Ask Liz Weston

Get smart with your money

Retirement

How divorced people can get spousal benefits

By

Dear Liz: I’ve been reading with interest your answers to questions about Social Security spousal benefits, particularly those available to divorced spouses. What if the former spouse is now remarried for more than 10 years, and the current spouse is receiving benefits? Are spousal benefits still available and how are they calculated?

Answer: The answer depends on whose earnings record we’re talking about, so a few pronouns might have helped clarify your question.

Let’s say you’re the earner. If your former spouse has remarried, then he is no longer eligible to receive spousal benefits based on your earnings record. Only divorced people whose marriages lasted 10 years and who are not married can get spousal benefits based on an ex’s earnings record.

If you’re the one hoping for spousal benefits, however, it doesn’t matter that your ex has remarried as long as you’re unmarried. Your ex’s current spouse and any previous spouses who qualify can receive spousal benefits. The amounts they get don’t affect any other spouse’s checks or the checks received by the earner (your ex).

Spousal benefits can be up to half the earner’s “primary insurance amount,” which is the check the earner would get if she started Social Security at full retirement age. The benefits are permanently discounted if the spouse or ex-spouse begins receiving them before his own full retirement age.

In case you missed it: “cliff” retirements and how to tell if Mom is losing it

By

Cliff diverHow can you make up for lost time if you’re approaching retirement age and haven’t saved enough? Adjusting your expectations is the first big step. Read about the others in “Facing the ‘cliff’ of retirement.”

The early signs of dementia may not be what you expect. In “How to tell if Mom is losing it,” you can learn the red flags and why it’s so important to get an early diagnosis to save what your parents have left.

Finally, my friend Donna Freedman writes about an intriguing idea Oregon’s lawmakers are considering–waiving tuition for students who promise to pay back 3% of their salaries over 24 years. Read more in “A college degree with no money down.”

Monday’s need-to-know money news

By

Morning at homeBaby Boomers are facing a different kind of retirement, how canceling credit cards impacts your credit score, how the new home office deduction may reduce your taxes and what happens to joint accounts when a parent declares bankruptcy.

Why Boomers May Not Retire like Their Parents

Is the baby boom generation about to fizzle?

Prepaid Cards that Take a Bite Out of Your Paycheck
Transaction fees could be eating away at your paycheck.

How Canceled Credit Cards Impact Credit Scores
Could cutting up your card affect your credit score?

Here’s What the New Home Office Tax Deduction Method Means
Important information for those who work from home.

Will Filing Bankruptcy Hurt My Children’s Credit?
When sharing credit card accounts becomes a problem.

Friday’s need-to-know money news

By

Cooling fanHow to tweak your retirement, save on summer utility bills, and enjoying having to show an ID.

10-Minute Tweaks to Save Your Retirement
Simple steps that could go a long way towards saving your retirement.

How to Control Your Utility Bills This Summer
Don’t let your air conditioner melt your wallet.

What sounds like a good idea could have long term implications.

How to Ferret Out Senior Discounts
With ages comes wisdom and freebies!

Do You Have to Pay Taxes on Credit Card Rewards?
Do those sweet rewards come with a hidden cost?

Three ways to retire poor

By

Will Work for FoodI hear from a lot of people who think they’re doing the right things with their money—little realizing that they’re impoverishing their future selves. Three behaviors you’re most likely to regret later:

Putting off saving for retirement. Some people spend every dime they make, while others delay saving while they pursue other goals that seem more worthy, like saving for a home or paying off debt. The reality is that retirement savings opportunities are “use it or lose it”—you can’t get back the company matches, tax breaks or (most important) the power of compounding if you don’t get those contributions into your account. Compounding is so powerful, in fact, that it gets harder and harder to catch up the older you get…until it gets impossible. The smarter solution: Start saving for retirement from your first job, and don’t stop.

Cashing out your retirement when you leave a job. The next most widespread and destructive behavior is tapping into what you do manage to save. About 42% of those who lost their jobs in 2010 cashed out their retirement plans, which is about the same percentage as before the recession, according to an Aon report. More than half of those in their 20s cashed out. Not only do you incur taxes and penalties that eat up 25% or more of your withdrawal, but you lose all the future tax-deferred compounding on that money—which means those in their 20s are hurt even more by cash-outs than those who do it later. (Figure every $1,000 you withdraw in your 20s will cost you $20,000 or more in lost future retirement income.) The smarter solution: Leave your retirement money for retirement. If you can’t or don’t want to leave your balance when you leave your job, roll it into your new employer’s plan or into an IRA.

Grabbing your Social Security benefit early. Social Security will be a big part of most people’s retirements, but too few people understand how much they’re hurting themselves—or their loved ones—when they apply early and lock in a permanently reduced check. It’s not just that you’re likely to live past the “breakeven point” when, mathematically, waiting until full retirement age pays off in terms of total benefits. More importantly, you may be cutting yourself off from strategies that would maximize your lifetime benefits and leaving your surviving spouse with a bigger check. Take a minute to read AARP’s excellent primer on the subject, “How to Maximize Your Social Security Benefits,” and use the free calculator at T. Rowe Price to help you understand the impact of different strategies. (If you want more freedom to customize a tool, www.maximizemysocialsecurity.com gives you that for $40.) The smarter solution: View Social Security as a kind of longevity insurance that helps protect you against the possibility of outliving your savings.

 

Is a Roth worth losing a tax deduction?

By

Dear Liz: Everyone talks about Roth IRAs and how beneficial they are. But I am self-employed, my husband contributes 16% toward his 401(k), our house is paid off, and we no longer have dependents to deduct on our 1040 tax return. My contribution to my traditional IRA is the only tax deduction we have left. Should I consider a Roth anyway? If so, why?

Answer: A Roth would give you a tax-free bucket of money to spend in retirement. That would give you more flexibility to manage your tax bill than if all your money were in 401(k)s and traditional IRAs, where your withdrawals typically are taxable. Also, there are no minimum distribution requirements for a Roth. If you don’t need the money, you can pass it on to your heirs. Other retirement funds require you to start taking money out after you turn 701/2. If you need to crack into your nest egg early, on the other hand, you’ll face no penalties or taxes when you withdraw amounts equal to your original contributions.

So is it worth giving up your IRA tax deduction now to get those benefits? If you have a ton of money saved, you want to leave a legacy for your kids and you’re likely to be in the same or a higher tax bracket in retirement, the answer may be yes. If you’re like most people, though, your tax bracket will drop once you retire. That means you’d be giving up a valuable tax break now for a tax benefit that may be worth less in the future.

You may not have to make a choice, however, between tax breaks now and tax breaks later if you have more than $5,500 (the current annual IRA limit) to contribute. Since you’re self-employed, you may be able to put up to $51,000 in a tax-deductible Simplified Employee Pension or SEP-IRA. At the same time, you could contribute up to $5,500 to a Roth (assuming your income as a married couple is within or below the phase-out range for 2013 of $178,000 to $188,000).

This would be a great issue to discuss with a tax pro.