q&a Archives - Page 86 of 106

November 16, 2015 By Liz Weston

Q&A: More on Social Security rule changes

Dear Readers: The changes Congress made to the “claim now, claim more later” Social Security strategy generated so many questions from readers that I’m devoting a second column to answering some of those queries. Next week, we’ll get back to the usual mix of personal finance topics.

Dear Liz: I am divorced after being married for 27 years and have not remarried. I was planning to file for early retirement benefits at 62 (I’m 58 now) on either my own or my ex-spouse’s record.

Then at full retirement age, I would switch to the other record, depending on which would be a larger monthly amount. Do the new rules affect early retirement claims the same as they affect suspended benefit claims?

Will I be able to file for early retirement benefits on the smaller payout, then change to the larger at full retirement age using the divorced spousal filing for one of the times?

Answer: The rules never allowed you to do what you’re proposing to do.

If you file for benefits before your own full retirement age, you’re deemed to be applying for both your own retirement benefit and a spousal benefit, and essentially given the larger of the two.

Your benefit would be permanently reduced because of the early start and you wouldn’t have the option to switch later.

The “claim now, claim more later” strategy that Congress targeted involved waiting until full retirement age (66 to 67, depending on your birth year) and then filing a restricted application for spousal benefits only.

That allowed you to collect an amount of up to half the benefit earned by your spouse or ex-spouse. Then you could switch to your own benefit at age 70, when it maxed out, if that benefit was larger.

The rules have now changed so that people who haven’t turned 62 by the end of this year, like yourself, will no longer be allowed to file that restricted application.

Dear Liz: I turn 66 next year. My wife is 63 and receiving Social Security benefits. When I turn 66, can I file a restricted application for spousal benefits?

Answer: Yes. People who are 62 or older by the end of this year still have the option to file a restricted application for a spousal benefit.

That is as long as the “primary worker” (in this case, your wife) is receiving benefits or was able to “file and suspend” before the May 1, 2016, deadline.

Filing for retirement benefits and then immediately suspending the application meant the filer’s benefit could continue to grow while still allowing the spouse to claim a spousal benefit.

Dear Liz: I was married for 23 years and divorced in 2009. I was told by the IRS about a year ago that when I turn 66, as long as I am still working I can collect half of my former husband’s Social Security until I turn 70. Is that still true with the new rules? I am 62.

Answer: You shouldn’t be asking the IRS about Social Security strategies. They have a hard-enough time answering people’s questions about taxes.

Your employment status has nothing to do with being able to get a spousal benefit.

When being employed matters is when you start Social Security benefits before full retirement age. If that’s the case, your check will be reduced by $1 for each $2 you earn over a certain amount (which is $15,720 in 2015 and 2016). That “earnings test” ends when you reach full retirement age (which in your case is 66).

Now, on to heart of your question — and the weird incentive Congress just gave people to get divorced.

Since you’re 62, you’ll still be allowed to file a restricted application for spousal benefits at 66.

If you’re still unmarried at that point, your spousal benefit will be based on your former husband’s earnings record. If you remarry, though, your spousal benefit will be based on your current husband’s record.

If you remarry, your husband will have to be receiving benefits or have filed and suspended by May 1 for you to receive spousal benefits. If you don’t remarry, your ex just has to be old enough to receive Social Security — 62 or above.

So married couples now have an incentive to split up, said economist Laurence Kotlikoff, coauthor of the book “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

If they divorce, one of them can put off starting Social Security benefits, but the other can start spousal benefits — something he or she couldn’t do if still married.

To qualify for divorced spousal benefits, the marriage had to have lasted at least 10 years, the divorce must be at least 2 years old, and the person applying for spousal benefits must not be remarried.

Filed Under: Q&A, Retirement Tagged With: claim now claim more later, q&a, Social Security

November 2, 2015 By Liz Weston

Q&A: Automatic payments

Dear Liz: Since I lost my second job, we have fallen behind on our bills. Although we get paid on Friday, by Monday our checking account is in the red even without buying anything.

It’s all going to automatic payments for things like insurance and college savings for our child. I think the bank has a way of processing transactions to maximize our bounce fees. Should we take control and pay manually? Is automatic payment a recipe for disaster?

Answer: In your situation, yes, because you’re spending more than you make. The bank’s fee-maximizing policies aren’t helping matters, but the fundamental problem is that you’re living beyond your means.

Your first step should be to use a refund calculator to see whether you can lower your tax withholding and take home more in your paychecks. Turbotax has one on its site called TaxCaster that’s easy to use. If you’re on track to get a fat refund next year, adjust your withholding so you can get the money now, when you need it. The human resources departments at your jobs can help with this.

Once you have a clear idea of your current income, review your spending to see where you can cut. Those college contributions should be among the first to go. Yes, you want to educate your child, but other expenses — including current bills and retirement savings — must take priority until your income is higher. Slashing expenses may be painful, but it’s necessary to avoid going into debt or incurring unnecessary bank fees.

You can call the bank and ask it to turn off bounce protection on your debit card transactions, but you may not be able to do so for automatic payments or checks. If that’s the case, you may want to discontinue automatic payments until you get a better handle on your finances.

Another option, if you want to continue with automatic payments, is to sign up for true overdraft protection. This is less expensive than bounce protection and taps your savings or a line of credit if an automated expense exceeds your balance.

Automatic payments are a great way to make sure your bills are paid and that you don’t incur late fees. Automatic payments also can protect your credit, since skipped payments on credit cards and loans can devastate your scores.

But you have to be able to keep a pad of cash in your checking account or have low-cost overdraft protection. If you can’t, automatic payments can cause more problems than they solve.

Filed Under: Banking, Q&A Tagged With: automatic payments, bill payments, q&a

November 2, 2015 By Liz Weston

Q&A: 401(k) and job changes

Dear Liz: I had to resign from my job as a phlebotomist at a hospital. Did I lose the money that was in my 401(k) or do I still have it? How do I find out?

Answer: Any money you contributed to a 401(k) is yours.

Money contributed by your employer may be subjected to vesting rules that could limit how much you can keep. Company matches may vest over time, giving you access to a portion of what’s contributed each year, or they may vest after a certain number of years, giving you access to all the money.

Say your match vests at 20% each year starting with the second year. You would get nothing if you quit after the first year. After the second year, you would get 20% of the match balance (the company’s contribution thus far plus or minus any gains). After the third year, you would get 40% of the match balance, and so on until you are entitled to 100% of the match balance after the sixth year.

You should contact your company’s human resources department to find out what your options are for your account. You may be able to leave it where it is to grow, which may be your best option until you find another job.

At that point, your next employer may allow you to roll the account into its retirement plan. If you can’t keep the money where it is, open an IRA and have the 401(k) provider send the check directly there.

What you don’t want to do is withdraw the money, since you’ll lose a big chunk to taxes and penalties. Even having the check sent to you to deposit into the IRA is a bad idea, since 20% will be withheld, and you’ll have to come up with that cash from another source to avoid taxes and penalties.

Filed Under: Banking, Q&A, Retirement Tagged With: 401(k), q&a

October 26, 2015 By Liz Weston

Q&A: Missing 401(k) plan

Dear Liz: I have two 401(k) plans that have vanished into the night. They are both more than 20 years old and the companies I worked for have been bought, sold, merged, spun off, and nobody knows anything anymore. Between them, the accounts are worth six figures. Do you know of any way I can find out what happened to my money (and hopefully retrieve it)?

Answer: There’s no central repository for missing 401(k)s as there is for missing pensions, which typically can be found at the Pension Benefit Guaranty Corp. So tracking down your money can be tough.

If you still have paperwork from the missing accounts, you might check with the plan providers — the financial services companies that provided the investment choices.

If that’s a dead end, the U.S. Department of Labor’s Abandoned Plan Database shows plans that have been or are about to be terminated, typically with contact information for the plan administrator.

It’s possible that your money was turned over or escheated to a state unclaimed property department. You can check at Unclaimed.org, the official site of the National Assn. of Unclaimed Property Administrators. NAUPA also endorses the site MissingMoney.com.

Another place to check is the National Registry of Unclaimed Retirement Benefits, which is run by a private company called PenChecks that says it’s the largest private processor of retirement checks.

If you do find your money, understand that you may still have missed out on a lot of growth. Your investments may have been converted to cash, which has earned next to nothing in the last two decades, particularly after inflation.

Leaving a 401(k) account in an old employer’s plan can be a convenient option, but only if you’re willing to keep track of the money — and let the administrator know each time you change your address. If that’s too much work, you should roll the account into a new employer’s plan or into an IRA. Your retirement may depend on it.

Filed Under: Banking, Q&A, Retirement Tagged With: 401(k), q&a, Retirement

October 26, 2015 By Liz Weston

Q&A: Lost tax return

Dear Liz: My CPA sent my completed tax return to my home address via first-class mail with no tracking number. The large envelope should have arrived in two days. Over a week has passed and it’s nowhere in sight. I am freaking out as it has all my financial data and is a gateway to fraud of every sort!

The various post office officials have really done nothing to assist in its location. I have credit freezes at all three bureaus and my bank accounts require passwords. What else can I do to try to avert disaster? I have been so distraught it has literally made me ill. And before you say it, yes, this mode of transit will never happen again.

Answer: It shouldn’t have happened in the first place.

With so much identity theft and tax refund fraud these days, it’s astonishing that tax preparers continue to send sensitive, personal information through the U.S. mail with no tracking — and in envelopes helpfully marked with the CPA firm’s name to make the returns easier for thieves to spot.

Your credit freezes should prevent identity thieves from opening new credit accounts in your name using purloined information, but they won’t stop tax refund fraud.

There’s typically not much you can do to protect yourself from this crime. People who have already been the victims of such fraud can request an “identity protection personal information number” or IP PIN from the Internal Revenue Service to prevent future fraudulent filings.

The IRS also allows residents of Florida, Georgia and the District of Columbia to request IP PINs as part of a pilot program, but residents of other states aren’t eligible.

You can try to file as early in the year as possible, but that’s no guarantee a criminal won’t file using your Social Security number first — and then it can take months to get any money you’re owed.

To help protect your bank accounts, see if your bank offers something called “two-factor authentication.” Two-factor authentication requires something you know, such as a password, plus something you have, such as a token that creates unique number codes or code that’s texted to your cellphone.

If your bank doesn’t offer this layer of protection, and only ascertains your identity with the use of security questions, strongly consider moving your accounts to another bank.

Security questions are easy to hack, as evidenced by the massive breach of the IRS’ Get Transcript service, where hackers were able to successfully answer the security questions for hundreds of thousands of taxpayer accounts.

Filed Under: Q&A, Taxes Tagged With: Identity Theft, q&a, tax return, Taxes

October 19, 2015 By Liz Weston

Q&A: Cosigning a loan

Dear Liz: Our son graduated from college last year and was recently hired as a permanent employee for a company he was contracted with for the past year. He wants to buy a new car but has limited credit history.

He has a credit card he has had since starting college. He uses it lightly and pays the balance off every month. If we are asked to cosign a loan, will paying for the car positively impact his credit scores?

Answer: Yes, an auto loan if paid on time should help his credit scores, but you shouldn’t cosign for it.

Many people who cosign loans somehow miss the important point that they are putting their good credit into someone else’s hands — and that one missed payment can trash that good credit, knocking 100 points or more from their scores.

Your son may be the most responsible 20-something on the planet, but he could still make a mistake. The only time that it makes sense to cosign a loan is when you are going to make all the payments on the debt.

He shouldn’t assume that his credit history is insufficient to get a loan. He can get his FICO scores, including the auto scores most often used by lenders, for about $20 apiece at MyFico.com. He should then take those scores to his local credit union to see what interest rate he would be offered on a car loan.

If it turns out his credit isn’t quite up to snuff, the credit union may have some kind of “credit builder” personal loan that can help improve it. (Credit unions are owned by their members and tend to have better rates and terms than many other lenders.)

Since he hasn’t had an auto loan before, discuss with him how easy it is to overspend on a car when you aren’t paying cash.

The costs of insuring, maintaining and repairing a car, plus the depreciation, can be as much as the monthly payment. In other words, the vehicle is likely to cost him twice what he thinks it will.

Once he sees how much of his paycheck is eaten up by car costs, he might be willing to consider buying a used car instead of a new one or saving up to pay cash.

If he does go ahead, make sure he understands the dangers of being “upside down” on a loan. Owing more than a car is worth leaves you vulnerable if the car is stolen or totaled, since you won’t get enough from the insurer to pay off the loan.

You can buy extra coverage for the gap, but a better approach is to make a large down payment and limit the loan term to three or four years.

Filed Under: Credit Scoring, Q&A Tagged With: co-signing loan, Credit Score, q&a

October 19, 2015 By Liz Weston

Q&A: Understanding pension vs Social Security

Dear Liz: I recently retired as a lifelong federal employee after 40 years of service. I participated under the old Civil Service Retirement System. My pension is about $85,000 per year. I will be 64 this year.

Twenty years ago, my ex-wife and I divorced after 17 years of marriage. Friends of mine have indicated that because we were married more than 10 years, I am eligible for a spousal Social Security benefit. I thought because I was covered under the CSRS, any Social Security received would be offset against the monthly pension payment.

I think this is due to the government pension offset, which has been in effect since 1983. My Social Security benefit would in effect be zero. Is my understanding accurate?

Answer: Yes. If you’re receiving a government pension based on work for which you didn’t pay Social Security taxes, then the pension offset typically reduces the amount of any so-called dependent benefits you might receive by two-thirds of the amount of that pension.

That reduction can wipe out any spousal or survivor benefit you might otherwise get.

Before the offset, people with government pensions that didn’t pay into Social Security could wind up better off than people who had paid into the system their entire working lives.
Those who paid into the system would get the larger of the checks to which they were entitled — either the dependent check or their own — while those who had pensions outside the Social Security system could get both their own benefit and dependent benefits.

There is a way you could have received a spousal benefit, and that’s if you had put off receiving your pension, said Laurence Kotlikoff, coauthor of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

If putting off the pension would have increased the amount you received, it could have made sense to do so and take the spousal benefit in the meantime.

There are various other exceptions to these rules, so you should check out the government pension offset information available at the Social Security site, www.ssa.gov.

Filed Under: Q&A, Retirement Tagged With: pensions, q&a, social security spousal benefits

October 12, 2015 By Liz Weston

Q&A: Rolling 401(k) into an IRA

Dear Liz: I’m leaving my job later this month and am trying to decide what to do with my 401(k) account. Some of my friends say to leave it where it is, and others say to roll it into a traditional individual retirement account or Roth IRA. Which is best?

Answer: You can’t roll a 401(k) directly into a Roth IRA. You would first need to roll it into a traditional IRA, then convert that to a Roth and pay the (often considerable) tax bill.

But let’s back up a bit. There are few reasons you might want to leave the money where it is, if you’re happy with your employer’s plan. Many large-company plans offer access to low-cost institutional funds that are cheaper than what you might find as a retail customer with an IRA.

Money in a 401(k) also has unlimited protection from creditors in case you’re ever sued or wind up filing for bankruptcy. When the money is in an IRA, the protection is typically limited to $1 million.

If you’re not happy with your old employer’s plan, you could transfer the account to your new employer’s plan if that’s allowed. If not, you can roll the 401(k) into an IRA, but choose your IRA provider carefully.

You’ll want access to a good array of low-cost mutual funds or exchange traded funds (ETFs). The costs you pay to invest make a huge difference in how much you eventually accumulate, so it’s important to keep those expenses down.

If you want help managing the money, many discount brokerages offer access to financial planners and some, including Vanguard and Charles Schwab, offer low-cost digital investment advice services. The services, also known as “robo-advisors,” use computer algorithms to invest and monitor your portfolio.

You’ll want to arrange a direct rollover, in which the money is transferred from your 401(k) account into the new IRA.

Avoid an indirect rollover, in which the 401(k) company sends a check to you. You would have 60 days to get the money into an IRA, but you’d have to come up with the cash to cover the 20% that’s withheld in such transfers. You would get that cash back when you file your taxes, but it’s an unnecessary hassle you can avoid with a direct rollover.

Before you decide to convert an IRA to a Roth, consult a tax professional.

Conversions can make sense if you expect to be in the same or higher tax bracket in retirement, which is often the case with young investors, and you can tap some account other than the IRA to pay the income taxes. But these can be complex calculations, so you should run your plan past an expert.

Filed Under: Investing, Q&A, Retirement Tagged With: 401(k), Investing, IRA, q&a, Roth IRA

October 5, 2015 By Liz Weston

Q&A: Home remodel

Dear Liz: I would like to add on and remodel so my home will be nice for me when I retire in a few years (probably around age 65).

I have a recently refinanced 30-year mortgage at 4.1%, but I’ve been making additional principal payments on a 20-year schedule. I think I can do what I want for around $200,000. (But of course it may be more.)

Post-construction, I’m estimating that the house would have a market value of $800,000 to $900,000, but the real motivation is to have new heating and air conditioning, new windows and floors, and electrical wiring.

I think I deserve it, despite the major disruption that remodeling provides. My question is: Do I do this with cash, or should I finance it?

If things work out as planned, I’ll have a pension of around $7,000 a month that should take care of my living expenses (including the ability to pay a bit of a higher mortgage), and I have about $350,000 in post-tax savings.

I additionally have about $500,000 in pretax retirement accounts that I plan to draw off of for inflation as the years go by.

I have never been comfortable with a lot of risk — I’ve never even had a car payment — but I probably could have amassed more if I hadn’t been so financially conservative.

Answer: You’re contemplating adding a considerable amount of debt at a time in life when most people are eager to pay theirs off.

They want to reduce their living expenses and the amount they have to pull from retirement funds. Being debt-free is one way to reduce the chances of running short of money after you quit working.

That’s not to say debt in retirement is always bad — especially for people like you, who have enough pension income to cover living expenses plus a good amount of other savings.

Your investments, if properly deployed, are likely to earn a better return than the after-tax cost of your debt. That said, your conservative nature could make it hard for you to sleep at night if you face significant house payments after you stop working.

You should discuss your options with a fee-only financial planner who can evaluate your entire financial situation.

You can discuss tapping your savings for the remodel, taking on more debt, changing the scope of what you want or moving. If what you’re after is a more modern home, it may make more sense to move than to endure the expense and disruption of a major remodel.

If you do remodel, consider adding features that will allow you to age in place more safely, such as installing grab bars, widening hallways and doorways, improving lighting and eliminating steps where possible.

The National Assn. of Home Builders has an Aging-in-Place Remodeling Checklist on its site, at www.nahb.org.

Filed Under: Q&A, Retirement Tagged With: home remodeling, mortgages, q&a, Retirement

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