Ask Liz Weston

Get smart with your money

Q&A

Q&A: Social Security and spousal benefits

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Dear Liz: My wife and I are both 66 and have not yet filed for Social Security. I don’t plan on filing until I am 70. Is my wife able to file for her own retirement benefit now, which is much lower than mine? And then when I file at 70 years, can she switch to the spousal benefit rate, without any type of penalty?

Answer: Yes and yes. This is one of the few instances in which people can still switch from one benefit to the other.

If you had already applied, your wife’s retirement benefit would be compared to her spousal benefit and she would get the larger of the two amounts. Since you haven’t applied, however, no spousal benefit is available. Your wife could receive her own benefit and then switch to the larger spousal amount once you apply at 70, when your own benefit has maxed out.

Also, as long as your wife has reached her full retirement age (66 years and two months, if she was born in 1955), she won’t face the earnings test if she continues to work. That test otherwise reduces benefits by $1 for each $2 earned over a certain amount, which in 2021 is $18,960.

Q&A: IRAs and tax considerations

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Dear Liz: I’ve been researching the backdoor Roth IRA and I am finding some conflicting information regarding taxes owed on the conversions. I have two sizable rollover IRAs and one small ($1,600) traditional IRA. Can I make an after-tax contribution to the traditional IRA and convert that to a Roth and pay tax only on that IRA or do I have to consider all three IRAs?

Answer: Sorry, but you have to consider all three. The tax on your conversion will be based on the pre-tax portion of all your IRAs combined, not just the IRA where you make your contribution.

Backdoor Roths allow people to get money into a Roth when their incomes are too high to make a direct contribution. Instead, they contribute to a traditional IRA and convert that to a Roth because conversions don’t have income limits. Conversions require paying taxes proportionately on your pre-tax contributions and earnings, however, so the technique may not be advisable when you have sizable pre-tax IRAs that will trigger a large tax bill.

Q&A: Seller financing and credit reporting

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Dear Liz: I bought a home and the seller financed the sale. I have made all payments on time, but that’s not reflected on my reports at the three credit bureaus. What can I do to get my mortgage payments acknowledged on my credit reports?

Answer: One of the advantages of seller financing — where the person selling the home is your lender — is that getting a mortgage can be easier than if you were to apply to a bank or business. Individuals, however, typically can’t report payments to the credit bureaus, so your payments won’t show up on credit reports.

If you’re trying to improve troubled credit, you can use other methods such as being added as an authorized user to someone’s credit card, getting a secured credit card or applying for a credit-builder loan from a credit bureau or online lender. If you were a renter, you also could subscribe to a rent-reporting service that would transmit your rent payment history to the bureaus for inclusion in your credit reports.

Here’s why emergency savings funds never go out of style

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Dear Liz: I was a fortunate individual and able to save enough money to cover my expenses for at least six months in case I became unemployed. Now I am retired with a fair amount of guaranteed monthly income through my Social Security and pension benefits. Any suggestion on what to do with that savings account now that it has served its purpose?

Answer: Emergency funds aren’t just for job loss. They’re also meant to cushion you against unexpected expenses. If you own a home, a car or a body, you’re likely to experience those in retirement, since all three tend to need repairs as they age.

If you’re new to Medicare or relatively healthy, you may not know that Medicare doesn’t cover all the medical expenses you’re likely to face. Medicare also doesn’t cover long-term care, which can be quite expensive if you eventually need help with daily living activities such as eating, bathing, dressing, getting around and using the bathroom. A study by Vanguard Research and Mercer Health and Benefits found that half of people over 65 will incur long-term care costs, and 15% will incur more than $250,000 in costs.

Q&A: Boosting Credit Scores

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Dear Liz: I’m frustrated with my FICO scores. At one point they were well into the 800s and now they languish in the 720 to 730 range. I have no debt — no mortgage or car loan — and fully pay off two credit cards monthly. I have millions (fact, not bragging) in assets with no liabilities. I don’t anticipate taking any loans but it is so odd to me. Why is this?

Answer: You likely had at least one installment loan, such as a mortgage or car loan, when your scores were near the top of FICO’s typical 300-to-850 scale. You can still have good scores without an installment loan — and you do — but the highest scores require you to have a mix of credit types.

You might be able to add a few points to your scores by paying attention to your credit utilization — the less of your credit limit you use, the better. Adding another card or two may ding your scores in the short run but also could add points long term.

Or you can just be happy as you are. As long as you continue to use your cards responsibly, you’ll continue to have scores that are “pretty enough for all normal purposes” — in other words, that will get you good rates and terms should you decide to apply for additional credit.

Q&A: Here’s a strategy to save for retirement in a rush

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Dear Liz: I’m hoping to retire in three years so I’m saving as much as possible. I’m maxing out my contributions to a 403(b) retirement plan, a 457(b) deferred compensation plan and a Roth IRA. I also contribute $1,000 each month from my paycheck to an after-tax defined contribution plan offered by my employer. A representative from the plan provider told me I should move the after-tax money into a Roth IRA via monthly rollovers as that will be “more tax efficient.” It means a monthly call, which I am happy to do if that is to my advantage. The rep explained it as “a backdoor Roth loophole” that allows one to contribute to a Roth IRA above and beyond the $7,000 limit. Is this advisable?

Answer: If your goal is to stuff more money into a Roth, then this could be a good way to do it.

Roths offer the option of tax-free money in retirement without minimum distribution requirements. That means you can leave the money alone to continue to grow tax free or use it to better manage your tax bill in retirement.

The ability to contribute directly to a Roth phases out with modified adjusted gross incomes of $140,000 for singles and $208,000 for married people filing jointly. People above those income limits can do a “backdoor Roth” by contributing to a traditional IRA and then converting the money to a Roth, since there’s no income limit on conversions. Taxes are owed on the portion of the conversion that represents pre-tax contributions and earnings, so this is usually a technique best used by people who don’t have big pre-tax IRAs.

The “mega backdoor Roth” puts this strategy on steroids. Instead of being held to the usual $6,000 annual IRA contribution limit (or $7,000 for people 50 and older), people make after-tax contributions of up to $58,000 a year to a workplace plan and then convert that money to a Roth IRA. The only tax owed would be on any gains the after-tax money earned between the time you contributed it and the time you converted it. You can have a big pre-tax IRA and still use this technique without that IRA triggering a lot of taxes.

While some plans require you to have left your job before you can make these rollovers, others — like yours — offer “in service” conversions that allow you to convert as you go, which can help minimize your tax bill. People who have to wait until they leave their job to convert will have to pay taxes on any gains the after-tax money has earned. Converting as you go minimizes the taxable gains and instead gets the money into the Roth so it can start growing tax free for you sooner. A monthly call seems like a small price to pay for this benefit, although sometimes the process can be automated. You might ask your employer if they could make that option available.

The $58,000, by the way, is the limit for all contributions to qualified plans. The money you contribute to your 403(b) and 457(a) is deducted from that limit, as are any matches your employer gives you. It’s typically a good idea to max out those pre-tax options, the way you’re doing, before you make any after-tax contributions.