Ask Liz Weston

Get smart with your money

Q&A

Q&A: Rebalancing your portfolio can trigger tax bills

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Dear Liz: Is there a tax aspect to rebalancing your portfolio? You’ve mentioned the importance of rebalancing regularly to reduce risk.

Answer: Rebalancing is basically the process of adjusting your portfolio back to a target asset allocation, or mix of stocks, bonds and cash. When stocks have been climbing, you can wind up with too high an exposure to the stock market, which means any downturn can hurt you disproportionately.

There definitely can be tax consequences to rebalancing, depending on whether the money is invested in retirement plans.

Rebalancing inside an IRA, 401(k) or other tax-deferred account won’t trigger a tax bill. Rebalancing in a regular account could. Investments held longer than a year may qualify for lower capital gains tax rates, but those held less than a year are typically taxed at regular income tax rates when they’re sold.

Tax experts often recommend selling some losers to offset winners’ gains, and “robo advisor” services that invest according to computer algorithms may offer automated “tax loss harvesting” to reduce tax bills.

Q&A: Feedback on a wedding conundrum

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Dear Liz: You recently answered a writer whose fiancee was facing medical debts and other financial concerns. I was surprised you didn’t address the expected cost of their wedding, which the writer said was $5,600. Although that seems quite modest compared with the average wedding these days, it’s still $5,600 that could go to other expenses.

My husband and I were poor, recent college grads when we married in 1985. We decided to see the judge, and we spent a three-day honeymoon weekend at a nearby beach hotel. Total cost was less than $350, including a new dress, a bouquet for me and a lapel flower for him. Our parents took us all out for a nice dinner with siblings and each of our best friends (best man and maid of honor).

Years later, when debts had been paid, we had a big party for our 10th anniversary. We made it almost to 30 years when I lost him to illness. It really comes down to whether you want a marriage or a wedding. I don’t regret our own choice.

Answer: Thank you so much for sharing your experience. Reliable statistics about how much people spend on weddings are hard to find, although the “averages” of $30,000 or more promoted by the wedding industry are probably inflated.

How much to spend is a personal choice, but weddings should be paid for in cash and with savings — not debt. When people already have significant debt, as this couple did, they would be smart to either postpone their celebration or scale it back to what they can afford to pay out of pocket.

Dear Liz: I’m hoping a portion of your answer was edited out when you answered the question about medical debt complicating someone’s wedding plans. Missing in your response is that modern couples pay equally for their own weddings.

Frankly, if he is fearful that he will have to make any financial contribution to his own wedding rather than have his future bride shoulder the entire burden, she should run screaming. She deserves a true partner, one who is equally invested, not one who is so selfish that he will let her deal on her own with the bad luck life throws at her and make her pay for their wedding. This is the kind of guy who will leave her and their child if they happen to have a medically fragile or disabled child because of the expenses.

Your first task should have been to point out that he should be paying half the wedding costs, and perhaps that $5,600 is quite reasonable. He sounds like he won’t be there “for better or for worse” but rather only when it doesn’t cause him any slight hardship or inconvenience.

Answer: People do make certain assumptions about many situations that often ought to be examined. In this case, you assumed that the letter writer wasn’t willing to shoulder any of the wedding costs, when that was not indicated. The letter writer was concerned about paying all the costs for the wedding.

You also assumed the letter writer was male, when that wasn’t indicated either.

People often do have different expectations about what marital finances should look like and who should pay for what. Those are matters that married people must work out for themselves.

Q&A: How to avoid the costly Medicare mistake that too many people make

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Dear Liz: My husband retired last year at 74. He had originally signed up for Medicare Part A and Part B. But during his employment, he cancelled Part B because of the company’s private health insurance. When he retired, we used COBRA to continue that insurance coverage for our family. (I’m not Medicare eligible, and we have a son.) Our COBRA coverage ends in a few weeks.

My husband was told he has to wait until January 2019 to enroll in Part B and will not have coverage until July 2019. He is ineligible for VA benefits and has costly medical expenses. I was able to get an Obamacare plan because coming off COBRA triggers a special enrollment period for me, but he cannot get coverage because he is Medicare eligible.

What a dilemma. No one told us when he retired that he should get back on Part B right away and not take the COBRA offered. Now, when he does get Part B, he will also pay a 20% premium penalty each month for life. We are shocked that the system works like this. Any ideas how to get out of this mess?

Answer: Your husband isn’t alone in misunderstanding the importance of signing up for Part B after retirement. Unfortunately, there’s probably no remedy.

For those who don’t know, Medicare Part A is the hospital coverage that’s provided to people 65 and older. They don’t pay premiums for this coverage. People do, however, pay premiums for Medicare Part B, which covers doctors’ visits and other medical costs. Those who are still working and covered by an employer’s plan often forgo Medicare Part B. Once their employment ends, though, they’re expected to sign up for Part B within 8 months or they pay a 10% premium for every 12 months they failed to sign up. They also have to wait for the regular Medicare enrollment window to roll around, which can leave them exposed to some hefty medical bills in the meantime.

“This is the biggest mistake people make and seriously this rule needs to be changed,” says Carolyn McClanahan, a physician and certified financial planner in Jacksonville, Fla.

There is a process known as “equitable relief” that allows people to request immediate enrollment and the waiving of the penalty, but you have to prove that the failure to enroll was the result of “error, misrepresentation or inaction” by a federal employee or anyone authorized by the federal government to act on its behalf, according to the Social Security Administration. So it’s not enough to inadvertently make a mistake. You have to prove you were misled. You can read more here: https://www.medicarerights.org/PartB-Enrollment-Toolkit/Equitable-Relief.pdf

Q&A: Waiting your way to better retirement benefits

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Dear Liz: You recently wrote, “When you apply for Social Security now, you’re ‘deemed’ (considered by the Social Security Administration) to be applying for both your own benefit and any available spousal benefit. If a spousal benefit is larger, you’ll get that, and you can’t switch back to your own later.”

I turn 62 in August and recently visited the Social Security Administration to apply for benefits. I worked for 20 years and earned a benefit of $1,400 a month if I waited to apply at 66. Since I was applying at the earlier age of 62, my benefit is lowered to about $1,000 a month. Half of my husband’s benefit is $1,300 a month but I was told my only choices are to take $1,000 at the earlier age of 62 or wait another four years and take my full benefit at $1,400.

What makes me incensed is that had I not worked at all, I would be eligible to take the higher amount of $1,300 spousal benefit at 62. This makes no sense!

Answer: No, it doesn’t, and it may be because you’re misunderstanding what you were told.

Your spousal benefit is half of your husband’s benefit only if you wait until your own full retirement age, 66, to take it. Social Security benefits are reduced if you start early.

If his benefit is currently $2,600, your spousal benefit now would be about 35% of that, or $904. Since your own benefit reduced for an early start is $1,000, you would get the larger of the two checks, or $1,000. If you wait until your full retirement age, you’ll get a substantially larger check — and it will still be bigger than your spousal benefit.

Q&A: How to ensure that assets end up with an heir — not that person’s spouse

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Dear Liz: What would be the ownership status of assets covered in our will and our retirement accounts when our heirs and beneficiaries receive them? In the case of married heirs, do the asset ownership laws of their state of residence dictate whether inheritance proceeds get held individually or jointly? In addition to having a candid conversation with our kids, we are debating the need for and risk associated with a revocable living trust to provide some assurance that our wishes be honored for our direct descendants to receive and manage any proceeds.

Answer: Inherited assets can be kept as separate property, even in community property states where assets acquired during marriage are typically considered jointly owned. Keeping property separate requires some vigilance, however. If an inheritance is deposited in a joint account, or joint funds are used to improve a separately owned house, those assets could become marital property.

Even if your heirs are scrupulous about keeping property separate, their spouses may ultimately inherit should your heirs die first. If those spouses remarry, the assets could wind up with another family, rather than with your grandkids.

If you want your assets to ultimately get to your grandchildren, there are a few ways to do that, such as bequeathing assets directly to them or through generation-skipping trusts. You can use either a will or a revocable living trust.

You’d be smart to talk to an experienced estate planning attorney about what you want and the best way to achieve those ends.

Q&A: Big severance creates a tax problem

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Dear Liz: My husband is being laid off with a severance package equal to seven months’ pay. What’s better for tax avoidance in California, a 529 college savings plan contribution or investing in an IRA?

Answer: A 529 college savings plan contribution won’t save you taxes in California. There’s no federal deduction for such contributions, and unlike most other states, California doesn’t offer a state tax break, either.

Your husband can contribute up to $5,500 to IRAs for each of you, plus an additional $1,000 per person if you’re 50 or over. Whether the money will reduce your 2018 tax bill depends on your income and whether you’re covered by workplace retirement programs.

If your husband had a 401(k) or similar plan, he would be able to deduct his contribution only if your modified adjusted gross income as a married couple filing jointly is under $101,000. A partial deduction is available until the tax break phases out at $121,000.

If you aren’t an active participant in a workplace plan, however, higher income limits apply. Your husband can make and deduct a spousal IRA contribution for you as long as your joint modified adjusted gross income is under $189,000. A partial deduction is available until the tax break phases out at $199,000.

Even if you’re able to reduce your taxable income with such contributions, you’ll still probably owe a sizable tax bill on this severance. Please consult a tax pro about how much of the money to put aside and whether you’ll need to make any payments before next year’s tax deadline.