Ask Liz Weston

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Q&A

Q&A: Am I eligible for my ex-husband’s Social Security?

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Dear Liz: My ex-husband and I were married for 10 years. I married again, but am now a widow. I was told I could collect benefits on my prior marriage when my ex-husband passes. But, now that I’m a widow, I am wondering if I’m eligible to collect on my ex-husband’s record, though he is living. I’m currently getting my late husband’s benefit.

Answer: You could be entitled to a divorced spousal benefit based on your ex’s earning’s record. The divorced spousal benefit could be up to half of your ex’s benefit at his full retirement age. You would only collect that amount if it was greater than what you are currently receiving, however. You can call Social Security to check if you’re entitled to a larger benefit.

To recap: Survivor benefits are up to 100% of what the primary worker received at their death, while spousal benefits are up to half of what the (still living) primary worker would receive at full retirement age. Someone who is divorced can be entitled to benefits based on their ex’s’ work records if the marriage lasted at least 10 years.

Q&A: How are IRA withdrawals taxed?

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Dear Liz: I’m aware that assets held in tax-advantaged accounts, such as an IRA or 401(k), avoid capital gains taxes on the sale of an asset. However, will those capital gains taxes have to be paid later when it is time to withdraw money from those accounts? If yes, can I offset it with any capital losses?

Answer: Traditional retirement accounts such as IRAs or 401(k)s change how investment gains are taxed. You don’t pay tax when investments within the accounts are sold, but withdrawals from the account are typically taxed as ordinary income, not as capital gains. So you won’t have an opportunity to directly offset capital gains with losses as you would with nonretirement accounts.

However, if your losses exceed your gains in your nonretirement accounts, you can use up to $3,000 of capital losses to offset ordinary income each year. Any remaining losses can be carried forward to the next year where it’s rinse and repeat: capital losses offset capital gains, with up to $3,000 of any remaining loss used to offset ordinary income. This goes on until the losses are finally used up.

Q&A: What exchange rate do credit cards use?

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Dear Liz: Are the card companies required to use a certain exchange rate for foreign transactions? I’ve used two different cards for purchases abroad, and the one that charges a fee used a better exchange rate so the total cost to me, including the fee, was less. How can I find out what exchange rates are used?

Answer: Credit card issuers can choose the exchange rates they use, although many employ the rates selected by their payment networks, such as Visa or MasterCard. These rates are typically close to the wholesale interbank rate.

Issuers can also choose when to make the exchange. The issuer may use the rate in effect when the transaction is processed, for example, which may be different from the time of purchase. So even if you used the two cards the same day, you might not get comparable exchange rates.

You can find more information about how your cards process foreign transactions in the cardmember agreement you received when you got the card. If you no longer have that document, you can request the issuer mail it to you or check the Consumer Financial Protection Bureau’s credit card agreement database.

Since most issuers use near-wholesale exchange rates, travel experts typically recommend using credit cards without foreign transaction fees to save money. You should also be wary of “dynamic conversion” — the offer you often get at the point of sale to have the transaction processed in your home currency rather than the local currency. Dynamic conversion rates are typically terrible with big markups, so always choose the local currency.

Q&A: Should you pay for a financial plan before hiring an advisor?

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Dear Liz: My spouse and I are retired. We have substantial investment assets, significant cash reserves and considerable equity in our home. Over nearly 40 years together, we’ve worked with several financial advisors, but every decade or so, we’ve become dissatisfied and moved on. Now, at this stage of life, we want a clearer roadmap for the next five to 10 years and beyond.

We’ve read your columns for years and have taken your advice about fiduciary financial advisors seriously. We’re currently looking for a new independent advisor, but we’re finding that many only offer financial planning if we also hire them under an assets-under-management (AUM) arrangement. Others will provide a standalone financial plan for a flat fee prior to having a client come on board for asset management.

We feel strongly that before committing to a long-term advisor relationship, we should first get an independent, comprehensive financial plan — essentially a snapshot of where we are now and how best to move forward. Does that approach make sense? Should we prioritize paying for a standalone financial plan before deciding whether to hire someone for ongoing investment management?

Answer: As you’ve discovered, many fiduciary fee-only advisors bundle financial planning advice with investment management because AUM fees are more lucrative than charging for plans. But that doesn’t mean it’s the best approach for every client.

Paying for a financial plan means shelling out more money up front, but you’ll get the opportunity to check out the advisor’s approach, communication style and attention to detail before entrusting them with your investments. The plan should include all the usual areas such as insurance, taxes, asset allocation and estate planning, with a special emphasis on the topics that are important at your stage of life, such as sustainable withdrawal rates, paying for long-term care and protecting your assets from fraud and cognitive decline.

Q&A: What should you do if an accountant ignores you?

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Dear Liz: When my sister became somewhat disabled, I started handling her financial affairs. (I have a power of attorney.) She hadn’t paid her taxes for several years, so I worked with her accountant to get them filed and pay the necessary penalties. I thought she was up to date with both her federal and state taxes. With no warning (to my knowledge), the state tax agency suddenly withdrew over $12,000 from her checking account.

After an attempt to contact the agency for an explanation, I decided to ask her accountant if he could help me understand where she stood tax-wise so we would not be hit with any similar financial shock. He had prepared her taxes for her for many years, but has not returned my calls or emails. I am at a loss as to how to obtain more information about her tax liabilities. I believe she had given him the authority to view her tax accounts. What else can I do to feel satisfied that she will not be subject to any further garnishment?

Answer: Many tax pros struggle to keep up with client communications in the weeks before the April 15 deadline. If you were trying to contact him during crunch time, that could explain why you didn’t hear back immediately. If he still hasn’t reached out, however, you should start looking for a new accountant who can help you sort this out.

State tax agencies don’t usually act without warning. Typically, they mail multiple notices about delinquent taxes and give taxpayers time to respond before taking money from a bank account. It’s possible these notices went to an old address, or that your sister received them but didn’t understand their importance.

Since you have the power of attorney, you should be able to get information directly from the state tax agency. They’ll have a form that allows you to establish your right to communicate with the agency on your sister’s behalf. Once filed, you can access her account history. That information can help you and the new accountant piece together what happened, determine if there are any outstanding liabilities and figure out a plan for preventing future collection actions.

You’ll also probably want to pull her credit reports to look for any other tax liens or collection actions. If she’s struggling to manage her money, you may need to take more proactive steps, such as taking over bill payment. Consider working with a fiduciary financial planner or an elder law attorney who can help you create a system to avoid future catastrophes.

Q&A: Advisor may have overlooked tax bill alternatives

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Dear Readers: The following comment was prompted by my response to the letter from a couple in their 70s asking if they had made a mistake moving their $2-million portfolio, including $340,000 in a taxable account, to a new advisor. The advisor recommended investment sales that resulted in a $50,000 capital gain tax bill, and their accountant disapproved. I wrote that the tax pro might not be in the best position to judge whether the sales were necessary, since accountants are typically focused on reducing tax bills but sometimes diversification is necessary to avoid even bigger financial consequences down the road. Here’s another perspective.

Dear Liz: The comment that the accountant is not in the best position to evaluate is correct, as the accountant is only looking at the taxes. However, as a retired portfolio manager and chartered financial analyst, I really doubt that it was appropriate for the investment manager to take this large of an amount of capital gains. It would only make sense if this taxable portfolio had nothing but speculative issues in it, which I would find doubtful for a couple in their late 70s. If the taxable account was too high in equities or poorly diversified by industry weightings, adjustments can be made in the larger retirement account to bring the combined account into better balance. It may have been appropriate to take some gains, but they can certainly be spread out over several years, as taking them all at once likely puts the couple in a higher tax bracket.

Answer: You’re making a good point that the couple had other options besides “ripping off the Band-Aid” and incurring one big tax bill rather than taking the gains more gradually. Their new advisor, as a fiduciary, should have discussed the options with them and helped them understand the impacts, including the expected tax bills and potential impact on Medicare premiums. If those discussions didn’t happen, that’s all the more reason to seek out a second opinion from another fee-only financial planner.