Ask Liz Weston

Get smart with your money

q&a

Q&A: Reducing taxes in retirement

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Dear Liz: It appears required minimum distributions will force me to take an additional $3,500 per month from my retirement funds starting in four years at age 72. This added taxable draw will greatly impact my income tax liabilities as I’m now fully retired. Are there any strategies at this time to reduce the hit? As my current income tax rate is 12% federal and 9% state, perhaps I should convert some of these funds to Roth IRAs?

Answer: Partial Roth conversions when your tax bracket is low can be an excellent way to reduce future mandatory withdrawals and save on taxes in the long run.

Let’s say you’re married filing jointly and have $60,000 in taxable income. The 12% federal tax bracket ends at $83,550, so you could convert more than $23,000 of your retirement funds without increasing your marginal federal tax rate. Conversions can affect other aspects of your taxes and finances, so consult a tax pro before proceeding.

Another way to potentially lower your tax bill may be to temporarily suspend your Social Security payments and take more from your retirement funds. Because of the peculiar way that Social Security is taxed, people often face a sharp rise and then fall in marginal tax rates when they have other income, something known as the “tax torpedo.” A tax pro should be able to determine if delaying or suspending Social Security payments could help you reduce the effects.

Q&A: Digital is safer than paper

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Dear Liz: You’ve advocated for going paperless. My preference for paper financial documentation over electronic versions is that paper provides “proof” in the event something compromises online or email reporting. What am I missing?

Answer: Proof of what, exactly?

That’s not a rhetorical question. If you don’t understand why you’re retaining a document, and what the alternatives are, you risk burying yourself in paper.

Consider your bank statements, for example. Your paper document is just a reproduction of the digital files that the bank securely stores and regularly backs up. If you do the same, regularly downloading statements and backing them up to secure storage, there’s no reason to convert the files to paper. Paper is in fact more vulnerable, since it can burn up in a house fire, be destroyed in a flood or simply have its ink fade to illegibility. In the rare circumstance where you actually need to provide a paper document, you can simply print it out.

Many people don’t even bother downloading their statements. Many financial institutions allow you to access five or more years’ worth of statements for free, which is as long as you’re likely to need such access.

There are a few documents you should keep in physical form either because they’re most useful that way (passports and driver’s licenses, for example) or because accessing or replacing them can be a hassle (birth certificates, citizenship certificates, divorce degrees and military discharge papers, among others). Even these documents, though, should be scanned and stored securely in case they’re lost or destroyed.

Q&A: A widow’s Social Security earnings problem

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Dear Liz: My dear friend lost her husband a few years ago. The husband did something wrong with working and collecting Social Security, so they are now withholding her $2,000 monthly Social Security check, which is devastating to her. Can she be punished for what he did unbeknownst to her? She is stuck and doesn’t know what to do.

Answer: People who start Social Security before full retirement age face the earnings test, which reduces benefits by $1 for every $2 earned over a certain amount (in 2022, the amount is $19,560).

It sounds as though the husband didn’t properly notify Social Security about his earnings and the overpayment wasn’t discovered until after his death. Whenever Social Security is unable to recover an overpayment from someone, the agency can collect from anyone else receiving benefits on that person’s earnings record, said William Meyer, founder of Social Security Solutions, a benefits claiming site.

The letter notifying her about the overpayment would have included a section about her appeal rights. If the earnings information was incorrect, for example, she would have 60 days to appeal and supply the correct amount of his earnings.

She also can call the agency’s toll-free number, (800) 772-1213, and request that less be taken from each check. As long as the total owed is paid off within 36 months, the agency will comply, Meyer says. If she can’t afford to have the overpayment repaid within 36 months, she can request longer but she’ll have to provide proof of her income, resources and expenses, he said.

If she’s in dire straits and can’t afford to pay any of the money back — in other words, if she can’t meet her “ordinary and necessary living expenses” — she should submit an SSA-632, “Request for Waiver of Overpayment Recovery” form, Meyer said.

Q&A: Updating old trusts, estate plans

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Dear Liz: I am 97 with two sons and have a trust prepared in 1991, shortly before my husband died. You warned there can be problems with bypass trusts created in older estate plans. I suspect that’s what I have. The attorney who created my trust died years ago, so I asked my son to do the research. He found an attorney near where I live who told us we should terminate my existing trust. We’re told it would avoid capital gains and my sons would enjoy a stepped-up basis in the assets. The charge would be close to $5,000. If I do nothing, the assets transferred to my sons will have no stepped-up basis and will incur capital gains taxes. I am thinking of a second opinion.

Answer: A second opinion might be a good idea, but please don’t delay. Your sons could wind up paying a potentially large and unnecessary tax bill if you don’t take action soon.

As mentioned in previous columns, bypass trusts were a common feature in estate plans back when the exemption limit was much lower. Although the trusts still have their uses, they’re often not necessary and cause problems for survivors and heirs.

Estate plans should be revisited after a major life change, a revision in estate tax laws or five years, whichever comes first.

Q&A: How to kick your ex off the credit cards

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Dear Liz: My divorce was final in 2016. My ex and I divided our credit cards as part of the settlement. I have several joint credit cards with high credit limits and zero balances. I have used them once a year to keep them in active status. Do I consider canceling them or do I risk lowering my credit score if I do?

Answer: If these truly are joint credit cards, then your ex potentially could run up a balance and default, damaging your credit. Obviously, that’s not ideal. With joint cards, neither party can be removed by the other, so the best option may be shutting down the account.

But joint credit cards are increasingly rare. Most cards used by couples have a primary cardholder and an authorized user. The authorized user is not responsible for paying the bill and can be removed at any time.

Contact the issuers to find out your status on each card: Are you a joint account holder? Primary or authorized user?

If you’re the primary holder on a card and your ex is still an authorized user, ask that your ex be removed. If the account truly is joint or if you’re the authorized user, consider opening one or two cards in your own name before taking any further action.

Your credit scores may still take a hit when you close accounts or get removed as an authorized user, but the additional lines of credit may limit the damage and ensure you still have access to credit.

Q&A: Should this couple leave their estate to kids who don’t share their values?

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Dear Liz: My husband and I are in our 60s and have two grown children. There are no grandchildren, and it’s not looking like there will be any. Sadly, our children do not share our values. We don’t want to leave them our estate because it will end up being given or bequeathed to charities of their choice. They are doing well and don’t “need” the money. However, we also don’t want to “cut them out.” I was thinking about a charitable remainder trust so they could have income during their lifetimes and the assets will go to our charities when they die. Can it be funded with what is left when we die or do we have to put some or all of our assets in it now? Is our estate sizable enough for such a trust? Our assets total about $3 million. A less complicated solution would be to leave them the house and bequeath the cash to charity. What are your thoughts?

Answer: Consider going with the less complicated solution.

Charitable remainder trusts are typically created while you’re alive. You contribute assets to an irrevocable trust and get a tax deduction for the contribution plus an income stream for life. At your death, the charity keeps the remaining assets — the remainder. Because the trusts are irrevocable, you should have careful counseling from an accountant, financial planner, the charity and an attorney before you sign away your assets, said Jennifer Sawday, an estate planning attorney in Long Beach.

You could create a trust that at your death pays income to your children and then contributes the remainder to a charity when they die. Such a trust probably would have to be administered for decades, so you’d need a corporate or other institutional trustee — and those aren’t cheap.

Also, keep in mind that a lot of things could change between now and your deaths. The kids who don’t “need” the money could suffer reverses, or you could. Opinions also can change; they might come closer to your point of view, or you could decide that the issues that divide you are less important than the bond you share. An unchangeable trust may not be the best option in a world that’s constantly changing.