- or two-year training program, and a 529 college savings plan can help pay for that. Money contributed to a 529 plan grows tax-deferred and can be used tax-free at nearly all colleges, universities and community colleges as well as many career and technical schools.

You will remain in control of the account and can withdraw money for other purposes if necessary, although you would owe income taxes and a 10% federal penalty on any gains.

If you really can’t accept any limitations on how the money is used, then you can open a brokerage account in your own name and invest the money there. Putting the money in his name could hurt his chances for financial aid if he does decide to go to college.

Q&A: Authorized credit card users

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Dear Liz: I have read that only the primary cardholder is responsible for the balance on a credit card, not the authorized user (such as a spouse). When that primary cardholder dies, there is no obligation for an authorized user to pay off the balance. Is this accurate? What would prevent someone whose primary cardholder is near death from racking up purchases and then, after the primary cardholder dies, refusing to pay it?

Answer: In a community property state such as California, spouses typically are both responsible for debts incurred during the marriage. In all states, the deceased spouse’s estate would have to pay all creditors before any leftover money was doled out to survivors. So a spouse who went on such a spending binge wouldn’t come out ahead, unless the primary cardholder was broke and left no estate.

Other authorized users might have no such restraints, however. Anyone who thinks an authorized user might pull such a stunt would be smart to take that person off the card before it becomes an issue.