Retirement

Q&A: Deferred compensation plans

June 26, 2017 By Liz Weston

Dear Liz: I’m 54 and plan on retiring at 55 with a government pension. I have about $450,000 in a 457(b) deferred compensation plan. I owe about $220,000 on my home. I would like to pay off my 15-year, 2.5% interest mortgage. This would free up $1,900 a month and leave us debt-free. Everyone I’ve spoken to says this is a bad idea since I’d lose my mortgage interest deduction and I’d be “investing” in a low-interest vehicle (my mortgage). My only other obligation is my daughter’s college education, and I’m paying that in cash. Am I crazy to pay off this mortgage?

Answer: You’re not crazy, but you probably haven’t thought this all the way through.

The money in your deferred compensation plan hasn’t been taxed. Withdrawing enough to pay off your mortgage in one lump sum would shove you into a higher tax bracket and require you to take out considerably more than $220,000 to pay the tax bill. You could easily end up paying a marginal federal tax rate of 33% plus any applicable state tax — all to pay off a 2.5% loan.

There are a few scenarios where using tax-deferred money to pay off a mortgage can make sense. Some people have so much saved in retirement plans that the required minimum distributions at age 70½ would push them into high tax brackets and cause more of their Social Security to be taxed. They also may have paid down their mortgage to the point where they’re no longer getting a tax break.

In those instances, it may be worth withdrawing some money earlier than required to ease the later tax bill. The math involved can be complex, though, and the decisions are irreversible, so anyone contemplating such a move should have it reviewed by a fee-only financial advisor who is familiar with these calculations.

In fact, it’s a good idea to get an objective second opinion from a fiduciary any time you’re considering tapping a retirement fund. (Fiduciaries are advisors who pledge to put your interests ahead of your own.)

During your meeting, you also should review the other aspects of your retirement plan. How will you pay for health insurance in the decade before you qualify for Medicare? If you’re a federal employee, you should be eligible for retiree health insurance but your premiums may rise once you quit work. If you’re planning to buy individual coverage through a healthcare exchange, what will you do if that’s yanked away or becomes unaffordable? How will you pay for long-term care if you need it, since that’s not covered by health insurance or Medicare?

You can get referrals to fee-only financial planners from the National Assn. of Personal Financial Advisors at napfa.org. You can find fee-only planners who charge by the hour at Garrett Planning Network, garrettplanningnetwork.com.

Q&A: Money in the bank isn’t safe from inflation

May 29, 2017 By Liz Weston

Dear Liz: I am 68 and not in very good health due to heart disease. I’m not sure what do with my savings of over $1 million, which sits in online bank accounts, earning 1.25% to 1.35% in 18-month certificates of deposit. (No account contains more than $250,000 to remain under the FDIC insurance limits.) The money will eventually go to my daughter, though I could use it for my retirement. I don’t have the appetite for market swings. What should I do with my money?

Answer: Your money currently is safe from just about everything except inflation. If you want to keep your nest egg away from market swings, you’ll have to accept that its buying power will shrink. There is no investment that can keep your principal safe while still offering inflation-beating growth.

If you do want a shot at some growth, you could keep most of your savings in cash but also invest a portion in stocks — preferably using low-cost index mutual funds or ultra-low-cost exchange-traded funds.

Before you know how to invest, though, you’ll need to think about your goals for this money. A fee-only financial planner could help you discuss the possibilities and come up with a plan. You can find fee-only planners who charge by the hour through the Garrett Planning Network, www.garrettplanningnetwork.com.

Q&A: Health savings accounts can supercharge retirement funds, but not for this guy

May 22, 2017 By Liz Weston

Dear Liz: Prior to retiring in 2015, I contributed to a health savings account. At the time my spouse and I were enrolled in my employer-provided high deductible health insurance plan. After I retired, I enrolled in an HMO plan my employer provided, which is not high deductible, and my wife enrolled in a Medicare supplemental plan. Can I make a one-time IRA rollover of $8,750 into the HSA? If not the $8,750, can I make any one-time contribution to the account while I am enrolled in the Kaiser health insurance plan? I have only $53 in the HSA. Are there any reasons to keep the account open or should I close it?

Answer: You did have the option, while you were enrolled in the high-deductible plan, to make a one-time rollover from your IRA to your HSA. The amount you could roll over is capped to the HSA contribution limit. The limit in 2015 would have been $7,650 ($6,650 for a family, plus a catch-up contribution of $1,000 for those 55 and over). You would have had to subtract from the rollover any amounts already contributed to the account that year.

Since you no longer have the high-deductible plan, though, rollovers and new contributions aren’t allowed. There’s no reason to keep open a plan with just $53 in it because most HSA providers charge monthly fees that will quickly eat up such a small balance. (Your employer may have paid these fees while you were working and covered by the high-deductible plan.)

That’s too bad, because a properly funded HSA can be an excellent way to save for medical expenses in retirement. HSAs offer a rare triple tax break: Contributions are pre-tax, the money can grow tax deferred and withdrawals are tax free when used for qualifying medical expenses. HSAs are meant to cover the considerable out-of-pocket expenses that come with high-deductible health insurance plans, but the money in the account can be rolled over from year to year and even invested so it can grow.

Q&A: The confusing balancing act between government pensions and Social Security benefits

May 1, 2017 By Liz Weston

Dear Liz: I am a public school teacher and plan to retire with 25 years of service. I had previously worked and paid into Social Security for about 20 years. My spouse has paid into Social Security for over 30 years. Will I be penalized because I have not paid Social Security taxes while I’ve been teaching? Should my wife die before me, will I get survivor benefits, or will the windfall elimination act take that away? It’s so confusing!

Answer: It is confusing, but you should understand that the rules about windfall elimination (along with a related provision, the government pension offset) are not designed to take away from you a benefit that others get. Rather, the rules are set up so that people who get government pensions — which are typically more generous than Social Security — don’t wind up with significantly more money from Social Security than those who paid into the system their entire working lives.

Here’s how that can happen. Social Security benefits are progressive, which means they’re designed to replace a higher percentage of a lower-earner’s income than that of a higher earner. If you don’t pay into the system for many years — because you’re in a job that provides a government pension instead — your annual earnings for Social Security would be reported as zeros in those years. Social Security is based on your 35 highest-earning years, so all those zeros would make it look like you earned a lower (often much lower) lifetime income than you actually did. Without any adjustments, you would wind up with a bigger check from Social Security than someone who earned the same income in the private sector and paid much more in Social Security taxes. It was that inequity that caused Congress to create the windfall elimination provision several decades ago.

People who earn government pensions also could wind up with significantly more money when a spouse dies. If a couple receives two Social Security checks, the survivor gets the larger of the two when a spouse dies. The household doesn’t continue to receive both checks. Without the government pension offset, someone like you would get both a pension and a full survivor’s check. Again, that could leave you significantly better off than someone who had paid more into the system.

Q&A: Social Security survivor benefits

April 24, 2017 By Liz Weston

Dear Liz: I have been with my significant other for over 30 years. We have an adult son. My significant other has a much larger Social Security benefit than I will have when it’s time for me to retire. I understand that if we were to marry and something happened to him, I would receive his benefit. But the law on Social Security is confusing. It says you have to be married several years to collect your spouse’s benefit unless you have a child. If we were married soon, would I be eligible for his benefits if something happened to him or would we have to be married for many years?

Answer: Social Security benefits can be confusing, but you don’t have to be married for many years to receive benefits.

To qualify for survivor benefits, you typically must have been married for at least nine months. To qualify for spousal benefits, you generally have to be married a year. If you have a natural child together and that child is a minor, the one-year requirement for spousal benefits is waived.

Survivor benefits are what you get when a higher-earning spouse dies. The benefit is 100% of what the deceased spouse received (or earned, if he hasn’t started benefits), but the amount is reduced if you as the surviving spouse begin benefits before your own full retirement age. The current full retirement age is 66 and will rise to 67 for people born in 1960 and later.

Spousal benefits are what you can receive while a spouse is still alive. This benefit is typically equal to half that spouse’s benefit and is reduced to reflect early starts.

You’ll need a longer marriage to get benefits should you divorce. The marriage must have lasted 10 years, and you must not be currently remarried to receive divorced spousal benefits based on your ex’s work record. For divorced survivor benefits, the marriage also must have lasted 10 years but you’re allowed to remarry at age 60 or later.

4 tax hacks you might not know

April 3, 2017 By Liz Weston

You know to contribute enough to your 401(k) to get the full company match. Maybe you’ve even adjusted your withholding so you’re not giving Uncle Sam an interest-free loan.

Yet you may feel the need to do even more, especially if you’re making the last big push toward retirement. These hacks allow you to shelter more money from taxes now and when you retire. In my latest for the Associated Press, the 4 crucial tax hacks you might not know.