Ask Liz Weston

Get smart with your money

Q&A

Q&A: Social Security benefits for exes

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Dear Liz: I divorced after three decades of marriage, and my ex remarried before age 60. If I understand Social Security’s rules correctly, that remarriage disqualified my ex from claiming a survivor’s benefit based on my work history. Here’s my question: If my ex’s current spouse dies before he does, does that then make him eligible to claim a survivor benefit on MY work history? I am retired and collect my Social Security benefit; he too is retired and presumably collecting his.

Answer: Yes. If your ex is widowed, he typically would have the option of taking a survivor benefit based on his most recent spouse’s work history, or a divorced survivor benefit based on your work history, instead of his own benefit. His choice would not affect how much you receive.

Q&A: Their 529 college savings plans have a problem: The students graduated. Now what?

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Dear Liz: My adult children both have money left in 529 accounts that I control as well as uncashed savings bonds given by generous grandparents. We were able to get them through college without needing the funds, but neither has decided to continue with graduate education and the funds have been stranded because of the high tax rate on non-education use. With the recent rule change for 2024, we plan to start converting the 529s into Roth IRAs, but this will take several years as we understand the contribution limits. Can you please discuss the IRA conversion process and make suggestions for cashing or converting the mature savings bonds to minimize the tax burden?

Answer: As you may know, interest on savings bonds isn’t subject to state or local taxes. Federal tax can be paid annually on savings bond interest, but most savers defer paying tax until the bonds are cashed in or reach final maturity, which happens 30 years after their issue date. Savings bond interest can be tax free if used for qualified education expenses, but there are a number of restrictions. For example, bond buyers must be 24 or older; if the bonds were registered in the children’s names, the qualified education exemption wouldn’t be available. (See IRS Publication 970 for details.)

You have more options for preserving tax-free use of the 529 funds. Starting next year, you’ll be able to roll up to $7,000 from each child’s 529 into a Roth IRA for them. The child must have been a beneficiary on the 529 for at least 15 years and contributions made within 5 years, plus their earnings, aren’t eligible to be rolled over. Any amounts they contribute to their own IRA or Roth IRA would reduce the amount you could roll over.

You can continue annual rollovers up to the Roth IRA contribution limit until a total of $35,000 has been transferred. The rollover must be direct or “trustee-to-trustee” — don’t ask the 529 plan to send you a check.

If you have money left over in the accounts after these rollovers, you could consider changing the trustee to a relative of the beneficiary. Eligible relatives include the child’s spouse, children and other descendants, parents and ancestors, in-laws, cousins, aunts, uncles, nephews and nieces and spouses of those relatives.

Even if you decide to pull the money out and pay the penalty, the taxes may not be as exorbitant as you fear. You’ll typically pay income tax and a 10% penalty, but only on the earnings, not the original contributions.

Q&A: Here’s how a health savings account works. Spoiler: It can be a stealth retirement fund

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Dear Liz: For the first time, I signed up for a high-deductible insurance plan along with a health savings account. However, I don’t quite understand a couple of key concepts. When our medical bills roll in, will we pay using our personal credit card or the HSA card provided by my employer? We have no trouble using our personal card but is that the right way to use an HSA — by not using it, in effect? Also, I read that the unused HSA funds can be invested to grow tax-deferred. How does the money get invested? Does my employer have a relationship with a specific broker? Or can I invest unused HSA funds with any broker?

Answer: If you want your HSA balance to grow for retirement, then paying your medical bills out of pocket is the way to go. If you use your credit card to pay medical bills, however, make sure you can pay off the balances in full. The benefits of an HSA would be diluted if you were paying double-digit interest rates.

If you do need to access your HSA funds, you can use your employer-provided card to pay medical bills or submit receipts to the HSA administrator for reimbursement.

As you probably know, HSAs offer a rare triple tax break. Contributions are pre-tax, your account can grow tax-deferred and withdrawals for qualifying medical expenses are tax-free. Because the account can be invested and balances rolled over from year to year, many people treat their HSAs as an additional way to save for retirement.

Your employer has chosen an HSA provider that typically will offer some investment options, but usually you can transfer your balances to a different provider if you wish. Compare fees, minimum balance requirements and investment options. If you decide to move your account, ask your current provider to set up a “trustee-to-trustee” transfer.

Q&A: Transferring bonds after a spouse dies

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Dear Liz: In 2001 I bought $50,000 worth of I Bonds. Half of them were in my name with my wife as beneficiary; the other half were in her name with me as beneficiary. She died two years ago but I do not want to cash her bonds in. How do I get them in my name without selling and repurchasing?

Answer: You can have the bonds reissued in your name alone because you were named as the beneficiary. The reissued bonds will be in electronic form, so if you haven’t already, you’ll need to create an account with TreasuryDirect, which is operated by the U.S. Department of the Treasury. If you have questions, you can reach the site’s call center at (844) 284-2676 from 8 a.m. to 5 p.m. Eastern time Monday through Friday.

Q&A: Explaining required minimum distributions

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Dear Liz: When my wife reached age 59½, we initiated required minimum distributions for all of her retirement funds. During the process, the investment company representative stated that as long as she was still working and contributing to her 401(k) and 403(b) at work, she was not required to take RMDs for those accounts. With all the changes lately in those types of accounts, is that still the case, or has the law changed?

Answer: Minimum distributions have never been required at age 59½ from any retirement fund. That’s the age at which people no longer have to pay penalties for accessing their retirement funds, not the age at which they must start taking money out.

The current age at which retired minimum distributions must begin is 73, and it rises to 75 for people born in 1960 and later. If your wife is still working at that point, she can put off RMDs from the retirement plans sponsored by her current employer. RMDs will still be required on other retirement accounts, such as IRAs and 401(k)s or 403(b)s from a previous employer. The other RMD exception is for Roth accounts, which don’t have RMDs for the account owner.

Generally you want money to stay in tax-deferred retirement accounts as long as possible. Unnecessary distributions just increase your tax bill and can reduce the amount you have to live on later in life.

If your wife has already taken a distribution, she has 60 days to roll it over into an IRA and avoid taxation.

Tax law can be confusing and mistakes can be expensive. Please use this experience as a reason to hire a good tax pro who can answer your questions and ensure you don’t make another potentially expensive misstep.

Q&A: Transferring a house to heirs

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Dear Liz: We are updating our estate plan to account for the transferral of our home to our six children when we die. The home currently has a large mortgage balance on it. We would prefer that it not have to go through probate, and that any outstanding mortgage balance would not be immediately due. I know there are various options for the transferral, all with pros and cons. Do you have any recommended best practices for our situation?

Answer: Yes. Discuss the situation with an experienced estate planning attorney, who can give you personalized advice. Estate planning can get complicated fast, and expert guidance is typically worth the cost.

Your attorney probably will suggest creating a living trust to avoid probate, the court process for settling an estate. Another way to avoid probate in many states is a transfer-on-death deed. The deed can be a solution for smaller estates, but the trust allows you to transfer other assets in addition to your home, provides for the administration of your estate and helps you plan for incapacity, as well.

You probably don’t need to worry about your lender immediately calling in your loan. Your mortgage may include a clause that technically makes the full balance due if the home is sold or transferred. While the estate is being settled, though, inheritors typically are protected from these clauses by state and federal law as long as payments continue to be made. Your attorney can provide more details on the protections in your state.

With a living trust, your successor trustee will be able to access other funds in the trust to make the payments while the estate is being settled, said Jennifer Sawday, an estate planning attorney in Long Beach. With a transfer-on-death deed, the heirs would be responsible for making the payments.

Inheritors often can assume a mortgage, but having six people own one house would be unwieldy, at best. Most probably, the best solution would be to have the estate continue to make the mortgage payments until the home is sold.