Ask Liz Weston

Get smart with your money

Q&A

Q&A: How to plan retirement withdrawals

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Dear Liz: I am 65 and plan on working until 70 to get the maximum Social Security. I have a 401(k) worth about $290,000. How do I determine the maximum monthly payout I should take while being somewhat certain it will last until I’m 90? Our family has a history of longevity, typically living into the early 90s.

Answer: You may have heard of the “4% rule,” a guideline that suggests an initial withdrawal rate of 4%, with the amount adjusted each year afterward by the inflation rate. The rule stems from research by certified financial planner Bill Bengen, who in a 1994 research paper used historic market returns for a portfolio consisting of 50% stocks and 50% bonds to determine the maximum safe withdrawal rate for a 30-year retirement.

Some researchers believe a sustainable withdrawal rate should start closer to 3%, and others suggest higher rates if the account owner is willing to cut back spending in bad years.

However, most retirement accounts, including 401(k)s, are subject to required minimum distributions. These will start after you turn 73. (For people born in 1960 or later, such distributions will be required starting at age 75.)

The exact amount you must withdraw depends on your account balance at the end of the previous year as well as your age and life expectancy. The percentages you must withdraw could be slightly less or considerably more than 4% of your original balance.

Q&A: Is it a business or a hobby? The IRS has rules

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Dear Liz: After accepting a layoff in exchange for a separation package earlier this year, I have started writing articles for a subscription website. My stories have become popular enough that I’m starting to earn some money and expect a 1099-K this year. I have enjoyed the work and want to cultivate a dedicated audience. I need a few things to improve my output (dedicated laptop, improved writing software, etc.). These will cost more than I plan to earn this year from my new gig but I have cash from my severance. What are my best options? Should I wait until I’ve earned enough from writing before purchasing upgrades?

Answer: The IRS doesn’t want people writing off losses if they’re not making a serious effort to make money. This is known as the hobby loss rule.

The agency understands, however, that not every business turns a profit every year and many businesses have significant start-up costs that may exceed their income for a time. Generally, if you make a profit in at least three out of five years, the IRS presumes you’re engaging in a real business rather than pursuing a hobby.

If you’re planning to spend more than you make this year and write off the loss on your taxes, you’ll want to make sure you’re running this new business in a business-like way. Consider hiring a tax pro who can advise you about how to structure your company, keep good records and file estimated tax payments when necessary.

Your tax pro also can make sure you don’t inadvertently over-report your income.

Forms 1099-K are issued by third-party payment networks including Venmo or PayPal to report payments over $600, but those transactions can include personal as well as business payments. A client may have used Venmo to pay you for a story, for example, but you also may have received payments from friends for their portion of a lunch tab. Plus, if that client pays you more than $600 in a year, you’ll also be issued a Form 1099-NEC. You’d be double reporting your income if you used both the Form 1099-NEC and the Form 1099-K.

Q&A: Inherited IRAs bring a tax bite

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Dear Liz: I have an IRA worth over $1 million and am taking required minimum distributions. When my kids inherit this, can they take it all out with no tax issues because it is an inheritance? Or will they have to take required minimum withdrawals when they are old enough?

Answer: Retirement accounts don’t get the favorable step-up in tax basis that other assets typically get when someone dies. Your children will pay income tax on any withdrawals from an inherited IRA and most likely will have to drain the account within 10 years.

In the past, IRA beneficiaries other than a spouse had to start taking required minimum distributions after the account owner’s death. They couldn’t put off required minimum distributions until their 70s, but they could base the distribution amounts on their own life expectancies. The so-called “stretch IRA” let most of the assets continue to grow tax deferred.

But the stretch IRA was eliminated for most beneficiaries by the SECURE Act, which Congress passed in December 2019. The reasoning was that retirement accounts were meant to support the original account owner in retirement, not to provide tax-deferred benefits to their heirs. There are certain exceptions for beneficiaries who are surviving spouses, minors, disabled, chronically ill, or within 10 years of the age of the original account holder.

Q&A: Social Security death benefits

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Dear Liz: My wife was 69 at the time of her passing. She was still working and was not collecting Social Security. I am 72, retired and collecting Social Security. When I spoke with Social Security, I was told that I cannot collect on my wife’s work history. All I qualify for is a $255 death benefit. I asked what happened to her money collected all these years. I was told it goes into a general fund. Is there anything I can get from my wife’s Social Security?

Answer: If your current benefit was larger than the one your spouse had earned before her untimely death, then you were given the correct answer: a $255 death benefit.

People sometimes mistakenly believe that surviving spouse benefits are something they can get in addition to their own benefit. But when one member of a couple dies, the survivor gets only the larger of the two checks the couple was previously receiving.

The taxes we pay into Social Security don’t go into retirement accounts with our names on them — the money goes instead to pay benefits to current retirees. There’s no guarantee that what you get out will be proportionate to what you contributed. Most people will get more from the system than they paid in, but some will get less and some, unfortunately, get nothing.

Q&A: IRS and selling a home

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Dear Liz: How does the IRS know you sold your house? If you sell and buy another home, must you report it? Most folks I know sell, then buy a more expensive house. Seems like lots of moving parts for the parties, including the IRS, to have to track.

Answer: Not really. The title company or attorney handling the closing on a property sale typically generates a Form 1099 with the sales price of the home. The seller gets a copy and so does the IRS. Sellers who “forget” to account for the proceeds on their tax returns will soon get a reminder from the IRS, which typically just tacks the sale amount onto the sellers’ income and demands its cut, along with penalties and interest.

Q&A: The Ins and Outs of Trusts

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Dear Liz: I liked your answer to the person who wanted to ensure a son from a prior marriage got an inheritance. You mentioned creating a trust so the surviving spouse can get income from the assets but then the son would inherit when that spouse dies. However, what’s to prevent the surviving spouse from using up all the funds so that the son is left with nothing after all?

Answer: These trusts typically put restrictions on how much the surviving spouse would be able to access and in what circumstances. If the surviving spouse is the sole trustee, of course, the temptation to ignore the rules could be great. Alternatively, the ultimate inheritor or a third party can be named as trustee or co-trustee.

But there’s no getting around the fact that the trusts create a conflict between the survivor and the ultimate inheritor. The survivor typically wants as much income as possible from the trust while the inheritor wants the trust to be left alone to grow.

Another issue is taxes. Assets in the trust will get a step-up in tax basis when the first spouse dies, but not when the surviving spouse dies.

Often, the best way to make sure someone gets an inheritance is to make an outright bequest rather than putting the money in a trust. If a surviving spouse needs income from the assets to make ends meet, though, a trust with a responsible trustee can help ensure the ultimate inheritor gets the inheritance that was intended.

An experienced estate planning attorney can help you sort through the available options and make the best plan for your loved ones.