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Q&A: This retiree got a big surprise: taxes

January 6, 2020 By Liz Weston

Dear Liz: I’m 76 and retired. During the decades I worked, I contributed to my IRA yearly using my tax refund or having money deducted from my paycheck. No one told me I would have to pay taxes on this when I turned 70. For the past six years, I have been required to withdraw a certain percentage of this IRA money and pay taxes on it. Is there ever going to be an end to this? Do I have to keep paying taxes on the same money every year? And what about when I pass away, do my children have to keep paying?

Answer: Ever heard the expression, “There’s no such thing as a free lunch”?

You got tax deductions on the money you contributed to your IRA over the years, and the earnings were allowed to grow tax deferred. Those tax breaks are designed to encourage people to save, but eventually Uncle Sam wants his cut.

Also, you aren’t “paying taxes on the same money every year,” because the money you withdraw has never been taxed. Plus, you’re required to take out only a small portion of your IRA each year starting at 70½. The required minimum distribution starts at 3.65% and creeps up a bit every year, but even at age 100 it’s only 15.87% of the total. You can leave the bulk of your IRA alone so it can continue to grow and bequeath the balance to your children.

Your heirs won’t get the money tax free. They typically will be required to make withdrawals to empty the account within 10 years and pay income taxes on those withdrawals. Previously, they were allowed to spread required minimum distributions over their own lifetimes. Congress recently changed that to require faster payouts because the intent of IRA deductions was to encourage saving for retirement, not transfer large sums to heirs.

The Roth IRA is an exception to the above rules. There’s no tax deduction when you contribute the money, but the money can be withdrawn tax-free in retirement or left alone — there are no required minimum distributions. Your children would be required to start distributions, but wouldn’t owe taxes on those withdrawals.

Filed Under: Q&A, Retirement, Taxes Tagged With: q&a, Retirement, Taxes

Q&A: Credit scores measure Dad’s accounts, too

January 6, 2020 By Liz Weston

Dear Liz: I recently added myself onto my 95-year-old father’s two credit card accounts as an authorized user. I am his agent under a power of attorney and handle his finances. I noticed that after being added to those accounts, my credit scores increased. When he passes on, I plan to close those accounts. Will my credit score be negatively affected?

Answer: Possibly. Closing accounts doesn’t help your scores and may hurt them. Scoring formulas are sensitive to the amount of credit you have versus how much you’re using. Closing an account shrinks your available credit, and the formulas don’t like that.

If you have good scores and plenty of other open accounts, though, the damage from closing these accounts probably will be minor and short-lived.

Filed Under: Credit Scoring, Q&A Tagged With: authorized users, Credit Score, q&a

Q&A: When to claim a survivor benefit

January 6, 2020 By Liz Weston

Dear Liz: As a widower who just turned 60, what are the pros and cons of starting my survivor benefit now? My wife passed away at 55, after 20 years of marriage. My lifetime earnings are higher than hers. I am in good health and have not remarried (though I’m open to doing so). Finances are not an issue. I’m debating how long to continue to work. It seems my best Social Security approach is to claim the survivor benefit now, then later (perhaps at age 67 or 70) claim my own benefit. Your thoughts, please?

Answer: If you start any Social Security benefit before your own full retirement age, you will be subject to the earnings test that reduces your checks by $1 for every $2 you earn over a certain limit ($18,240 in 2020). So if you continue to work, it’s often best to delay starting benefits.

Your full retirement age is 66 years and 10 months if you were born in 1959. (It’s 67 for people born in 1960 and later.) Once you reach full retirement age, the earnings test disappears. You could collect the survivor benefit and leave your own alone to grow. Once your benefit maxes out at age 70, you could switch.

Filed Under: Q&A, Social Security Tagged With: q&a, Social Security, survivor benefits

Q&A: How deposit insurance limits work

December 30, 2019 By Liz Weston

Dear Liz: My parents, who are in their 80s, just moved and are about to sell their former home. Their net gain from the sale will be approximately $400,000. I am advocating they put this money in a high-yield savings account as capital preservation is key. I know an individual account is insured by the FDIC for up to $250,000. But if we set it up so they are joint account holders, would the FDIC insurance limit on that one account rise to $500,000?

Answer: Yes. The FDIC insures up to $250,000 per depositor, per institution and per ownership category. Ownership categories include single accounts, joint accounts, certain retirement accounts such as IRAs, revocable trust accounts and irrevocable trust accounts, among others. Each depositor in a joint savings account is covered up to $250,000, so a couple would have $500,000 of coverage.

Filed Under: Banking, Q&A Tagged With: banking, deposit insurance, FDIC, q&a

Q&A:Getting bum info from Social Security

December 30, 2019 By Liz Weston

Dear Liz: After taking Social Security early at 62, I have called, written and visited in person asking to have my benefit suspended so it can earn delayed retirement credits. Nothing has worked. Social Security representatives say I cannot change anything after the first 12 months.

I turn 66 this month and wanted to get this done.

Answer: The employees you’re talking to are confusing benefit suspension with application withdrawal.

As you know, Social Security benefits grow by 5% to 8% each year you delay between 62 and 70. Starting early can be an expensive mistake that permanently reduces the amount you receive over your lifetime.

There are two potential ways to fix the mistake. One is a withdrawal, where you rescind your application and pay back the money you’ve received. Withdrawals are a “do over” that resets the clock entirely on your benefit so that it’s as if you never applied. Withdrawals are only allowed in the first 12 months after your application.

A suspension, on the other hand, is when you ask Social Security to halt your benefit so that it can earn delayed retirement credits. You don’t have to pay any money back, but you also don’t get to reset the clock. Instead, the benefit you’re currently receiving is allowed to earn delayed retirement credits. You can only suspend your benefit once you’ve reached full retirement age. If you were born between 1943 and 1954, your full retirement age is 66.

Social Security explains how suspension works online in the retirement section. You might want to print that out and take it with you to the Social Security office. If someone again tries to tell you that suspension isn’t allowed, ask to speak to a manager. This is your right, and it could make a big difference in providing you a more comfortable retirement.

Filed Under: Q&A, Social Security Tagged With: benefit suspension, q&a, Social Security

Q&A: Here’s why one donation of $1,000 beats 10 donations of $100

December 30, 2019 By Liz Weston

Dear Liz: I want to support about 10 charities and nonprofits but have a limited budget of $1,000. I’ve been dividing it among those charities, but would I have a bigger impact contributing the full amount to just one?

Answer: Absolutely, for a number of reasons.

Each charity spends a certain amount to process your donation. The smaller the donation, the more of it is eaten up by these costs. If it costs $5 to process a donation, for example, the costs represent 5% of each $100 donation. If $1,000 went to one charity, just one fee would be incurred and it would represent just 0.5% of the total.

Any donation you give can trigger more appeals from the charity, so you’re potentially incurring 10 times the junk mail.

Wise donors also research charities using services such as GuideStar or Charity Navigator to make sure the bulk of their contributions go to the cause, rather than to executive salaries, fundraising and overhead. Monitoring 10 charities is a lot more work than keeping track of one or two.

You might also consider making monthly contributions, rather than waiting until the end of the year, since that helps charities budget. A direct debit from your checking account is often the best way to set this up, because using a credit card incurs transaction fees that reduce your contribution.

Filed Under: Q&A Tagged With: charitable contributions, q&a

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