Ask Liz Weston

Get smart with your money

Q&A

Q&A: Backdoor Roth IRA contributions

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Dear Liz: You mentioned in a previous column that a backdoor Roth contribution could be expensive if you have a large pretax IRA. I was in that situation, and opted to first roll my IRA into my employer’s 401(k). I then made a nondeductible contribution to a new IRA and shortly afterward converted it to a Roth. This allowed me to get money into a Roth without a big tax bill.

Answer: That’s a great solution for those who have access to 401(k) plans that accept such transfers, and many do.

For those who don’t know, backdoor Roths are a two-step process for people whose incomes are too high to contribute directly to a Roth. Instead, they contribute to a regular IRA and then convert that money to a Roth because there’s no income limit on conversions.

Taxes are usually owed on Roth conversions, based on how much pretax money you have in IRAs. But the conversion can be tax free if the contribution was nondeductible, you convert shortly after the contribution and you don’t already have a pre-tax money IRA.

Some questioned the legality of this particular loophole, but Congress blessed it in 2017 as part of the Tax Cut and Jobs Act of 2017.

Q&A: 2020 taxes bring another stimulus shot

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Dear Liz: My 2019 tax return was electronically submitted May 11 and my income was low enough to qualify for a stimulus payment. I got my refund at the end of July but was told I wouldn’t get a stimulus check because my 2018 income was too high. The IRS agent on the phone said I could request the money when I filed my 2020 taxes. But isn’t that past the deadline? The agent sounded like he was just trying to get me off the phone.

Answer: He probably was, but he gave you the correct information. The IRS used the tax returns it had on hand this spring when it started sending out stimulus payments. Since your 2019 return hadn’t been filed, it used your 2018 income to determine how much, if anything, to send you.

People who didn’t get checks or got too little aren’t out of luck. The stimulus checks were an advance payment of a credit that will be added to people’s 2020 tax returns. If you should have received a check but didn’t, you’ll get the full credit added to your refund next year.

Q&A: Why it makes sense to play the Social Security waiting game

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Dear Liz: I’m concerned that you don’t make it clear that in order for a Social Security benefit to grow, a person needs to keep working and earning the same income that they’ve been making. I’ve retired recently and am lucky enough to have a pension to live on. I talked to someone at the Social Security office recently. She recommended that I go ahead and start drawing my benefits now because there will be minimal growth for the next seven years if I’m not working. She says lots of people think that they should wait, no matter what. However, she says it doesn’t make sense if you’re not working. Even my personal financial advisor was recommending that I wait, but the person at the Social Security office convinced me otherwise. When you go on Social Security’s website to check your benefits, all the estimates are based on continued employment at your current salary. There’s no way to check and see what your estimates are if you are working less or not at all. I think it’s important to give the whole story.

Answer: Yes, it is, and you didn’t get the whole story — or even correct information — from the Social Security employee who convinced you to ignore your financial advisor.

Benefits grow by 5% to 7% each year you delay starting between age 62 and your full retirement age, which is between 66 and 67, depending on the year you were born. After your full retirement age, your benefit grows by 8% each year you delay until age 70, when it maxes out. That guaranteed growth happens regardless of whether you continue working or not.

You are correct that Social Security’s estimates of the dollar amount you’ll receive assume you will continue working until you apply, so it’s possible that your benefit will be somewhat lower when the agency actually calculates your first check. But that doesn’t mean you won’t benefit from the delay — you just won’t benefit quite as much as they’re estimating.

If you want to get a better idea of what your benefit will look like without additional earnings, you can use an online tool like Social Security Solutions or MaximizeMySocialSecurity.

Your financial advisor probably has access to similar tools, as well as a wealth of research about the best claiming strategies that make it clear most people are better off delaying. Plus, your advisor knows the details of your personal financial situation.

The woman at the Social Security office did not. Even if she had her facts straight, she should not have been giving you advice about maximizing your benefits.

You may still have time to rectify this mistake. You can withdraw your application within 12 months and pay back the money you received to reset the clock on your benefits. If it’s been longer than 12 months, you can suspend your benefit once you reach your full retirement age and at least get the 8% delayed retirement credits for a few years.

Q&A: Retirement funds and creditors

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Dear Liz: I keep reading conflicting things about 401(k)s and IRAs. If I roll over my 401(k) from my previous employer into an IRA, is it still protected from creditors? I’ve left it in the old 401(k) plan for now because I’ve read IRAs can be seized in lawsuits or bankruptcy, or alternatively that only $1 million is protected and the rest could be at risk. I’ve read that if I leave it in the 401(k), the whole amount is protected. Can you please help clear up this confusion so I can make a wise decision?

Answer: Your 401(k) is protected from creditors, full stop. Federal law bans creditors from taking money in a pension plan that was set up under the Employee Retirement Income Security Act (ERISA), and that includes 401(k)s as well as traditional pensions.

Your IRA is protected in bankruptcy court up to a certain amount, currently $1,362,800. Whether creditors outside of bankruptcy court can access your IRA funds depends on state law. In California, for example, there’s no specific dollar amount.

If a creditor wins a judgment against you and goes after your IRA, a court would decide how much of the account was necessary for your support and protect that. The rest could go to the creditor.

Q&A: Missing refund update

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Dear Liz: Thank you for including my previous email about a missing tax refund in your recent column. Just to update you, on Aug. 20 I checked the IRS “refund status” website and lo and behold, it showed they had received my mother’s paper return, processed it, and even approved the refund (with $3.59 interest no less)! The check is to be mailed on Aug. 27. So for those concerned about the delays: The IRS will indeed get to them eventually and, as you’ve previously advised, there is no need to call them and check. Their backlog is massive, so let’s keep them working on that.

Answer: Thanks for the update!

Q&A: Where’s that tax refund?

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Dear Liz: Like the writer in a recent column, I received a stimulus check for my late mother and dutifully mailed the IRS a check as the agency requested on May 6. The check finally cleared on Aug. 12. So, yes, the IRS will absolutely eventually cash it. However, I’m still waiting for the federal tax refund for my mother’s final tax return, which I mailed on April 20. I figure if it took them over three months to just cash a check, it’ll be at least a couple more months, if not longer, to process the return.

Answer: You’re probably right, and — as the previous column emphasized — the IRS does not need calls from people about non-urgent matters as the agency slowly works through its massive backlog. If you can wait to talk to the IRS, in other words, you should.