Ask Liz Weston

Get smart with your money

Retirement Savings

Q&A: Finding a fiduciary

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Dear Liz: I am 55 and a single mom of three teenagers. My money has been sitting at a discount brokerage firm unmanaged … ugh!! I need help, but I am afraid to hire someone who will lose my money. Plus, two of my kids are old enough now to open a retirement account. We need help!

Answer: There’s actually no age minimum on contributing to a retirement fund; your kids just need to be earning at least as much money as they’re putting into the account. If they want to contribute the maximum $6,500 to an IRA, for example — or you want to contribute that much on their behalf — they have to earn at least $6,500.

The word you’ll want to keep in mind when seeking help with your money is “fiduciary.” Your advisor should be willing to put in writing that they will put your interests ahead of their own.

Many advisors are held to a lower “suitability” standard, which means they can recommend investments that are more expensive or perform worse than available alternatives, simply because the recommended investment pays the advisor more.

You don’t actually need a human being for investment management, though. Your investing firm probably offers target date mutual funds, which adjust the mix of investments to be more conservative as your retirement date nears. Another option is a robo-advisor, which handles the investing according to a computer algorithm.

Where a human can come in handy is if you have broader financial questions, such as whether you’re saving enough, when you can safely retire and whether your family is adequately insured, among other issues. Your discount brokerage may offer access to fiduciary advisors for a fee or in exchange for investing a certain amount of money.

You can also find fiduciary advisors through the Assn. for Financial Counseling and Planning Education, the XY Planning Network, the Garrett Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners, among others.

Q&A: Should your retirement savings plan include life insurance? Here are some pros and cons

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Dear Liz: Are indexed universal life insurance products worthwhile, and how do they compare to a Roth IRA?

Answer: Both offer the potential for tax-free distributions in retirement, but indexed universal life insurance is a complex product with high expenses that’s not a good fit for most investors.

With a Roth IRA, virtually all of your money can go toward your retirement investment. (Most investments have fees of some kind, but you can minimize those by using exchange traded funds or low-cost index funds.) With permanent life insurance, some of your money goes toward paying premiums for the death benefit and other administrative expenses, including commissions for the person who sells you the policy. The remaining cash can be invested in accounts that are tied to the performance of a stock market index. Your principal is guaranteed, but the amount you earn is subject to caps.

Financial planners generally recommend that you first max out other retirement savings options, such as 401(k)s and IRAs, before considering investing through a life insurance policy. Also, you should be someone who needs permanent life insurance — the kind that is meant to cover you for the rest of your life. (Term insurance, by contrast, is a much less expensive option meant to cover you for a set term, such as 20 years.)

Some people do need permanent coverage. Their estates may be large enough to incur estate taxes that they want to pay with insurance, for example. Or they may have a special needs child who will require ongoing support. If you need permanent coverage, consider hiring a fee-only financial planner to help you sort through your options.

Q&A: Roth IRA or traditional IRA? Here’s why one might be a better choice for young workers

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Dear Liz: My mid-20s nephews and I discussed financial planning for them. After recommending they check with their employers for a 401(k) or equivalent program, we spoke about traditional versus Roth IRAs. Would younger investors benefit more from a Roth IRA because the length of time the money would be invested is so long that the eventual tax-free withdrawal of the earnings outweighs the initial tax benefits of a traditional IRA? At this time, we cannot determine if my nephews will have a higher tax rate post-retirement than now (even assuming income tax rates stay the same).

Answer: The usual advice has been that people should contribute to a Roth IRA rather than a traditional IRA if they expect to be in the same or higher tax brackets in retirement. (Contributions to Roths are not tax-deductible but withdrawals in retirement are tax-free. By contrast, contributions to traditional IRAs are often deductible, but withdrawals are taxed as income in retirement.)

Of course, you can’t predict future tax rates with any certainty. But it’s a pretty good bet that 20-somethings who are at the beginning of their careers will earn more — and thus face higher tax rates — down the road. In other words, your nephews’ current tax rates may be the lowest they’ll ever be. Your nephews may not get much benefit from a tax deduction now but could get huge benefits from tax-free withdrawals in the future.

Also, premature withdrawals from traditional IRAs are usually taxed and penalized, but you can always withdraw the amount you contribute to a Roth without paying taxes or penalties. That flexibility often appeals to young people who worry about “locking up” their money or who don’t yet have a substantial emergency fund.

Q&A: 401(k) payouts and Social Security

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Dear Liz: I was laid off from my job in late 2021 and at 62 was unable to find employment. After six months of unemployment benefits, I filed for Social Security. My 401(k) account from my previous employer was rolled into a traditional IRA. I also took a distribution to carry me through the months without unemployment and to repay a 401(k) loan I used as the downpayment on my home. I was taxed on the total amount of rollover funds, as well as on the distribution, which seems like I paid tax twice. All told, it looks like I made a lot of money in 2022. How will this affect my Social Security benefits going forward?

Answer: You don’t have to pay tax on the 401(k) funds that were rolled into the traditional IRA. If you’ve already done so, please consult a tax pro immediately about filing an amended return to get that money back.

You may have been confused by the 1099-R tax form issued by your 401(k) provider, which reported the entire amount that left your 401(k) account as a distribution. But only the amount that didn’t make it into the IRA is considered taxable.

The taxable distribution isn’t considered earned income that would trigger the earnings test. (The earnings test applies to people receiving Social Security before their full retirement age, currently ages 66 to 67. The test causes $1 to be withheld for every $2 earned over a certain limit, which is $21,240 in 2023.)

But distributions can cause more of your Social Security benefit to be taxable. Taxes on Social Security are based on a unique formula known as “combined income,” which includes your adjusted gross income plus any nontaxable interest and half your Social Security benefits.

If you’re a single filer and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your benefits may be taxable. Married couples filing jointly may have to pay income tax on up to 50% of benefits if their combined income is between $32,000 and $44,000. If their combined income is more than $44,000, they could owe tax on up to 85% of their benefits.

Keep in mind that you don’t lose 50% to 85% of your benefit to taxes. That’s the proportion that is subject to tax.

A tax pro can help you estimate the effect of future distributions and calculate how much you may need to withhold to avoid penalties.

Q&A: Should extra cash go to retirement or emergency savings?

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Dear Liz: I have an excessive amount of money in my bank checking and savings account (about $20,000 in each) and need to know where to invest it. My financial planner advised putting it in my 401(k), but I can’t transfer a chunk of money, I can only increase the percentage I contribute (which is currently at 10% of my salary). I have IRAs, but I can only deposit a certain amount there as well. Where would be the best place for this extra money to go that will pay interest?

Answer: You may not be able to put the money directly into your 401(k), but you could boost your contribution rate at work and tap the “excess” money in your accounts to make up the difference in your paychecks.

First, though, make sure you have an adequate emergency fund. Most financial planners recommend keeping a reserve equal to three to six months’ worth of expenses. This money should be kept in a safe, liquid account, such as an FDIC-insured bank account. You don’t need to settle for the tiny amount of interest many banks pay, however. Some online high-yield savings accounts are now paying over 4%.

Q&A: How to get started managing your retirement assets

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Dear Liz: I’m 72 and still employed with a salary of $80,000. My wife and I have a home with about $1.6 million in equity. We have almost $4 million in real estate investments, $200,000 in stocks, IRAs worth about $250,000 and about $175,000 in cash. Although it may seem like we have a lot, I really have no clue what to do at this time. I worry about the need for long-term care in future for me or my wife, or what would happen if I stopped working and lost that income. I don’t know how to manage the stocks and cash I do have or how to plan for the future. I tried contacting quite a few fee-only financial planners and they all told me they wouldn’t work with me unless I had $500,000 to give them to invest. Any suggestions on where I can get some real advice without giving someone complete control of money that I don’t have anyway?

Answer: You’re describing the “assets under management” model, in which advisors charge a percentage of the assets they manage for clients and often require the clients to have a minimum level of investable assets such as stocks, bonds and cash. This model evolved in part because many people balked at paying directly for comprehensive financial planning, which is time- and labor-intensive.

But this model often isn’t a great fit for people who are just starting out, who don’t want asset management or who, like you, have most of their money in less liquid investments.

Fortunately there are other ways fee-only planners get paid. Some, including those represented by the Garrett Planning Network, charge by the hour. Others, represented by the XY Planning Network and the Alliance of Comprehensive Planners, use the retainer model, in which clients pay monthly or quarterly fees. Interview a few planners from these organizations to find a good fit.