Ask Liz Weston

Get smart with your money

Social Security

Q&A: Spousal benefits go to spouse, not partner

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Dear Liz: I’ve been separated from my husband for 50 years but there’s been no legal divorce. If he dies, do I receive his Social Security benefit or does his common-law wife of 20 years?

Answer: You do.

Social Security recognizes common law marriage if a couple lives in a state that recognizes such unions, or lived in one when the marriage began. No state, however, recognizes common-law bigamy. As long as he’s still married to you, he can’t be legally married to someone else.

If the two of you divorced and he re-married, his spouse could qualify for benefits on his work record — but so could you. Since your marriage lasted more than 10 years, you could qualify for divorced spousal benefits (a percentage of his benefit while he was alive) as well as divorced survivor benefits (100% of his benefit when he dies). Your divorced spousal benefits would end if you remarry. If he dies and you get divorced survivor benefits, you would be able to keep those if you’re 60 or older when you remarry.

Q&A: Reducing taxes in retirement

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Dear Liz: I agree with this concept of delaying Social Security to lessen overall taxes and have a further suggestion. My spouse and I are gradually converting our traditional IRA account funds to Roth IRAs. The converted funds are immediately taxable but could continue to gain in value and future distributions would not be taxable. Also, Roth accounts don’t have required minimum distributions.

Answer: Conversions make the most sense when you expect to be in the same or higher tax bracket in retirement.

That’s not the case for most people because they’re in a lower tax bracket when they stop working. Some older people, however, do face higher tax rates in retirement — typically because they’ve been good savers, and required minimum distributions from their retirement accounts will push their tax rates higher.

When that’s the case, they may be able to take advantage of their current lower tax rate to do a series of Roth conversions.

The math can be tricky, though, so it’s advisable to get help from a tax pro or financial planner. You don’t want to convert too much and push yourself into a higher tax bracket, or trigger higher Medicare premiums.

If your intention is to leave retirement money to your heirs, Roth conversions may also make sense now that Congress has eliminated the stretch IRA.

Stretch IRAs used to allow non-spouse beneficiaries — often children and grandchildren — to take money out of an inherited IRA gradually over their lifetimes. This spread out the tax bill and allowed the funds to continue growing. Now inherited IRAs typically have to be drained within 10 years if the inheritor is not a spouse.

To compensate, some people are converting IRAs to Roths — essentially paying the tax bill now, so their heirs won’t have to do so later. Heirs would still have to withdraw all the money in an inherited Roth IRA within 10 years, but taxes would not be owed.

Q&A: The value of waiting

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Dear Liz: This is a follow-up question to one you recently answered about tapping 401(k)s in order to delay the start of Social Security. I am 63 and retired early with a good pension that fully covers my basic living expenses. Any additional money would only be “gravy” for vacations and travel. Would I be taxed the same if I start taking Social Security now vs. waiting? I could easily tap my 401(k) to put off applying for Social Security.

Answer: When it comes to Social Security, if you can wait, you probably should.

Many middle-income people who have retirement funds will pay higher taxes if they start their benefits early, according to researchers who studied the “tax torpedo,” which is a sharp increase and then decline in marginal tax rates caused by the way Social Security benefits are taxed. The researchers found that many could lessen its effects by delaying the start of Social Security and tapping retirement funds instead.

If you’re married and the primary earner, it’s especially important to delay as long as possible because your benefit determines the survivor benefit that one of you will receive after the other dies.

Q&A: Which to tap first: IRA or Social Security?

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Dear Liz: I retired in 2015 but have not started Social Security. My wife and I are living on a pension and savings. I read an article saying that taking early IRA withdrawals and holding off on Social Security can help minimize the so-called tax torpedo, which is a sharp rise and fall in marginal tax rates due to the way Social Security benefits are taxed.

I made a spreadsheet to compare the cumulative income we could expect by starting IRA withdrawals now and delaying Social Security until age 70, versus starting Social Security now and delaying the IRA withdrawals. The spreadsheets indicate that by taking early IRA distributions and delaying Social Security, we would get a significant increase in total cumulative income as the years go by.

We feel we need a professional to verify our results and perhaps advise us as to which might be our best route, as well as getting an assessment of our income tax implications for the next five years or so. My wife thinks we should ask a Certified Public Accountant and is concerned about the price of a fee-only advisor.

Answer: Your findings are similar to what researchers reported in the July 2018 issue of the Journal of Financial Planning. The tax torpedo increases marginal tax rates for many middle-income households. One solution is to delay Social Security until age 70 and tap IRAs instead. That maximizes the Social Security benefit while reducing future required minimum distributions.

It’s always a good idea to get an objective second opinion on retirement distributions, however. Mistakes can be costly and irreversible. A fee-only certified financial planner should have access to powerful software that can model various scenarios to help confirm your results and guide your next steps.

Q&A: Delaying Social Security benefits

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Dear Liz: My wife is a retired schoolteacher who has a pension. Because she is subject to the government pension offset, she will not be eligible for my Social Security benefit when I pass. My plan was to wait until 70 to file to maximize my benefit. This usually has the advantage of also increasing the survivor benefit that a spouse would receive.

Considering the government pension offset would eliminate any benefit to her, is waiting until 70 still the best strategy? Do I view it as longevity insurance with the understanding that I, or my wife, may never receive a nickel from Social Security if I die before claiming?

Answer: As you know, it’s usually advisable for the higher earner in a couple to delay starting Social Security as long as possible, because that increases the survivor benefit one spouse will get after the other dies.

Waiting until 70, when your benefit maxes out, can still make sense. Most people will live past the “break even” age when the larger checks more than offset the forgone benefits. The average life expectancy for a 65-year-old male is another 18 years. If you’re well educated, higher income or have longevity in your family, your life expectancy is probably even longer.

Delaying Social Security also can help minimize the “tax torpedo.” This is a surge in marginal tax rates that affects middle-income households caused by the unique way Social Security benefits are taxed. Drawing from retirement accounts first and then starting Social Security at 70 can result in considerable tax savings.

Also, in today’s low-rate environment, there’s no other investment that promises a guaranteed 8% annual return, which is what you get by delaying Social Security after your full retirement age.

To see which claiming strategy makes sense, consider using a Social Security claiming calculator that can include government pension offset situations such as Maximize My Social Security or Social Security Solutions.

Q&A: Survivor benefits and earnings tests

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Dear Liz: In a recent column, you suggested someone might not want to apply for early survivor benefits if they were still working because earnings over $18,240 will be reduced by $1 for every $2 earned. I don’t understand the logic. One can still earn $18,240, plus half of additional earnings plus the survivor benefit. Why do you recommend it is better to not apply?

Answer: You’ve misunderstood how the earnings test works.

When you apply for Social Security benefits before your own full retirement age and continue to work, your benefit — not your pay — is reduced by $1 for every $2 you earn over a certain limit, which in 2020 is $18,240.

Let’s say your survivor benefit is $1,000 a month, or $12,000 a year. If you earn $32,240 a year, that’s $14,000 over the earnings test limit. Your $12,000 benefit would be reduced by $7,000 — half of $14,000. You’d get $5,000 a year or $416.67 a month.

Now let’s say you earn $42,240, or $24,000 over the limit. Half of $24,000 is $12,000. Your $12,000 benefit is completely offset by the earnings test, reducing your check to zero.

The earnings test disappears at full retirement age, which is somewhere between 66 and 67, depending on when you were born. After that point, your earnings no longer impact your benefit amount.