Ask Liz Weston

Get smart with your money

Q&A

Q&A: Here’s why two 401(k) accounts aren’t better than one

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Dear Liz: I changed jobs more than three years ago and did not roll over my 401(k) when I started a 401(k) account with my new employer. I’m perfectly happy having separate accounts. However, I’ve read some IRS rules that I cannot understand about being penalized for not contributing to a 401(k) for five years. So my question: After turning 59½, will I face any sort of penalty or loss when I begin withdrawing funds from a 401(k) account that has been sitting idle?

Answer: There’s no penalty for not contributing to an old 401(k). In fact, you cannot contribute to an old 401(k). Once you leave the employer that sponsored the plan, you generally can’t put any more money into it.

What you may have stumbled upon are IRS rules that apply to employers who sponsor 401(k) plans that have a profit-sharing component.

Employers aren’t required to make contributions to these plans every year — there may be years when there’s no profit to share — but their contributions have to be “recurring and substantial.” If the employer hasn’t made contributions in three of the past five consecutive years, the plan could be terminated, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That obviously doesn’t apply to your situation, and if you want to continue managing two 401(k) accounts, you’re welcome to do so. But consider rolling the money into your new employer’s plan, if it’s a good one and accepts such transfers. That would mean one fewer account you need to track and also could give you access to more money if you wanted to take out a loan.

Q&A: IRA confusion leads to disappointment

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Dear Liz: Many years ago, I read in a personal finance magazine about a mutual fund company that paid $1 million to a customer who had an IRA for 40 years. So I started an IRA at that company in December 1992 and paid $10,000. As of today, that account is worth only $80,000. What happened to the high payoff?

Answer: First things first. The maximum you were supposed to contribute to an IRA in 1992 was $2,000. If you were able to contribute more, you may have opened a different type of account, such as a regular taxable brokerage account. Either that or you have some explaining to do to the IRS.

Also, IRAs hadn’t been around for 40 years in 1992. They were created in 1974 by the Employee Retirement Income Security Act. So what you probably read in the magazine was a hypothetical example of what someone might accumulate over time in an IRA. Someone who contributed $2,000 a year to an IRA for 40 years could wind up with $1 million, but only with returns in excess of 10%.

Actual returns historically have been closer to 8%, but that’s an average. Some years it’s less, some years it’s more. There are no guarantees. What you end up with depends on how you invested the money and what fees you paid, among other factors. If your investment had done as well as the broader stock market, as measured by the Standard & Poor’s 500, you would have over $100,000 by now.

If your money is in an IRA, you could move it to be a better investment, such as a low-cost, broad-market index fund, without tax consequences. If it’s not in an IRA, then selling the investment to buy another could generate a tax bill, so consult a tax pro before taking any action.

Q&A: The benefits of delaying Social Security

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Dear Liz: I retired and started collecting Social Security at 62. My husband is currently 68 and plans to retire next year. I called Social Security before I retired and they told me that I could collect Social Security at 62 and when my husband retired, I could collect my own Social Security or half of my husband’s, whichever was greater. Is this accurate? I should have done more research before taking my benefit as I’m not sure this is true.

Answer: It’s true. There’s a substantial penalty for starting early, and most people are stuck with a permanently reduced payment, but your situation is one of the potential exceptions.

You weren’t eligible for a spousal benefit at 62 because your husband hadn’t started his benefit. When your husband does start, the spousal benefit will be half of what he would have received had he applied at his full retirement age of 66. If you’re younger than your own full retirement age, the spousal benefit will be reduced to reflect the early start. If all those calculations result in an amount that’s more than what you collect, you’ll get the larger amount.

By waiting to start benefits, your husband gets delayed retirement credits equal to 8% for each year he has waited past his full retirement age. Spousal benefits don’t qualify to share those credits, but survivor benefits do. When one of you dies, the smaller of the two checks you receive as a couple goes away and the survivor receives the larger of the two benefits. The survivor’s check will be larger because your husband waited to apply.

This is why it’s so important for the larger earner in a married couple to delay filing for as long as possible. The higher earner’s benefit determines what the survivor will have to live on, often for years and sometimes for decades, after the first spouse dies.

Q&A: Taking out a reverse mortgage may help if coronavirus wipes out your job

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Dear Liz: I read with interest the letter from the person who was a tour guide and lost their job due to the virus. I kept reading, expecting you to suggest a reverse mortgage. Are these a bad idea?

Answer: Not necessarily. The person in question owned the home with a sibling, and the sibling did not live in the home, which could complicate the process of getting a reverse mortgage.

If there was substantial equity in the home, however, a reverse mortgage could pay off the existing mortgage and might be worth the effort. One way to investigate this option is to talk to a HUD-approved housing counseling agency.

Q&A: Balancing disability and survivor benefits

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Dear Liz: My 70-year-old husband is retiring at the end of the month. I’m 64 and collecting Social Security disability. If he should pass away before me, which is not likely considering my medical conditions, will I still get at least half of his Social Security income instead of my own, if it’s more than what I’m already collecting? I do understand that my disability benefit will stop at 65. I will then be collecting a regular Social Security benefit at my retirement age of 67. We are totally confused and trying to decide whether to forgo getting a retirement annuity benefit for me from his employer pension if he should pass before me.

Answer: Your disability benefit doesn’t stop at 65. It continues until you reach your full retirement age of 67, and then converts to a retirement benefit. The name for the benefit changes but the amount doesn’t.

If the amount you’re receiving is less than what your husband gets, and your husband dies first, you will get a survivor’s benefit equal to what he was getting. Survivors don’t get their own benefit plus their spouse’s; they just get the larger of the two benefits.

With pensions, it would be smart to get expert advice before you sign away your right to a survivor benefit. The default payout option for a married person is typically “joint and survivor,” which means the survivor would continue to receive the checks after the person dies. Opting for a “single life” payout instead increases the monthly check, but the money stops when he dies. While it may seem more likely you’ll die first, there are no guarantees and waiving your right to a survivor benefit could lead to a steep drop in your income.

The pension may offer different joint and survivor options, such as 100%, 75% and 50%. With the 100% option, the payments continue to be the same if he dies first. The 75% and 50% options reduce the payment after his death to 75% or 50% of the previous amount. Choosing 75% or 50% could be a decent compromise that allows you to get more money now but still get payments should he die first.

Q&A:The IRS doesn’t need your worry

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Dear Liz: My mother received a stimulus payment on behalf of my late father in April. Per an IRS directive on May 6, I returned the money to the IRS. As of Aug. 1, the check I sent has not been cashed. I have made two phone calls to the specific IRS phone number that deals with any stimulus payment issues and both times have been told, “Don’t worry about it.” Do you have any suggestions for us?

Answer: Yes. Don’t worry about it. And stop calling.

The IRS is dealing with a tremendous backlog that accumulated while its operations centers were shut down because of the pandemic. Although the centers have reopened, the pandemic is still affecting the agency and probably will do so for some time.

The IRS recently warned that “live assistance on telephones, processing paper tax returns and responding to correspondence continue to be extremely limited.” The IRS will cash the check eventually; your calls won’t speed that up and will unnecessarily tax an already overwhelmed system.

In the future, consider using the IRS’ online payment systems. They’re safer than sending checks in the mail and you’ll get instant confirmation that your payment was received.