Q&A: Social Security for a child

Dear Liz: I will be 65 next year and have an 8-year-old son. I have been told by various people that I can receive an extra Social Security allowance for him until he is 18. These same people also said it would reduce my benefit permanently. Is that correct?

Answer: Yes, plus your benefit would be subject to the Social Security earnings test if you continue to work. The earnings test applies when you start Social Security before your full retirement age, which is 66 and 2 months, and could temporarily reduce or even eliminate your benefit.

The earnings test disappears at full retirement age, which is why it’s usually good to wait until then to apply if you continue to work. Most people benefit from delaying the start of Social Security even longer, but your situation may be one of the exceptions because the child benefit can be a valuable, if temporary, addition to the family finances.

A child can receive up to half the parent’s full retirement benefit, typically until the child turns 18. (Benefits can continue as late as age 19 if the child is still in high school.) The parent must apply for his or her own benefit to trigger a child benefit. Also, there’s a limit to how much a family can receive based on one worker’s earnings record. This family maximum varies but can be from 150% to 180% of the parent’s full benefit amount.

Free Social Security claiming calculators typically aren’t set up to handle the possibility of child benefits, so you may want to use one of the paid versions such as Maximize My Social Security or Social Security Solutions to determine your best course.

Q&A: Rising insurance premiums

Dear Liz: I’m an insurance agent specializing in long-term-care policies and just read your advice to the woman who was upset about how much her premiums had risen. Her premiums were $2,400 annually starting when she was 55 but are $4,470 now that she’s 77. First, thank you for noting that these premium increases are because insurance companies didn’t expect people to live so long and nursing home rates to increase so much. Please also tell your reader that, at her age, her premium for the coverage she has now would be well over $12,000! She bought early and she’s definitely getting a ridiculously low premium for the coverage she has. I’m sorry that she’s on a fixed income, but ask her how she’ll pay for a $60,000-per-year stay in a nursing home. If she can’t afford her premium, she should reduce her amount of time covered, not the amount of dollars covered.

Answer: Let’s be clear about who’s at fault here. It’s not the people who bought long-term-care insurance policies and expected them to remain affordable.

Insurers are supposed to be experts at predicting risk, but they made incorrect assumptions about how many people would drop their policies (known as the lapse rate), how many would file claims and how long those claims would last. Insurers also overestimated the returns they could get on their bond investments, which also help determine premiums.

All these stumbles have led to repeated premium increases that have threatened to make coverage unaffordable right when people need their coverage the most.

This woman is well aware of the high costs of long-term care; that’s why she bought the policy in the first place and kept paying it all these years. Her premium might seem “ridiculously low” to you, but anyone with an ounce of empathy could understand that $4,470 is a huge chunk of change for most seniors.

Keeping her coverage means giving up some of the benefits she was promised and had been counting on. Reducing the number of years the policy protects her, for example, could make her premium more affordable but leave her exposed to devastating costs if she needs many years of care.

This is a crappy situation for people who were trying to do the right thing. They don’t deserve to be sneered at for being upset about it.

Q&A: When savings are meager, it might be time to unretire

Dear Liz: I’m 67, retired and have $83,000 in a 401(k) that I left with my employer. Should I see a certified financial planner? Based on my current income, I either need a job, or I have to start pulling $10,000 from my 401(k) each year, which will clean out my account in eight years.

Answer: You definitely need a job.

You could burn through your nest egg even faster than you expect if the stock market drops or an unexpected expense crops up. And retirement is loaded with surprise expenses, from healthcare bills to home repairs to long-term care. Even in a best-case scenario, you’re likely to run short of money long before you run out of breath.

A planner could have warned you about this and suggested that a few more years of working, saving and delaying Social Security could have given you a far more comfortable retirement.

It may not be too late.

If you can return to work full-time, you could suspend your Social Security benefit. That would allow it to grow by 8% each year until you turn 70. If you’re married and the higher earner, that also would increase the survivor benefit that one of you will have to live on once the other dies.

Even if you can’t work full time, a part-time job could ease the drain on your 401(k). If you’re a homeowner, you also could consider a reverse mortgage that would allow you to turn your home equity into a lifetime stream of monthly checks, a line of credit or a lump sum.

A fee-only advisor — one who is paid only by clients’ fees, rather than by commission — could help you review your options. The Garrett Planning Network offers referrals to fee-only planners who charge by the hour.

Another option for people on a budget: accredited financial counselors or financial fitness coaches. These folks aren’t certified financial planners, but they can help with budgeting, debt management and retirement planning. You can get referrals from the Assn. for Financial Counseling & Planning Education.

Q&A: This generous gift has no tax effects

Dear Liz: If I give $15,000 to my grandson, do I report it on my tax return? Is it deductible? Does my grandson report the gift on his tax return and does he owe tax on it? What if three sets of grandparents (parents and stepparents of his parents) do the same?

Answer: No, no, no, no and it doesn’t matter for tax purposes (although obviously your grandson should be delighted he has such generous grandparents).

Gifts to individuals aren’t tax deductible, but neither are they taxable to the recipient.

People can give a certain amount each year to as many recipients as they like without having to report the gifts via a gift tax return. In 2019 and 2020, the limit is $15,000. Each grandparent could give up to that amount to your grandson; he wouldn’t have to report the income on his tax returns, and it wouldn’t cause any of you to have to file gift tax returns.

There’s no limit to the number of people who can give $15,000 to your grandson this way.

You wouldn’t owe gift taxes until the amount you’d given away above the annual exemption limit exceeded $11.4 million.

Q&A: Too many credit cards? Protect your credit scores while closing accounts

Dear Liz: Over the years, my husband and I have accumulated a number of credit cards. All have had a zero balance for years. I want to start canceling these cards, but I’m concerned that will hurt our great credit scores. How should I go about this, or should I?

Answer: As you probably know, closing credit accounts won’t help your scores and may hurt them. That doesn’t mean you can never close a credit card, but you shouldn’t close a bunch of them at once or close any if you’ll be in the market for a major loan, such as a mortgage or auto loan.

If you’re not planning to borrow money in the near future, then you can start closing accounts one at a time. You’ll probably want to keep the cards with the highest credit limits, and perhaps your oldest card as well. Monitor your scores to see how long they take to recover from each closure. You may need to wait a few months before shutting the next account.

Be sure to use your remaining cards occasionally by charging small amounts and paying the balance in full. That will keep the cards active and help prevent the issuer from canceling them.

Q&A: Direct tuition payment pros, cons

Dear Liz: You recently answered a question from someone whose parents misused trust funds intended for their child’s education. I chose to pay the colleges directly each semester once my grandchildren enrolled rather than give money to the parents. I decided that was the only way I could be assured the money went for what grandma intended.

Answer: Your grandchildren are fortunate to have a generous grandmother, but your strategy has some drawbacks as well as advantages.

Direct tuition payments aren’t considered gifts to the child, which means no gift tax return is required. Your payments could, however, reduce any need-based financial aid the children could get. Also, your approach requires that you be ready and able to make the tuition payments when the children reached college age. Your death or a financial setback could have turned your good intentions into an empty promise.

Q&A: Don’t fall for these common Social Security misconceptions

Dear Liz: I decided to start taking Social Security benefits this summer when I turned 62. My monthly benefit is $1,809. My wife turned 62 at the end of last year and started her benefit of $841 a month. I just accepted an unexpected job offer that will pay me more than $130,000 a year. I suspect I should consider suspending my benefit at this point and work as many years with this company as possible. If I choose to suspend my benefits now and allow my benefits to remain suspended until my full retirement age of 66 years six months, I will pass up benefits of $112,000 over the next 4.5 years. Granted that amount will be overshadowed by the additional new income and the opportunity to contribute to a 401(k), but is it out of the question to continue my current benefit and just pay the 85% tax on the Social Security we receive each year in addition to our other income?

Answer: Social Security is complicated, so it’s not surprising that so many people get the details wrong. Unfortunately, those details can have a huge effect on financial well-being in retirement. The difference between the best claiming decisions and the worst can total more than $250,000, researchers have found.

Let’s start with the detail you need most: You don’t have the option right now of suspending your benefit. Only people who have reached their full retirement age can suspend. You can, however, withdraw an application within the first 12 months. You will have to pay back all the money you’ve received from Social Security, but then it will be as if you’d never applied. Your benefit can continue to grow by 5% to 8% each year until you restart your benefits or turn 70, whichever comes first.

Withdrawing your application is a good idea because otherwise your new job will offset all of your Social Security benefit.

Because you started Social Security early, you are subject to the earnings test and your benefit will be reduced by $1 for every $2 you earn over a certain limit, which in 2020 is $18,240. Your six-figure income would reduce your benefit to zero.

This earnings test disappears at full retirement age, and any money that was withheld because of it is added back into your benefit over time. In the meantime, however, you’ve given up the more valuable 5% to 8% growth in your benefit and reduced your survivor benefit as well.

Social Security taxation also works differently than what you’ve described. You never have to pay taxes equal to 85% of your benefit. If your income exceeds certain levels, then up to 85% of your benefit could be subject to taxation. (To illustrate, that means if you’re in the 10% federal tax bracket, you’d pay 10% on up to 85% of your benefit. It’s more complicated than that, but that may help you understand the difference between losing a huge chunk of your benefit and having to pay tax on a portion of it.)

Given all these complexities, it’s important for people to use a few Social Security claiming calculators before applying. Ideally, they also would consult a financial planner who’s been educated on Social Security claiming strategies.

Q&A: Finding income for widow and children

Dear Liz: You recently answered a question from someone about Social Security survivor benefits for her grandchildren. The young father who died had been paid under the table, which meant his employment didn’t qualify the children for survivor benefits. It’s a long shot, but perhaps the young man filed his taxes as if he were self-employed, in which case his employment would count toward Social Security’s requirements. If no returns were filed, perhaps the family could consider preparing and filing the returns for the last several years. That could trigger a tax bill, but the cost probably would be outweighed by the potential benefits to these young children.

Answer: That’s certainly an option worth exploring with a CPA or tax attorney, especially if the father had a bank account or some other way to document the cash he received.

As mentioned in the previous column, Social Security survivor benefits can be paid to the children of qualified deceased workers until the kids turn 18 (or 19, if they are still in high school full time), but the worker needs to have paid into Social Security a certain length of time. The children’s mother also might be eligible for benefits, if she was married to the father. As a widow caring for the deceased person’s minor children, she would be entitled to benefits until the youngest child turned 16.

Q&A: Social Security doesn’t prevent working

Dear Liz: I have a friend who is in her early 70s and earns income from her own business but she said that she also collects Social Security. How is this possible? I thought that a person cannot earn income from a job or self-employment while also collecting Social Security. Am I wrong?

Answer: Quite wrong.

Nothing prevents people from working while receiving Social Security. If they’re receiving benefits before their full retirement age — which is currently 66 — their checks are subject to the earnings test. That test reduces the amount they receive by $1 for every $2 they earn over a certain limit, which in 2019 was $17,640.

Once people reach full retirement age, the earnings test goes away and they no longer have to worry about its effect on their checks.

Q&A: A surprise pension creates investment concerns

Dear Liz: Before my husband died, I encouraged him to find out if he had a pension. He worked for his company for more than 10 years and was vested, but he didn’t think he qualified. A few months after he died, I found an unopened letter stating he would receive a pension after he reached his retirement date. I contacted the benefit plan service center and submitted the required documents. I now have two options for receiving the money as his beneficiary: a lump sum or a single-life annuity that would pay a monthly benefit for my lifetime only. The lump sum could be rolled over into an eligible employer plan or traditional IRA, neither of which I have, or paid directly to me, in which case the whole amount is taxable. I am 65 and my only income is his Social Security survivor benefit and a small pension from my company when I retired. So what is the best thing for me to do?

Answer: Thank goodness you found that letter. It’s unfortunate your husband didn’t understand that “vested” meant qualified to receive a pension.

You don’t have to have an employer plan or an existing IRA to keep the lump sum from being taxed right away. You can open an IRA for the sole purpose of receiving the rollover. A bank or brokerage can help you set this up.

Any withdrawals would be taxed, but you wouldn’t be required to start taking withdrawals until you turn 70½. Even then, you would be required to withdraw only a small portion each year (a little less than 4% to start). You can always take more if you want.

Your income is low enough that taxes shouldn’t be driving your decision. Instead, consider whether you’d rather be able to tap the money at will or have more guaranteed income for the rest of your life.

If you don’t have other savings, you may want to have this pool of money standing by to use for emergencies and other spending. On the other hand, an annuity is money that you don’t have to manage and that you can’t outlive or lose to fraud, bad investments or bad decisions. If you have enough emergency savings, adding more guaranteed income could help you live a bit more comfortably.