Ask Liz Weston

Get smart with your money

Retirement Savings

Q&A: Do retirement accounts affect survivor benefits?

By

Dear Liz: I was 36 with two young children, ages 6 and 2, when my husband died. We are collecting Social Security survivor benefits. I work only part time since my kids are so young. He left two IRAs: one that named me as a beneficiary and one that didn’t name anyone. I understand I can treat the first one as if it were my own, and put off taking withdrawals. The second one must be drained within five years. Will the withdrawals from the second account affect my gross income and ability to collect our monthly Social Security benefit?

Answer: The withdrawals will be considered taxable income, but the money shouldn’t affect your survivor benefits.

Social Security benefits received before your full retirement age are subject to the earnings test, which withholds $1 of benefits for every $2 you earn over a certain amount, which in 2025 is $23,400. The earnings test includes wages and self-employment income, but doesn’t include withdrawals from retirement accounts.

Q&A: Be careful when commingling old and new funds in a Roth IRA

By

Dear Liz: I am a stay-at-home mom of 15 years who has a Roth IRA account from working before marriage. I will start working again soon and would like to know how to best protect my separate property from my future community property earnings. Should I start a new Roth IRA instead of adding to my existing one so as to not commingle the funds?

Answer: That could be a smart idea.

In general, assets acquired before marriage are considered separate property. But that status can change if post-marriage funds are added into pre-marriage accounts. The rules vary by state, but making retirement contributions to a new account can help keep the lines between separate and marital property from getting blurred.

Q&A: When it comes to Roth IRAs, 59½ and 5 are the magic numbers

By

Dear Liz: You recently answered a question about Roth conversions, saying that each conversion triggered its own five-year holding period. It was my understanding that after age 59½, the five-year rule doesn’t apply and earnings aren’t taxed.

Answer: The rules for Roth IRAs can be complicated, and they’re different for accounts that you fund directly versus those that are funded through conversions.

If you contribute directly to a Roth, you can withdraw your contributions any time without tax or penalty. You can withdraw earnings tax free if you’re 59½ or older and the account has been open for at least five years.

But as mentioned in the previous column, the five-year holding period applies to each conversion you make from another retirement account into a Roth. What goes away after age 59½ is the 10% penalty for early withdrawal, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Earnings withdrawn before five years can be taxed as income. However, it’s assumed that any withdrawals are principal first, so you’d have to withdraw the entire conversion amount before earnings would be taxed.

Luscombe notes that some people set up separate accounts for each conversion to make tracking the five-year periods easier. That could be especially helpful if they plan to make substantial withdrawals that could include earnings before the last conversion amount hits its five-year mark. Once all the five-year periods have expired, the accounts can be combined into one.

Q&A: Roth conversions and holding periods

By

Dear Liz: Eight years ago I converted a number of stocks from an IRA to a Roth IRA and paid the taxes. Now I am in a position to convert the last shares but want to do it incrementally over the next four years. Does each conversion then require its own five-year waiting period or will anything in the existing Roth now qualify to be withdrawn at any time?

Answer: The IRS requires five-year holding periods before earnings can be withdrawn tax-free from Roth accounts. The five-year rule applies separately to each Roth conversion, so the partial conversions you’re contemplating will each have their own five-year holding period, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That’s different from regular Roth accounts, where the five-year rule starts the year the account was first opened and isn’t triggered again by subsequent contributions, Luscombe says.

Q&A: Navigating the Risks of 401(k)s, IRAs, and Payable-on-Death Accounts

By

Dear Liz: You recently wrote about the drawbacks of payable on death accounts, including that the funds go directly to the beneficiaries before the estate’s expenses are paid. Aren’t all 401(k)s payable on death? I’m often reminded to update my beneficiary info whenever I log into my account. Should 401(k)s be converted to IRAs once we leave our jobs when we retire? At least one of my 401(k) accounts from a previous job is still in that company’s plan, as it is a very good plan. Can we designate that certain expenses be paid from the accounts before our beneficiaries receive their inheritance?

Answer: Retirement accounts, including 401(k)s and IRAs, typically have named beneficiaries that will inherit the money directly. That means retirement accounts have the same potential drawback as payable-on-death bank accounts or transfer-on-death arrangements. If you have no other assets when you die, the person who settles your estate may have to appeal to these beneficiaries to return some of the money to pay your final bills. The beneficiaries usually would be under no obligation to cooperate, however.

You could name your estate as your beneficiary, but that could have some tax drawbacks so you should consult an attorney before doing so.