Ask Liz Weston

Get smart with your money

Q&A

Q&A: How to tap an unused 529 college savings plan without getting taxed

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Dear Liz: I opened a 529 college savings plan for our son and over the years it grew. My son was fortunate to receive a full-ride academic scholarship and therefore much of the money stayed in the plan. Recently my son became a new father to my first grandchild. I know that it is permissible to give five years’ worth of tax-free giving in setting up a new 529 plan for a child. My question is: Can I transfer five years of annual gift-tax-free giving ($85,000) to my grandchild from the account originally set up for my son without incurring a gift tax obligation?

Answer: You’re worrying about the wrong taxes.

Few people need to be concerned about gift taxes, since someone would have to give away more than the current gift and estate tax lifetime limit for any gift to be taxable. That limit is currently $12.92 million.

The annual gift tax exclusion limit is the amount you can give away without having to file a gift tax return. The 2023 limit is $17,000 per recipient, and 529 college savings plans allow you to give up to five years’ worth of annual exclusions at one time, or $85,000. (If you are married, you and your spouse can give up to $170,000.)

A 529 college savings plan can have only one beneficiary at a time, however. With few exceptions — and we’ll get to one of those in a moment — withdrawals are tax free only if used to pay qualified education expenses for the plan’s beneficiary. So the transfer you’re proposing would incur income taxes and penalties.

You can, however, change the beneficiary of the 529 plan to your grandchild. As long as the new beneficiary is a family member of the current beneficiary, there will be no tax consequences, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. The IRS’ definition of family includes the beneficiary’s spouse, children or other descendants, parents or other ancestors, siblings and in-laws, along with aunts, uncles, nieces, nephews and first cousins and their spouses.

You may want to wait a few years, however. Starting in 2024, you’ll have the option to roll up to $35,000 from a 529 to a Roth IRA for your son, subject to annual contribution limits, Luscombe said. If next year’s IRA contribution limit is $7,000, for example, that would be the maximum you could roll into the Roth for the year. Your son also would have to have earned income equal to the amount rolled over.

Taking advantage of this option could be a great way to help your son build tax-free income for retirement before you switch the beneficiary designation to benefit your grandchild.

Q&A: Death and document retention

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Dear Liz: After a spouse’s death, I am wondering if there is some guidance on how long to keep items such as a driver’s license, Social Security card, Medicare and health plan card, passport, veteran’s information and so on. I haven’t seen this addressed in your column.

Answer: Guidance about what to keep and discard after a death can vary widely, so you may want to ask your estate attorney for help. In general, though, you can begin to dispose of many documents three years after the estate is settled, said Jennifer Sawday, an estate planning attorney in Long Beach.

In some cases, you can shred them sooner. Social Security numbers are often printed on the death certificate, so the card can be shredded once you verify the number on the certificate is accurate, Sawday said. You also may wish to shred the passport as soon as possible to avoid it falling into the hands of an identity thief. Another option is to mark the passport “void” and keep it as a family history item, she says.

The driver’s license is another possible family history item — and boon to an identity thief — but it can be discarded at the three-year point, Sawday said. Veteran’s information can be kept for family history purposes or discarded three years after any death VA benefits are claimed.

Medicare and health plan cards should be kept in case any medical billing issues arise and then discarded when those issues, if any, are resolved, she said.

Q&A: Social Security survivor benefits

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Dear Liz: I’m 70, collecting Social Security since age 62 and still working. My ex-wife passed away a few years ago at 67. We were married for 25 years. I read that I could collect on her Social Security benefits as the survivor, but Social Security said no. What did I not understand about this?

Answer: Many people misunderstand how survivor benefits work. You don’t get the deceased person’s check in addition to your current benefit. If the survivor benefit is larger than what you currently receive, you get that payment instead. When Social Security said no, the agency was confirming that your benefit is larger than what you could receive based on your ex-wife’s earnings history.

Understanding how survivor benefits work is hugely important for currently married couples as well. Many are not prepared for the sharp drop in income that happens when the first spouse dies and the survivor is left with only a single check. Having the higher earner delay Social Security as long as possible can help ensure the survivor has more to live on.

Q&A: What happens when your unmarried life partner dies without a will?

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Dear Liz: A close friend recently lost her partner of many decades. The partner left no will or trust or anything in writing. The partner owned many properties and had a huge IRA and lots of money in the bank, but all in the partner’s name alone. My friend asked an estate lawyer and the lawyer said she had no legal right to anything, even the home she has lived in for many years. Can anything be done?

Answer: The lawyer is probably correct. Without estate documents, beneficiary designations or some kind of written agreement, unmarried partners typically can’t inherit, said Jennifer Sawday, an estate planning attorney in Long Beach.

But your friend should consider talking to a family law attorney to see if she has any recourse, Sawday said.

In California, for example, she may be able to make a “Marvin” claim against the estate. (Marvin claims stem from a 1976 California Supreme Court case between Michelle and Lee Marvin, which established that unwed partners could sue each other over property divisions after a relationship ended.)

Q&A: Tax consequences of annuity conversion

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Dear Liz: Several years ago my wife inherited an IRA when her mother died. Her banker suggested rolling the IRA into an annuity with an insurance company. That company is difficult to deal with and not forthcoming about how the annuity is invested. She wants to convert the IRA into a certificate of deposit so it is insured by the FDIC. What are the tax consequences of doing that?

Answer: There are many different types of annuities. If your wife purchased an immediate annuity, which offers a stream of payments in return for a lump sum, then she probably can’t change her mind since those transactions are effectively irreversible.

If she purchased a deferred annuity, though, she has more options. Deferred annuities allow people to defer the stream of payments until later — often years or even decades in the future. In the meantime, the annuity may pay a fixed rate, a variable rate based on the performance of underlying investments, or an indexed rate based on a market benchmark.

Your wife won’t face taxes if she switches from a deferred annuity to a CD, since changing investments within an IRA isn’t considered a taxable event. The annuity itself may have surrender charges, however. Because annuities often pay advisors substantial commissions, surrender charges help discourage investors from withdrawing the money before insurers can recoup those fees.

These charges and high expenses in general make deferred annuities a poor fit for many investors, and many financial planners especially dislike seeing them in IRAs. A deferred annuity’s primary advantage is tax deferral, which an IRA already offers.

If your wife feels she was misled about this investment, she can make a complaint with her state insurance regulator.

Q&A: Getting a second financial opinion

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Dear Liz: My wife and I recently retired. Our investments are managed by a certified financial planner. Our nest egg has not shown much growth over the last several years. We think it is time for another professional advisor to analyze our portfolio and see if we are really heading in the right direction. Is this out of the ordinary to seek more advice and how would we go about it, without offending our current planner?

Answer: You can certainly consult another advisor, but consider talking to your own first.

Start by asking the certified financial planner how your portfolio has performed relative to an appropriate benchmark over the last five years. The planner should be able to explain what benchmark was chosen and why. A portfolio that invests heavily in bonds, for example, will have a different benchmark than one that invests mostly in stocks.

If your portfolio is lagging behind this benchmark, then ask the planner what changes can be made to improve your investment performance. Switching from actively managed investments to passive ones, such as index mutual funds or index exchange traded funds, could save on costs and improve performance because few actively managed investments manage to beat the market.

If your portfolio is performing appropriately relative to its benchmark, then discuss whether you want to take on more risk for better returns. Many planners recommend retirees have a substantial portion of their portfolios in stocks for inflation-beating growth.

Your certified financial planner should be open to this discussion and ready to course correct if necessary. If you find that’s not the case, then it may be time not just for a second opinion but for a new advisor.