Ask Liz Weston

Get smart with your money

Q&A

Q&A: Direct tuition payment pros, cons

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Dear Liz: You recently answered a question from someone whose parents misused trust funds intended for their child’s education. I chose to pay the colleges directly each semester once my grandchildren enrolled rather than give money to the parents. I decided that was the only way I could be assured the money went for what grandma intended.

Answer: Your grandchildren are fortunate to have a generous grandmother, but your strategy has some drawbacks as well as advantages.

Direct tuition payments aren’t considered gifts to the child, which means no gift tax return is required. Your payments could, however, reduce any need-based financial aid the children could get. Also, your approach requires that you be ready and able to make the tuition payments when the children reached college age. Your death or a financial setback could have turned your good intentions into an empty promise.

Q&A: Don’t fall for these common Social Security misconceptions

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Dear Liz: I decided to start taking Social Security benefits this summer when I turned 62. My monthly benefit is $1,809. My wife turned 62 at the end of last year and started her benefit of $841 a month. I just accepted an unexpected job offer that will pay me more than $130,000 a year. I suspect I should consider suspending my benefit at this point and work as many years with this company as possible. If I choose to suspend my benefits now and allow my benefits to remain suspended until my full retirement age of 66 years six months, I will pass up benefits of $112,000 over the next 4.5 years. Granted that amount will be overshadowed by the additional new income and the opportunity to contribute to a 401(k), but is it out of the question to continue my current benefit and just pay the 85% tax on the Social Security we receive each year in addition to our other income?

Answer: Social Security is complicated, so it’s not surprising that so many people get the details wrong. Unfortunately, those details can have a huge effect on financial well-being in retirement. The difference between the best claiming decisions and the worst can total more than $250,000, researchers have found.

Let’s start with the detail you need most: You don’t have the option right now of suspending your benefit. Only people who have reached their full retirement age can suspend. You can, however, withdraw an application within the first 12 months. You will have to pay back all the money you’ve received from Social Security, but then it will be as if you’d never applied. Your benefit can continue to grow by 5% to 8% each year until you restart your benefits or turn 70, whichever comes first.

Withdrawing your application is a good idea because otherwise your new job will offset all of your Social Security benefit.

Because you started Social Security early, you are subject to the earnings test and your benefit will be reduced by $1 for every $2 you earn over a certain limit, which in 2020 is $18,240. Your six-figure income would reduce your benefit to zero.

This earnings test disappears at full retirement age, and any money that was withheld because of it is added back into your benefit over time. In the meantime, however, you’ve given up the more valuable 5% to 8% growth in your benefit and reduced your survivor benefit as well.

Social Security taxation also works differently than what you’ve described. You never have to pay taxes equal to 85% of your benefit. If your income exceeds certain levels, then up to 85% of your benefit could be subject to taxation. (To illustrate, that means if you’re in the 10% federal tax bracket, you’d pay 10% on up to 85% of your benefit. It’s more complicated than that, but that may help you understand the difference between losing a huge chunk of your benefit and having to pay tax on a portion of it.)

Given all these complexities, it’s important for people to use a few Social Security claiming calculators before applying. Ideally, they also would consult a financial planner who’s been educated on Social Security claiming strategies.

Q&A: Finding income for widow and children

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Dear Liz: You recently answered a question from someone about Social Security survivor benefits for her grandchildren. The young father who died had been paid under the table, which meant his employment didn’t qualify the children for survivor benefits. It’s a long shot, but perhaps the young man filed his taxes as if he were self-employed, in which case his employment would count toward Social Security’s requirements. If no returns were filed, perhaps the family could consider preparing and filing the returns for the last several years. That could trigger a tax bill, but the cost probably would be outweighed by the potential benefits to these young children.

Answer: That’s certainly an option worth exploring with a CPA or tax attorney, especially if the father had a bank account or some other way to document the cash he received.

As mentioned in the previous column, Social Security survivor benefits can be paid to the children of qualified deceased workers until the kids turn 18 (or 19, if they are still in high school full time), but the worker needs to have paid into Social Security a certain length of time. The children’s mother also might be eligible for benefits, if she was married to the father. As a widow caring for the deceased person’s minor children, she would be entitled to benefits until the youngest child turned 16.

Q&A: Social Security doesn’t prevent working

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Dear Liz: I have a friend who is in her early 70s and earns income from her own business but she said that she also collects Social Security. How is this possible? I thought that a person cannot earn income from a job or self-employment while also collecting Social Security. Am I wrong?

Answer: Quite wrong.

Nothing prevents people from working while receiving Social Security. If they’re receiving benefits before their full retirement age — which is currently 66 — their checks are subject to the earnings test. That test reduces the amount they receive by $1 for every $2 they earn over a certain limit, which in 2019 was $17,640.

Once people reach full retirement age, the earnings test goes away and they no longer have to worry about its effect on their checks.

Q&A: A surprise pension creates investment concerns

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Dear Liz: Before my husband died, I encouraged him to find out if he had a pension. He worked for his company for more than 10 years and was vested, but he didn’t think he qualified. A few months after he died, I found an unopened letter stating he would receive a pension after he reached his retirement date. I contacted the benefit plan service center and submitted the required documents. I now have two options for receiving the money as his beneficiary: a lump sum or a single-life annuity that would pay a monthly benefit for my lifetime only. The lump sum could be rolled over into an eligible employer plan or traditional IRA, neither of which I have, or paid directly to me, in which case the whole amount is taxable. I am 65 and my only income is his Social Security survivor benefit and a small pension from my company when I retired. So what is the best thing for me to do?

Answer: Thank goodness you found that letter. It’s unfortunate your husband didn’t understand that “vested” meant qualified to receive a pension.

You don’t have to have an employer plan or an existing IRA to keep the lump sum from being taxed right away. You can open an IRA for the sole purpose of receiving the rollover. A bank or brokerage can help you set this up.

Any withdrawals would be taxed, but you wouldn’t be required to start taking withdrawals until you turn 70½. Even then, you would be required to withdraw only a small portion each year (a little less than 4% to start). You can always take more if you want.

Your income is low enough that taxes shouldn’t be driving your decision. Instead, consider whether you’d rather be able to tap the money at will or have more guaranteed income for the rest of your life.

If you don’t have other savings, you may want to have this pool of money standing by to use for emergencies and other spending. On the other hand, an annuity is money that you don’t have to manage and that you can’t outlive or lose to fraud, bad investments or bad decisions. If you have enough emergency savings, adding more guaranteed income could help you live a bit more comfortably.

Q&A: How Medicare, COBRA interact

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Dear Liz: You recently wrote about how Medicare coverage interacts with employer coverage. My husband will retire next year at age 65. His company has over 20 employees, so it’s considered a large company plan that won’t require him to sign up for Medicare. Is it better for him to elect family COBRA coverage for 36 months and defer Medicare coverage, since his company healthcare plan will be superior to Medicare? Can he elect Medicare coverage once COBRA terminates? Coverage matters more than costs.

Answer: He shouldn’t put off signing up for Medicare, because COBRA won’t insulate him from penalties.

The previous column mentioned that Medicare Part A, which covers hospital visits, is usually premium-free, but people generally pay premiums for Medicare Part B, which covers doctor’s visits, and Medicare Part D, which covers prescription drugs.

Failing to sign up when you’re first eligible for Part B and Part D typically means incurring permanent penalties that can be substantial. You can avoid the penalties if you’re covered by a large employer health insurance plan — but that plan must be as a result of current employment, either yours or your spouse’s. Once your husband retires, his employment is no longer current, so he should sign up for Medicare to avoid penalties.

If you or any other dependents need coverage, he may end up paying for additional insurance through COBRA on top of what he pays for Medicare. He can have both COBRA and Medicare for himself if his Medicare benefits become effective on or before the day he elects COBRA coverage. If he starts Medicare after he signs up for COBRA, his COBRA benefits would cease but coverage for you and any dependent children could be extended for up to 36 months. Another option to consider would be to cover you and any dependents using a plan from an Affordable Care Act marketplace. You may want to discuss your options with an insurance agent before deciding.

In fact, getting expert opinions is a must, because Medicare rules and health insurance in general can be so complex. Anyone nearing 65 also would be smart to discuss their individual situations with their company’s human resources department and then confirm the information with Medicare before deciding when and how to sign up.