Ask Liz Weston

Get smart with your money

Retirement

Q&A: Social Security and marriage

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Dear Liz: My partner is 69 and receives about $800 monthly from Social Security. I am 66 and receive about $1,100 from Social Security. We are not married but have been living as such for the past 10 years. We own our home together. Does it make sense financially for us to marry?

Answer: When one of you dies, the survivor will have to get by on one Social Security check. If you were married, it would be the larger of the two checks you received as a couple. Unmarried survivors keep their own checks and lose their partners’ benefits, even if the partners’ benefits were larger.

One reason not to marry would be if either of you qualified for spousal benefits based on a previous marriage, and those benefits were greater than what you’re receiving now. Many people don’t realize that divorced people can receive spousal benefits based on an ex’s work record, as long as the marriage lasted at least 10 years and the ex is at least 62. Divorced spousal benefits end, however, when the recipient remarries.

Divorced people who were married at least 10 years also may qualify for survivor benefits if their exes have died. Unlike spousal benefits, however, survivor benefits can continue if the recipient remarries after reaching the age of 60.

Q&A: Using Roth IRA earnings for a first-time home purchase

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Dear Liz: My 29-year-old son recently married, and as a gift I pledged $20,000 as a down payment on a house. My daughter-in-law is beginning a career as a registered nurse and I know they will not be buying for a few years. Is there any type of account that will grow tax-free or tax-deferred for a first-time buyer? Maybe I could gift this money to them into a retirement account for the time being?

Answer: You may be able to give them enough money to fund Roth IRA accounts for both 2015 and 2016. They would be able to withdraw those contributions tax- and penalty-free at any time in the future for whatever purpose they wanted.

Withdrawing earnings from a Roth can trigger taxes and penalties, but that’s not likely to be an issue in this case. Each person is allowed to withdraw up to $10,000 in Roth earnings for a first-time home purchase. If they plan to buy a home within a few years, it’s highly unlikely that your gift would generate enough earnings to cause concern.

The ability to contribute to a Roth begins to phase out for married couples filing jointly at modified adjusted gross income of $183,000 in 2015 and $184,000 in 2016. Assuming their incomes were below those limits, they each can contribute up to $5,500 per year to a Roth. The deadline for making 2015 contributions is April 15, 2016. If you give them the money now, they could fund two years’ worth of contributions at once.

Q&A: Social Security spousal benefit

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Dear Liz: I am 57 and my husband is 60. I will have a bigger Social Security benefit than he will. He plans to retire at 65 when he will take his own retirement benefit. I will file and suspend at my full retirement age (66 and 6 months), at which time he can file for spousal benefits. Then at 70, I can take my benefits. Is this correct? Or is the spousal benefit half of what I will get, which would be less than his reduced benefit anyway?

Answer: The spousal benefit is never more than half the primary earner’s benefit. If that would be less than his own benefit, then it wouldn’t make much sense for your husband to switch from his own check.

In any case, Congress is eliminating the option to file and suspend in order to trigger a spousal benefit. Since you must have reached your own full retirement age to file and suspend, and you won’t have done so by the April 29 deadline, filing and suspending is off the table for you.

It still makes sense for you to delay starting Social Security as long as possible, because you’re the higher earner. When one of you dies, the other will have to get by on a single check, so it makes sense to ensure that the survivor’s benefit is as large as possible.

Q&A: College savings strategy

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Dear Liz: I will be 66 in May 2016. My wife is 68 and retired. She began receiving Social Security when she turned 66. I am still working, making a high six-figure income, and will continue to do so until I reach 70, when my Social Security benefit reaches its maximum. I plan to use my Social Security earnings to save for my grandchildren’s college educations (unless an emergency occurs and we need the income). I want to maximize the amount that I can give them. What is the best strategy, taking into consideration the recent change in Social Security rules relating to “claim now, claim more later”?

Answer: You just missed the April 29 cutoff for being able to “file and suspend.” Before the rules changed, you could have filed your application at full retirement age (66) and immediately suspended it. That would allow your benefit to continue growing while giving you the option to change your mind and get a lump-sum payout dating back to your application date.

Since Congress did away with file-and-suspend for people who turn 66 after April 30, that option is off the table for you. There are other ways to maximize your household benefit, said economist Laurence Kotlikoff, author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” They include:

•Your wife suspends her benefit and lets it grow for another two years, then restarts getting checks when she turns 70.

•At 66, you file for a spousal benefit. People who are 62 or older by the end of this year retain the ability to file a “restricted application” for spousal benefits only once they turn 66. That option is not available to younger people, who will be given the larger of their spousal benefits or their own benefits when they apply.

•At 70, you switch to your own, maxed-out benefit. Again, the ability to switch from spousal to one’s own benefit is going away, but you still have the option to do this.

Consider saving in a 529 college savings plan, which offers tax advantages while allowing you to retain control of the money. You can even withdraw the money for your own use if necessary, although you would pay income taxes and a 10% federal penalty on any earnings.

You should know, however, that college-savings plans owned by grandparents can mess with financial aid. Plans owned by grandparents aren’t factored into initial financial aid calculations, but any disbursements are counted as income that can negatively affect future awards. One workaround is to wait until Jan. 1 of the child’s junior year, when financial aid forms will no longer be a consideration, and pay for all qualified education expenses from that point on.

Obviously, you won’t have to worry about this if your grandchildren wouldn’t qualify for financial aid anyway. If your children also make six-figure incomes, that’s likely to be the case.

Q&A: Social Security claiming strategy

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Dear Liz: Your recent article about Social Security claiming strategies may contain some wrong information. You told the woman who is 64 and had a former spouse who died that she could take her own benefit now and then switch to her survivor benefits when reaching 66. I wanted my wife to do something like this (but not the survivor part; I’m still alive), but was told by a few Social Security experts that this scenario is not possible because Social Security deems spouses to be filing for the spousal benefit and their own retirement at the same time. Once they’re deemed to have filed for both benefits, they get the larger of the two and can’t switch later. Please print a clarification.

Answer: Let’s clarify that you are still breathing and the ex-spouse in the original letter is not. The fact that you’re alive makes a world of difference, not just to you and your loved ones but to the Social Security benefit system.

When you’re alive, your spouse (or ex-spouse) may receive spousal benefits. When you’re dead, your spouse or ex-spouse may receive survivor benefits. Survivor benefits would essentially equal your benefit, while spousal benefits are capped at half of your benefit. Both spousal and survivor benefits are reduced if they’re started before the recipient’s full retirement age (currently 66).

There are other differences. Survivors can remarry at age 60 or later without losing their benefits. They also can switch from their own benefit to a survivor benefit, or vice versa, at any time.

Spousal benefits paid to a divorced person, by contrast, end if that person remarries at any age. Also, there’s the deeming issue you mention. When people apply for spousal benefits before their own full retirement age, they’re deemed or considered by Social Security to be applying for both spousal and their own retirement benefits. They’re given an amount equal to the larger of the two, and they lose the option of switching to their own benefits later, even if it would have been larger.

Those who wait until full retirement age had the option of filing a restricted application for spousal benefits only, which would allow them to switch later. Congress recently eliminated that option for those who haven’t turned 62 by the end of this year.

Q&A: Public pension and Social Security

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Dear Liz: I am one of the thousands of adjunct faculty who teach in our nation’s colleges. We are paid on an hourly or per-class basis. We therefore earn a fraction of what tenured faculty earn. I am covered by a state teachers pension, but my anticipated benefit, even after 30 years of teaching, will not exceed $1,500 per month. I have qualified for a modest Social Security benefit of perhaps $1,000, accrued through years of part-time work as a student and graduate student. I have been told that my Social Security will be reduced because of my teacher’s pension.

Surely this cannot be correct. I understand that if I were collecting a generous state or military pension, I would not need Social Security. However, without my Social Security, my teacher’s pension will not even lift me above the poverty level. Isn’t there some sort of “means testing” before they slash your Social Security benefit?

Answer: You were informed correctly. When you receive a pension from a job that didn’t pay into Social Security, any Social Security benefit you did earn may be reduced (but not eliminated).
Before the creation of the Windfall Elimination Provision, people who received pensions based on earnings not covered by Social Security often got a proportionately larger benefit than those who paid into the system their entire working lives.

The Social Security site has a chart and a calculator to help you understand how your benefit might be affected. The chart shows that if you reached age 62 this year and you had fewer than 20 years of so-called “substantial earnings” covered by Social Security, your monthly benefit could be reduced by up to $413 or half of your teacher’s pension, whichever is less. Limiting the offset to half protects people who get small pensions from having too much of their Social Security benefit wiped out. Substantial earnings are wages equal to or above a certain amount each year ($22,050 for 2015) from jobs that paid into Social Security.

Based on the information you provided, your pension and Social Security income would total just over $2,000 a month. That’s not a lot, but the average Social Security check in 2015 was about $1,300. The poverty threshold in 2015, meanwhile, was $980 per month for a one-person household and $1,327.50 for a two-person household.