Ask Liz Weston

Get smart with your money

Q&A

Q&A: Social Security and the tax torpedo

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Dear Liz: People are typically advised to wait as long as possible (full retirement age or later) to take Social Security to maximize the benefit. If a couple has low expenses and substantial pensions, wouldn’t it make sense to take Social Security earlier, to preserve retirement funds to pass on to their heirs? Social Security payments stop upon death, whereas retirement accounts are passed on to heirs.

Answer: If your primary concern is preserving an inheritance, maximizing your Social Security payments could help you reduce how much you have to withdraw from retirement funds in the long run.

Starting early also could make you more susceptible to what’s known as the tax torpedo, which is a sharp increase in marginal tax rates due to how Social Security is taxed when someone receives other income. People who only receive Social Security don’t face the torpedo, and higher-income people probably can’t avoid it, but middle-income people may be able to lessen the hit by delaying Social Security and drawing from their retirement funds instead.

One way to preserve assets for heirs is to convert traditional retirement accounts to Roth IRAs. This requires paying taxes on the conversions, but then you wouldn’t face required minimum distributions on the Roth accounts.

Calculating the best course can be difficult. You can pay $20 to $40 to use sophisticated claiming software such as Social Security Solutions or Maximize My Social Security to model various options, or consider consulting with a fee-only advisor.

Q&A: Long-term-care insurance

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Dear Liz: I’d appreciate your thoughts about long-term-care insurance programs. Ours has just announced a 52% rate increase with a possible 25% increase next year. Although I realize that none of us can predict the future, are there any guidelines you can suggest for deciding whether, for example, an 80-year-old in good health needs the maximum 10-year coverage or can get by with a three-year coverage period?

Answer: Most people over 65 will need some kind of long-term care, but most need it for less than three years. You may want to err on the side of caution and opt for a longer coverage period if you have a family history of dementia.

Q&A: Retiring early doesn’t mean losing affordable health insurance

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Dear Liz: I am 55 and have health issues that I don’t talk about at work. I want to retire soon. I know that getting health insurance is going to be hard. I am just at a loss as to how I am going to keep working when I don’t feel well. What are my options?

Answer: In the past, getting health insurance could be difficult or prohibitively expensive if you had even relatively minor health conditions. That changed with the Affordable Care Act, which requires insurers to extend coverage without jacking up the premiums for preexisting conditions. In addition, most people qualify for tax subsidies that reduce the premiums, and those subsidies were expanded this spring when President Biden signed the American Rescue Plan into law. You can start your search for coverage at HealthCare.gov.

Before you quit, however, consider whether your employer could make accommodations that would allow you to continue working. Many people at 55 don’t have enough saved for a comfortable retirement that could last decades. Shifting to part-time work, if your employer allows it, could help you continue to save or at least reduce the amount you need to withdraw from your savings.

Q&A: Refinance or use IRA funds on mortgage?

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Dear Liz: I owe $360,000 on my mortgage. I have sufficient funds in my IRA to pay this amount off without depleting income distribution for the next 20 years. I am currently paying $1,100 monthly on an interest-only loan, but I have to start making much larger principal payments in November 2022. Would you advise withdrawing IRA investment monies (and taking a tax hit) to pay off the full loan amount, or simply getting a conventional mortgage and live with a higher payment ($1,500) each month? I am 77 and retired now for four years.

Answer: Making that large a withdrawal will almost certainly hurl you into a much higher tax bracket and increase your Medicare premiums. Refinancing the mortgage while rates are low likely makes the most sense, but consult a tax pro or a fee-only financial advisor before making any big moves with retirement funds.

Q&A: Pensions and Social Security benefits

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Dear Liz: My situation is similar to the former teacher who wrote about a pension impacting Social Security benefits. I started Social Security at 62. My wife’s government pension is from a job that didn’t pay into Social Security. I’ll receive her pension if she should die before I do. If this occurs, how will my Social Security be impacted?

Answer: It won’t, because your situation is actually the reverse of the former teacher’s.

You paid a portion of each paycheck, currently 6.2%, into the Social Security system. The teacher (and your wife) did not, so their benefits are affected by rules designed to prevent people who didn’t pay into Social Security from getting more than those who did.

Q&A: Investing a windfall

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Dear Liz: My husband and I are retired and recently inherited a large sum of money. We already have money of our own invested and have a good income. Would a whole-life insurance policy based on an index account be a good place to put this money?

Answer: The insurance agent trying to sell you that policy certainly thinks so, because it’s an expensive product that would generate a substantial commission. You’d be smart to get a second opinion from a fee-only financial planner that doesn’t profit from the investments they recommend.