Ask Liz Weston

Get smart with your money

Q&A

Q&A: This spouse wants to keep an inheritance secret from the other spouse. Here’s a better idea

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Dear Liz: A good friend is leaving me money from her IRA after she dies. I have asked that the gift be designated as “sole and separate property” to me. As I am married and file joint state and federal taxes, can this money be kept separate for my use only? I prefer that my spouse not be made aware of this as they have different ideas about how to use our money.

Answer: Inheritances can be kept as separate property even in community property states where other assets acquired during marriage are considered jointly owned. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

An inherited IRA, however, would be tough to keep secret if you file taxes jointly with your spouse. You’ll be required to take yearly minimum distributions to empty the account within 10 years, and those withdrawals will be taxed as income.

Few couples are entirely on the same page about money, but keeping financial secrets from each other generally isn’t the best way to cope with these differences. Instead, many people find it helpful to have some “no questions asked” money that they can spend as they please without consulting their partner.

Q&A: Social Security survivor benefits

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Dear Liz: My beloved brother died recently. He was 70, retired and collecting Social Security. His husband, age 63, is still working. They had been married since 2008 but when he applied for survivor benefits, he was denied. Several in our friend group looked into this and the way we all read it, he should be entitled to survivor benefits. What are we not understanding?

Answer: Your brother-in-law wasn’t denied a survivor benefit, precisely. He just earns too much to receive one.

If your brother-in-law was born in 1960, his full retirement age is 67. People who apply for Social Security benefits before their full retirement age are subject to the earnings test, which reduces their benefit by $1 for every $2 they earn over a certain limit, which in 2023 is $21,240.

The earnings test will go away once he turns 67. At that point — or earlier, if he reduces his work hours and earnings sufficiently — he will have a choice between starting a survivor benefit and starting his own, with the option to switch later. If he’s earned a sizable benefit on his own work record, for example, it could make sense to start the survivor benefit and allow his own benefit to grow until it maxes out at age 70. A claiming strategies site, such as Maximize My Social Security or Social Security Solutions, can help him choose the right course, or he could consult a fee-only financial planner.

Q&A: When WEP doesn’t apply

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Dear Liz: I am a retired police officer who worked for an organization that did not pay into Social Security or Medicare. During my career I worked side jobs and paid my own self-employment taxes to get my 40 quarters to qualify for Medicare once I reach age 65. I did have Social Security earnings for about eight years prior to my law enforcement career. My understanding is any Social Security I would otherwise be entitled to will be wiped out by the windfall elimination provision. The WEP calculator on Social Security’s website isn’t user friendly so I can’t tell if I will lose all or a portion of my Social Security to WEP.

Answer: Your own Social Security benefit won’t be wiped out. The windfall elimination provision can reduce your Social Security retirement benefit by up to half when you get a pension from a job that didn’t pay into Social Security.

By contrast, another provision called the government pension offset (GPO) can and often does eliminate Social Security benefits, but only those based on someone else’s work record, such as spousal or survivor benefits.

Also, you misunderstood how Medicare works. You need to work 40 quarters to qualify for a Social Security retirement benefit, but you can qualify for Medicare at age 65 as a U.S. citizen regardless of your work history.

Q&A: Social Security cost of living adjustments

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Dear Liz: I am 67 and am delaying taking my Social Security until age 70 to take advantage of the 8% annual deferral. I was told by an individual at the Social Security office that I won’t get any inflation adjustments, such as the 8.7% increase for this year, and that people only receive the inflation adjustments if they’re actually receiving Social Security. Is that correct?

Answer: No. The Social Security Administration makes that clear in its two-page document, “Your Retirement Benefit: How It’s Figured.” Here’s what that document says verbatim:

“You’re eligible for cost-of-living benefit increases starting with the year you turn age 62. This is true even if you don’t get benefits until your full retirement age or even age 70. We add cost-of-living increases to your benefits beginning with the year you reach 62. Benefits are adjusted yearly to reflect the increase, if any, in the cost-of-living as measured by the Consumer Price Index.”

Your experience unfortunately isn’t unique. Other readers have reported getting misinformation or bad advice from Social Security reps. Social Security is a complicated system with many nuances, so it’s important to get a second opinion from a knowledgeable source, such as a fee-only financial planner, before making decisions regarding your benefits.

Q&A: Taxes on account withdrawals

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Dear Liz: We have two large expenses that need to be paid this year. I’m in my late 60s. My wife is in her 50s. I think that we should pull the money from our brokerage account (which is taxable) and protect the money in our IRA and Roth IRA accounts so that it can continue to grow tax deferred (and tax free in the case of the Roth). My wife feels that the withdrawal should come from the IRA or Roth IRA, saying that the money used from the brokerage account would be “double taxed.” Which account would you pull the money from?

Answer: There should be no double taxation when you sell investments in a brokerage account. You pay taxes only on the growth in value of the investments you bought.

She may be confused if you’ve paid taxes in the interim on dividends and capital gains distributions. If those were paid out to you, they’re no longer part of your investment and won’t be taxed again when you sell. If the dividends and capital gains were reinvested, those amounts should be added to the original purchase price to determine your tax basis, or the amount you can deduct from the sales proceeds to determine your capital gains.

You typically benefit from favorable capital gains rates if you sell investments in a taxable brokerage account that you’ve held for at least a year. By contrast, withdrawals from traditional IRAs are typically taxed at higher income tax rates. A large enough withdrawal from a traditional IRA could throw you into a higher tax bracket. And withdrawals from either the brokerage account or the traditional IRA could increase your Medicare premiums.

Qualified withdrawals from a Roth may not affect your taxes or premiums, but as you noted you’d be giving up future tax-free compounding, which could be an even stiffer price to pay.

It also matters who owns the retirement accounts. For example, a withdrawal from your wife’s IRA could be penalized as well as taxed if she’s not yet 59½.

There are enough moving parts to this decision that you’d be smart to consult a tax pro who can model how the various transactions will affect the rest of your finances.

Q&A: How to help someone else build credit

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Dear Liz: My 30-year-old son lives in Southeast Asia. He has some U.S. bank accounts but no U.S. credit cards. If I add him to my credit card, will that help to establish credit? Or is there another way for him to start getting credit in the U.S.? At some point, he and his wife will move back to the U.S.

Answer: Adding someone to your credit card as an authorized user can be a great way to help them build credit. Your history with the card is typically added to the other person’s credit reports and used in calculating their credit scores. If you can add him to more than one card, even better. As long as you use the cards responsibly — paying the bills on time, using only a fraction of the available credit — his scores should benefit.

You don’t have to give your son access to the cards for this to work. If you do, keep in mind that authorized users aren’t responsible for paying any charges.

Authorized users typically can be added or removed with a phone call to the issuer. You also can add an authorized user online by logging into your credit card account. But removing them may require you to pick up the phone.

Your son can build credit in other ways, including credit builder loans and secured cards, but those may have to wait until he has a U.S. address.