Ask Liz Weston

Get smart with your money

Q&A

Q&A: Executor duties

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Dear Liz: My best friend made me her executor. She has no relatives. She has listed people to receive money, possessions and her house. She has left me money as well. Once everything is disbursed and bills paid, there will be leftover money. If she wants me to have it, what needs to be written in the trust?

Answer: Her will should include a phrase that disposes of her residuary estate. After listing specific bequests, she would include a phrase such as “the rest and residue of my estate goes to” followed by the name of the person she wants to have the remaining estate. This clause isn’t without its problems, however, since receiving the residuary estate could tempt you to stint the other beneficiaries. Keep in mind that as executor, you have a fiduciary duty to all the beneficiaries, which means you cannot put your own interests first.

Q&A: How to minimize taxes after you retire

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Roth conversionsDear Liz: In preparing my 2021 tax returns, I was dismayed to find out that my first required minimum distributions from my retirement account have pushed me into the highest tax bracket ever in my life and caused 85% of my modest Social Security benefit to become taxable. Since I retired five years ago at full retirement age, I never had to pay taxes on my Social Security as it was the majority of my income. In my remaining years, I wonder if there is anything I can do to avoid paying about $8,000 to $9,000 a year in income taxes!? Even a partial conversion from a 401(k) to a Roth IRA would surely increase my Medicare Part B premium, another financial problem. I am not rich, just average middle class, and my financial goals are to carefully plan my necessary expenses so that I will not run out of funds. I do not need to leave an inheritance to my two adult children.

Answer: You’re probably correct that Roth conversions aren’t the answer now, although they may have been helpful earlier. You also may have been able to reduce the overall taxes you pay by waiting until age 70 to claim Social Security and taking distributions from your 401(k) instead.

You can discuss your situation with a tax pro to see if there are any other opportunities for reducing your taxes. Mostly, though, your situation is a good illustration of why it’s so important to get professional financial planning and tax advice well before you retire. Even if you think you’re well informed, you’re inexperienced — you’ve never retired before, whereas experienced financial planners and tax pros have guided many people through this phase of their lives.

Some of the decisions you make around retirement are irreversible and can have a profound effect on how much money you can spend. Ideally, you’d meet with a fee-only, fiduciary financial planner five to 10 years in advance of your retirement date and have several check-ins to make sure your financial plan is sound before you give notice.

Q&A: Switch to electronic documents

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Dear Liz: I have to disagree with your suggestion to switch to electronic documents versus using the U.S. mail. People need to keep an eye on dubious actors like cable and cellphone companies, where it’s important to pay attention to sneaky new charges or “expiring discount rates.” The same is true for credit cards, where fraudulent charges are likely to appear. I know I will open and read a bill in the mail while email is much more likely to be deleted unread. It’s a personal preference, but I think it’s sound financial discipline. Also, good luck trying to refinance or get a loan using e-statements — lenders refuse them.

Answer: Your last statement may have been true for some lenders before the pandemic, but the financial industry was rapidly digitizing even before the lockdowns began. After all, uploading electronic documents is much faster and more secure than relying on the mail. Our last refinance was handled entirely electronically, although we did have to sign a few closing documents in person with a notary who sat six feet away on our porch. Even if our lender had asked for a paper copy of an electronic document, though, that wouldn’t have been a problem: That’s what printers are for.

If you’re in the habit of scrutinizing paper bills while ignoring your email, switching to electronic documents can be tricky. Some people use personal finance apps to help them monitor what’s happening in their accounts while others put reminders on their calendars to review their transactions.

Reminders also can help you avoid paying more when you take advantage of a limited-time offer, such as an introductory rate for a service or a teaser rate on a credit card. Put the expiration date on your calendar as a prompt to renegotiate with the company or find another deal.

Simplifying your finances also can help you more easily spot fraud and unnecessary charges. It’s easier to monitor one checking account, one savings account and one credit card than a bunch of accounts spread across multiple companies.

Of course, there will be some people who simply can’t change the habits of a lifetime. For those who can, though, electronic documents are the way to go.

Q&A: Leaving IRAs to charity

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Dear Liz: In responding to the reader who asked how to plan around the tax consequences of leaving a traditional IRA to a family member, I wish you had mentioned the tax benefit of naming a charity as the beneficiary of a traditional IRA. There is no tax on the distribution of a traditional IRA to a charity. The consequence is that the income is never taxed (on the front end or back end) and a charity benefits from the IRA owner’s generosity.

Answer: The reader was primarily concerned with bequeathing assets to children and grandchildren after the Secure Act of 2019 did away with “stretch IRAs” for most non-spouse beneficiaries. One way to do that while also benefiting a charity is the charitable remainder trust that was mentioned in the column. These trusts require some expense to set up and aren’t a good option if the IRA owner isn’t charitably minded.

If someone’s primary goal is to benefit the charity, however, then qualified charitable distributions or outright bequests are certainly an option. Qualified charitable distributions, which can begin at age 70½, allow someone to donate required minimum distribution amounts directly to a charity; the distribution isn’t counted as taxable income to the donor.

Q&A: Retirement account distribution rules

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Dear Liz: My husband is 71 and retired. We have started withdrawing from one of his retirement funds but I am unsure if there is a minimum amount that needs to be withdrawn per year. We have a few retirement funds in different places. Do we have to withdraw from each or just a minimum per year no matter where?

Answer: Required minimum distributions from most retirement accounts typically must begin when someone turns 72. The withdrawals must be made by Dec. 31 each year, but your first one can be delayed until April 1. If your husband turns 72 next year, for example, then the first withdrawal wouldn’t be due until April 1, 2024. Your husband would need to take a second distribution by Dec. 31, 2024.

Required minimum distributions are calculated using the tables in IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs). IRA owners have to calculate the minimum withdrawal separately for each IRA they own, but they’re allowed to draw the total amount from one or more of the IRAs. People who have 403(b) accounts are also allowed to take the total amount from one or more 403(b) contracts after calculating the amount separately for each one.

The rules are different for other types of retirement plans. People who have 401(k) and 457(b) plans must calculate and take minimum withdrawals separately from each of those plan accounts. No distributions are required for Roth IRAs during the owner’s lifetime.

Your brokerage typically can help you calculate required minimum distributions, or you can talk to a tax pro. A tax pro or fee-only financial planner also could help you decide if it makes sense to consolidate your accounts. At your stage of life, you probably could benefit from simplifying your finances and having fewer accounts to monitor.

Q&A: When a full-service brokerage doesn’t want your business anymore

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Dear Liz: Can a brokerage firm drop a 26-year customer because their account falls below $200,000? I have been told that they don’t normally have accounts under that limit. Of course, my balance is lower because of the market slide. This policy doesn’t seem very ethical. Ten years ago, I had another account with them and it fell below $100,000 and nothing was said about that.

Answer: Your full-service brokerage may have just done you a favor. After charging you high fees for years, it has set you loose to find an alternative that will cost you much less.

Discount brokerages such as Vanguard, Fidelity, Charles Schwab and T. Rowe Price will welcome your business. You also could explore robo-advisory options that manage your money for a fraction of what you’re paying now.