Ask Liz Weston

Get smart with your money

Q&A

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.

Q&A: Getting spousal benefits after divorce

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Dear Liz: When I retired at 63, my husband had been on Social Security for several years. We had been divorced about six months at that time. Should I have been bumped up to his benefits? We had been married for 42 years.

Answer: You wouldn’t get an amount equal to his benefit if he’s still alive — that’s called a survivor’s benefit, and it’s only available after his death. But you could get a spousal benefit of up to half of his check if that amount is larger than your own retirement benefit.

Both spousal and survivor benefits are available to divorced spouses if the marriage lasted at least 10 years. Neither benefit reduces what your ex or any subsequent spouses get.

You should call the Social Security Administration at (800) 772-1213 to see if you qualify for a larger check.

Q&A: When the path to the altar is littered with old debts

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Dear Liz: My fiancee has incurred a lot of medical debt during the course of our relationship. She works 13- to 14-hour days at two jobs so she can start saving for the wedding and our shared goals, which include buying her a car, sending me to grad school without incurring more student debt, creating a real emergency fund for us, and moving out of my apartment into a new one.

She thinks her credit is horrible (though she has never checked it) and she knows with the medical bills, it is getting worse. She doesn’t think she can move in because she can’t buy a car.

What should I do? Should I help her with her debt so we can actually plan for the wedding scheduled next July? Or should I let her deal with it herself?

My biggest concern in all of this is that I have significantly better finances. I worked hard in college and have a full-time job that pays a living wage. I’ve been in my own apartment for two years.

Sometimes I feel resentful of the fact that she cannot contribute to our household like I can, and I worry that I will have to shoulder our shared goals. I am particularly worried I will have to pay for the wedding, which I am finding more and more ridiculously expensive every day (we’re only spending $5,600), while not being able to save for grad school.

I really am not sure how to give up my frustration and face reality, and our reality is that medical debt is holding up our plans.

Answer: It’s understandable that you’re frustrated. But please don’t take it out on your fiancee, who sounds like a hard-working person who had the bad luck of getting sick.

Working 13-hour days isn’t sustainable, particularly for someone with health issues. She may already have more medical debt than she can reasonably repay, and continuing to struggle with these bills may make achieving other goals impossible.

Encourage her to make an appointment with an experienced bankruptcy attorney. Bankruptcy may not be the right choice for her, but the attorney should be able to assess her situation and discuss her options.

Her debt may be manageable with some help from you. In that case, you two need to discuss how to handle this and your finances in general.

Don’t listen to people — or your own preconceptions — telling you there’s only one way couples should handle money. Some married couples keep their finances entirely separate. Some combine everything — all assets and income are joint, and so are all debts. Most take a middle path, combining some accounts and obligations while keeping others separate.

Finances can also evolve. You may be able to contribute more now, but your fiancee may become the primary breadwinner when you start graduate school. When that happens, would you expect her to help you pay the student loan debt you acquired before marriage, or will that be your obligation?

What’s most important is that you figure out how to work as a team, without resentment and unspoken expectations. It may help to schedule a visit with a fee-only financial planner to discuss your shared goals and how you’ll fund them. You can get referrals to fee-only advisors who charge by the hour at the Garrett Planning Network, www.garrettplanningnetwork.com, and to those who charge monthly fees at the XY Planning Network, www.xyplanningnetwork.com.