Ask Liz Weston

Get smart with your money

Retirement Savings

Q&A: Don’t try evading Roth IRA requirements

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Dear Liz: My son is a student. He would like to maximize his Roth IRA at the annual $7,000 limit and has the money in savings to do so. However, his income from odd jobs, paid in cash, will probably be less than the $7,000 required to make this maximum contribution. Can he report additional income on his income tax beyond what he earned, pay the associated additional income taxes and thus meet the $7,000 income requirement?

Answer: Your son’s enthusiasm for retirement savings is commendable, but filing fraudulent tax returns is not. He can’t contribute more than he legitimately earns.

Q&A: You might have unclaimed retirement benefits. How to find them

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Dear Liz: My wife recently received from the Social Security Administration a notice of “Potential Private Retirement Benefit Information.” It cites a 401(k) account with a previous employer with a relatively small balance and states the “year reported” as 1992. My wife does not have any recollection of ever cashing out this account. Should the account still be accessible or are 401(k) accounts subject to abandoned property laws?

Answer: Keep in mind that many small accounts in that era were simply cashed out. The company sent the departing worker a check with a certain amount withheld for taxes, and that was that.

Still, even a small account could have grown substantially in the meantime, so it’s worth trying to find out if it might still exist somewhere. A couple of places to check first would be the National Registry of Unclaimed Retirement Benefits, which allows you to search using your Social Security number. Another site to check for missing money of all sorts is the National Assn. of Unclaimed Property Administrators.

If nothing turns up, your wife should try to find the plan’s administrator. If she has any old statements or paperwork from the plan, the administrator or plan provider would be listed. If not, and her former employer is still in business, she can call the human resources department to find out what company administered the plan.

If that doesn’t work, her next stop would be the Department of Labor’s efast system to look for the plan’s Form 5500. Employee benefit plans have to file these annual reports and include contact information. FreeErisa is another site to check for Forms 5500.

Q&A: Retirement benefits and taxes

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Dear Liz: We are just getting to the age where mandatory distributions from our retirement accounts have to start. We don’t need the additional cash as we have great pensions. If we convert to Roth IRAs, will the amount in the Roth be subject to minimum deductions going forward? Will our heir have to pay any taxes on the money in the Roth account when inherited? Can we count the amount converted to the Roth account against the mandatory required distribution? I do understand that all the money will be taxed as income when coming out of the retirement accounts.

Answer: Required minimum distributions and Roth conversions have to be separate transactions. Conversions can’t count against your RMDs, and you’re not allowed to put an RMD into a Roth.

Any money you convert to a Roth would, however, reduce future RMDs, since Roths aren’t subject to mandatory distributions. Your heirs wouldn’t pay taxes on inherited Roth accounts, either, although they would be required to drain those accounts within 10 years.

Plus, you’re increasing your pool of tax-free money. This could be especially helpful for whichever of you survives the other, because after the year of death, the survivor probably won’t be able to file as “married filing jointly” anymore and would be subject to less favorable single taxpayer status.

Consult a tax pro, however. Roth conversions can push you into a higher tax bracket and increase your Medicare premiums. A “laddered” approach, or a series of partial Roth conversions over several years, may be advisable.

Q&A: Pensions and Social Security benefits

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Dear Liz: I am a teacher getting ready to retire. I have been collecting a spousal benefit from my husband’s Social Security. My understanding is that once I start collecting my pension, I will be subject to the windfall elimination provision. Is there a way to continue to collect against my husband’s Social Security, which is greater than my own Social Security benefit?

Answer: Because you will be receiving a pension from a job that didn’t pay into Social Security, you’re subject to two provisions: the windfall elimination provision, which can reduce but not eliminate your own Social Security benefit, and the government pension offset, which can reduce or eliminate any spousal or survivor benefit.

If the GPO wipes out your spousal benefit, you may still get at least a portion of your own benefit. Claiming strategy sites such as Maximize My Social Security and Social Security Solutions could help you estimate the effect of those provisions.

Q&A: How to dump your broker and invest your own money

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Dear Liz: I have a mutual fund and a Roth IRA that are actively managed by a broker. The accounts have not done well. I would like to withdraw them from the broker and reinvest them on my own. How do I safely and securely withdraw them from the broker? What paperwork and fees should I expect?

Answer: Look through your records to find the agreement you signed with the brokerage when these accounts were opened. The agreement may include the steps for closing the account along with any fees. You also could try searching for the name of the brokerage and “account closure fees” to see what, if anything, you might owe.

The brokerage may give you the option to manage the account on your own, or you may want to set up accounts at a new, less expensive discount brokerage. Once the accounts have been opened, your new brokerage will help with the transfers. If any of your money is invested in “proprietary funds” — that is, investments offered only at the old brokerage — those investments probably would have to be sold first. Such a sale wouldn’t incur any tax consequences with your Roth IRA. If your mutual fund is proprietary, though, its sale may incur capital gains taxes.

Q&A: Tax consequences of annuity conversion

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Dear Liz: Several years ago my wife inherited an IRA when her mother died. Her banker suggested rolling the IRA into an annuity with an insurance company. That company is difficult to deal with and not forthcoming about how the annuity is invested. She wants to convert the IRA into a certificate of deposit so it is insured by the FDIC. What are the tax consequences of doing that?

Answer: There are many different types of annuities. If your wife purchased an immediate annuity, which offers a stream of payments in return for a lump sum, then she probably can’t change her mind since those transactions are effectively irreversible.

If she purchased a deferred annuity, though, she has more options. Deferred annuities allow people to defer the stream of payments until later — often years or even decades in the future. In the meantime, the annuity may pay a fixed rate, a variable rate based on the performance of underlying investments, or an indexed rate based on a market benchmark.

Your wife won’t face taxes if she switches from a deferred annuity to a CD, since changing investments within an IRA isn’t considered a taxable event. The annuity itself may have surrender charges, however. Because annuities often pay advisors substantial commissions, surrender charges help discourage investors from withdrawing the money before insurers can recoup those fees.

These charges and high expenses in general make deferred annuities a poor fit for many investors, and many financial planners especially dislike seeing them in IRAs. A deferred annuity’s primary advantage is tax deferral, which an IRA already offers.

If your wife feels she was misled about this investment, she can make a complaint with her state insurance regulator.