Ask Liz Weston

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Q&A

Q&A: Lost retirement accounts are a growing problem. How to track down yours

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Dear Liz: I applied for and received Social Security widow’s benefits from my deceased ex-husband. Social Security notified me that my ex-husband had a profit-sharing plan that could have beneficiary money. I have tried to find out the correct people to talk to, but the original employer has changed hands a few times. I spoke to the financial services company that handles retirement plans for the current iteration, but they had no record of my ex-husband’s account. Do you have any ideas of people to talk to [in order to] find out if there is a beneficiary for his account?

Answer: Lost retirement accounts are unfortunately a common issue. Financial services company Capitalize estimated in 2021 that 24.3 million 401(k) accounts, with an average balance of $55,400, had been left behind by job changers, with the total rising year after year. Leaving an account with a former employer isn’t a guarantee the money will be forgotten, but it does increase the odds. Most people are better off rolling an old account into a new employer’s plan or an IRA.

There’s no national database for unclaimed retirement accounts, but there are a few places you can look. Companies with employee retirement plans are required to file a Form 5500 annually with the IRS, and these forms have contact information that may be helpful. You can try searching the U.S. Department of Labor’s site for the forms at efast.dol.gov. Another option is creating a free account at FreeErisa, which may help you find older plans. The Department of Labor also has an abandoned plan database at askebsa.dol.gov/AbandonedPlanSearch.

Your next step might be checking the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com. This database is run by a company that processes retirement plan distributions. Another place to try is the National Assn. of Unclaimed Property Administrators’ database at unclaimed.org.

Q&A: Capital gains on inherited property

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Dear Liz: You recently advised the heir to a triplex that they’d have to pay capital gains tax if they sell the property, but if they keep it and bequeath to their children, there would be no capital gains for the children. How does that work?

Answer: The original letter writer inherited the property from a parent in 2007. The inherited property got a favorable “step up” in tax basis to the fair market value at the date of the parent’s death. As a result, all the appreciation that happened during the parent’s lifetime was never taxed.

If the heir sells the property, however, the heir will face capital gains taxes on appreciation since 2007. If the heir holds the property until death, the property will once again get a tax basis step up to the market value at that point. The appreciation that happened during the heir’s lifetime won’t be taxed.

Q&A: Tax consequences of a CD bequest

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Dear Liz: I currently have a certificate of deposit with what I consider a reasonably high balance. I’ve named a beneficiary in the event something were to happen to me. Would there be tax consequences for the beneficiary upon receipt?

Answer: There’s no federal inheritance tax, but six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — do assess inheritance taxes. Spouses are typically exempt and the tax rate is generally lower for close relatives.

Q&A: Why delaying Social Security might be the ultimate gift for your spouse

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Dear Liz: My husband is 75 and started Social Security at 62. I am 68 and started Social Security at my full retirement age of 66. My Social Security benefit is the higher of the two. My financial planner says the rules on survivorship have changed. She believes that if I die first, while my husband can still claim my benefit, it will be reduced since he took benefits early. I have not heard of this before. Is this true?

Answer: No. His early start won’t affect his survivor benefit should you die first, because you were the higher earner. Had he been the higher earner, though, his early start could have penalized you.

It’s the higher earner’s benefit that determines what the survivor gets. When one of you dies, the smaller of your two benefits goes away. The survivor gets the larger of the two checks instead.

Obviously, losing a benefit can mean a significant drop in income. A larger survivor benefit can really help the remaining spouse make ends meet. That’s why it’s so important for the higher earner to delay filing if possible.

Your husband accepted a permanently reduced benefit when he applied for Social Security at 62. You got your full, unreduced benefit by waiting for your full retirement age. If you’d put off your application a bit longer, though, you could have received “delayed retirement credits” that would have boosted your check — and the eventual survivor benefit — by 8% each year until your benefit maxed out at age 70.

Abundant research has shown that most people are better off delaying Social Security if they can. In a November 2022 study for the National Bureau of Economic Research, three economists found that virtually all American workers ages 45 to 62 should wait beyond age 65 to collect and more than 90% should wait till age 70.

One of the three economists, Laurence J. Kotlikoff, has also written a book for the general public about Social Security claiming strategies, “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” Make sure to get the updated version because Congress changed some claiming strategies in 2015 (but not the ones that affect survivor benefits).

You might consider getting a copy for your advisor, or at least sending her a link, because she definitely needs to strengthen her knowledge of this vital program for retirees.

Q&A: Opening an IRA for a retired spouse

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Dear Liz: Are spousal IRAs a good idea for a couple when one spouse is retired but the other is working? I’m 63 and work full time. My husband is 76 and retired. I have a Roth IRA; he does not. I contribute the maximum amount to my IRA. If we create a spousal IRA for him, would we be able to contribute as if it were a regular Roth IRA?

Answer: Yes. Normally people must have earned income — such as wages, salary, commissions, tips or self-employment income — to contribute to an IRA or a Roth IRA. If you’re married and working, though, you can contribute up to the maximum amount on behalf of a nonworking spouse. In 2023, the maximum contribution for people 50 and older is $7,500. As long as you earn at least $15,000 ($7,500 times two), you can max out both accounts.

There’s no special “spousal IRA” account, by the way. Just open a regular IRA or Roth IRA in his name.

Q&A: Selling a rental property? Here are the tax consequences

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Dear Liz: My siblings and I are considering selling a triplex. It was bequeathed to us by our mother when she died in 2007. There is no mortgage and it is fully occupied. If we sell, my wife and I (both over 50) would get roughly $200,000, and we’d like to minimize the tax impact. We own our home free and clear and have no debt. We’d like to use this windfall to help our son buy a home. We’d also give our daughter a cash gift. We have no interest in buying another investment property using a 1031 exchange. Any suggestions to minimize our tax bill given our circumstances?

Answer: Talk to a tax pro, because selling a rental property is more complicated than selling your personal home.

You’re not eligible for the $250,000-per-person home sale profit exclusion, and in addition to paying capital gains tax you also face a depreciation recapture tax of 25%. (Depreciation is the amount of wear-and-tear you wrote off during your ownership of the property; the IRS requires you to repay that tax break when you sell.)

A big capital gain could affect other areas of your finances, such as Medicare premiums, and the pro can help you plan for that as well.

A 1031 exchange would allow you to defer taxes on a rental property by buying a similar replacement property.

Another solution would be to hang on to the property, continue to enjoy the rental income and bequeath your portion of it to your children when you die. Your portion will receive a favorable step-up in tax basis so that your heirs won’t owe taxes on the capital gains that occurred during your ownership. They also won’t face the tax on depreciation recapture you would otherwise owe.

But that obviously isn’t a good solution if you no longer want to be a landlord or want the cash instead. In that case, the tax pro can help you properly account for selling costs, legal fees and improvement expenses that could reduce the tax hit and may be able to suggest other ways to manage your tax bill.