Q&A

Q&A: A gray area in required distributions

February 28, 2022 By Liz Weston

Dear Liz: I’ve reached that “certain age” when I should be taking required minimum distributions from my retirement accounts. I retired from full-time work at age 65 but continued doing small jobs at an hourly rate for that same employer. I set my own hours and earn just a couple thousand bucks a year. The company that holds my retirement funds says I don’t have to take the required minimum distribution because I never retired. I don’t want to be penalized for failing to take the RMD, and I can’t believe I get to delay taking the funds. Have I found a little-known loophole?

Answer: You’ve found a definite gray area.

People who are still working for the employer who provides their 401(k) may be exempted from the required minimum withdrawals that are otherwise supposed to start at age 72. The exemption does not apply to IRAs or retirement plans from previous employers. The exemption also doesn’t apply if you own more than 5% of the company, and not all 401(k) plans offer a “still working” exemption.

The IRS hasn’t offered a lot of guidance about the still-working exemption. For example, there doesn’t seem to be a clear minimum number of hours that an individual must work, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Luscombe says the exemption may depend in part on the minimum number of hours required to participate in the plan. Even then, though, it’s not clear that an employee could reduce the number of hours working from a full-time level to a part-time level and still qualify for the still-working exception, he said.

“This could be a discrimination issue if higher-paid employees were allowed to reduce their hours and lower-paid employees were not,” Luscombe notes.

The company might need a written rule that all employees are allowed to reduce their hours at a certain age, Luscombe said.

If a particular plan permits part-time employees working at least 500 hours per year to qualify for its 401(k) plan, for example, then perhaps working at least 500 hours per year meets the still-working standard for that plan.

You’ll want to get some clarity about this, because the penalty for not taking required minimum distributions on time is high — it’s 50% of the amount you should have taken but didn’t. If the plan doesn’t have clear rules, ask your company to create some to guide you and others in your situation.

Q&A: Government pensions and Social Security

February 21, 2022 By Liz Weston

Dear Liz: Both of my parents have been retired for over 25 years. My father collects Social Security but my mother didn’t have enough quarters to collect. Both have Postal Service retirements. Can my mother file and get half of my father’s amount? Can they get back payments for 25 years?

Answer: The answer to both questions is “probably not.”

Your parents’ situation is complicated by the fact that the federal government changed its pension system for civilian employment in the 1980s. Prior to 1984, civilian employment was covered by the Civil Service Retirement System and workers did not pay into Social Security. Starting in January 1984, new hires were covered by the Federal Employee Retirement System and were required to pay into Social Security. Current hires had the option, but not the requirement, to join FERS, says William Meyer, founder of Social Security Solutions, a claiming strategy site.

Normally when someone receives a pension from a job that didn’t pay into Social Security, the government pension offset would reduce or eliminate any Social Security spousal benefit they might otherwise receive. However, there is an exception: The offset doesn’t apply to government workers who pay Social Security taxes for the last 60 months of employment. This exception applies to employees paying into FERS, Meyer says.

If your mother paid into FERS during the last 60 months of her employment at the Postal Service, she would be eligible for a spousal benefit on your father’s record, Meyer says. If your mother didn’t pay into FERS those last 60 months, the government pension offset would apply and would reduce or eliminate any spousal benefit.

That option should have been explored when your parents applied for their Postal Service retirement benefits, Meyer says. Social Security also would have looked into it as part of your father’s application process. If she’s not receiving a Social Security spousal benefit, she probably didn’t switch to FERS and did not pay into Social Security during the last 60 months of her employment at the Postal Service, Meyer says.

Q&A: How a living trust helps your heirs after you die

February 21, 2022 By Liz Weston

Dear Liz: My husband and I made a living trust in 2004. He died in 2018, so his half became irrevocable. But while we were settling his estate, no one mentioned (though I can see clearly in the 2004 flow sheet) that all the assets from his half went into a survivor’s trust, controlled by me. I had the option to disclaim those assets within a year, which I did not do, so now everything is mine. Is this standard? If so, how can it be considered irrevocable?

Answer: The structure you’re describing is pretty standard for living trusts, which avoid probate, the court process that otherwise follows death. Living trusts are considered revocable when they are created, meaning the creators can make changes during their lifetimes. Eventually, the trust usually becomes irrevocable, which means changes no longer can be made.

Your living trust was entirely revocable while both of you were alive. That means you could make changes or cancel the trust entirely. When your husband died, part of the living trust became irrevocable — the part that created the survivor’s trust. You had the option to disclaim those assets, which means refusing to accept them, but you couldn’t dictate where the assets would go at that point or otherwise change the terms of the trust.

If your living trust had created a bypass trust instead, then that would have been irrevocable as well but the structure would have been quite different. The assets in the bypass trust would not become yours. Instead, you would get the income from the assets but they would ultimately be passed to heirs designated by your husband.

As mentioned earlier, bypass trusts can be helpful in blended family situations. They also are used to avoid or reduce estate taxes, which are no longer an issue for the vast majority of people. (A public service announcement: If your estate plan was created prior to 2010, you need to have it reviewed pronto. It’s entirely possible your plan includes a bypass trust that’s no longer necessary and that could needlessly complicate your estate.)

Q&A; An auto dealer keeps checking my credit. Is that a problem?

February 14, 2022 By Liz Weston

Dear Liz: How do I remove inquiries from multiple auto lenders? One of the dealerships pulled my credit at least eight times over a two-day period. I thought this could only be done while the customer is physically at the car lot.

Answer: Dealerships aren’t supposed to check your credit without your permission, and they can’t check your credit if you don’t give them your personal information, including your Social Security number. Some dealers use deceptive methods to get your personal information, such as claiming they need your Social Security number for you to take a test drive. (They don’t.)

If you did give permission, though, there’s not a lot you can do about multiple inquiries. Dealerships can, and will, check with multiple lenders to see what rates and terms they’ll offer you. If your credit isn’t great, multiple inquiries may be necessary to find you a loan.

The good news is that multiple auto loan inquiries in a two-day span won’t hurt your credit that much or for that long. Most credit scoring formulas don’t count each auto loan inquiry separately, but instead aggregate such inquiries together and count them as one. The ding against your credit scores is typically small and lasts only a few months.

Ideally, though, you wouldn’t continue to do business with a dealership that wasn’t crystal clear about why it needed your personal information and how it was going to be used. Also, consider applying for a car loan from a local credit union before you step onto a car lot. Credit unions are member-owned and tend to have good rates and terms, without the runarounds and add-ons that are so prevalent at car dealerships.

Q&A: DIY estate planning is unwise

February 14, 2022 By Liz Weston

Dear Liz: Please tell us about some estate planning tools that many might be able to use for themselves without incurring attorney fees and probate costs, such as naming payment-on-death beneficiaries at financial institutions and using real estate deeds with transfer-on-death provisions.

Answer: There are a number of ways that people can avoid probate, which is the court-supervised process of settling someone’s estate. Bank, financial and retirement accounts can pass to named beneficiaries outside probate, as can life insurance. Property owned in joint tenancy also avoids probate. Some states have transfer-on-death options for real estate and for vehicles.

The fact that you can avoid probate with these methods, however, doesn’t necessarily mean that you should.

Do-it-yourself estate planning can create a mess for your heirs that could incur far more in legal fees than you would have spent getting expert, personalized advice in the first place. A good rule of thumb: If you can afford to hire an estate planning attorney, you probably should.

Also, you shouldn’t automatically assume that probate is worth avoiding.

Probate is often lengthy and expensive in California and Florida, but may be far less cumbersome elsewhere. In addition, small estates typically qualify for simplified probate that’s faster and cheaper.

Probate also has some advantages, including limiting the time creditors have to make claims against your estate. You also might prefer a court’s supervision if you have contentious heirs or you’re concerned that your executor might not carry out your wishes.