Don’t Delay
James McGlynn | Apr 18, 2024
I HAD LUNCH RECENTLY with a longtime friend—a 66-year-old retiree. I asked him how he’s generating income since he hasn’t filed for Social Security and doesn’t have a pension. He said that, for now, he’s just drawing down his savings. I know his wife is three years older and her lifetime earnings were much lower than his, so I asked him if she’d filed for Social Security. He proudly said that she hadn’t—because she expects to live to age 90, like her mother. What he didn’t know: Because the Social Security benefit based on his wife’s own earnings record is less than half of his benefit as of his full Social Security retirement age (FRA), it probably didn’t make sense for her to delay her own benefit beyond her FRA. Why? Let’s start with the basics: His wife’s spousal benefit is a maximum 50% of his FRA amount. Her benefit would be reduced if she receives benefits—whether it’s benefits based on her own earnings record or his—before her FRA. What if she claims after her FRA? That’ll increase the benefits based on her own earnings record. But it won’t increase her spousal benefit. Moreover, she can’t receive that spousal benefit until her husband claims his benefit. Got all that? Many retirees delay benefits until age 70, thinking that’s the prudent course, given the chance they’ll live to a ripe old age. But in many cases, it’s best to file at your FRA if your spouse is entitled to a much larger Social Security benefit. Let’s continue with the example of my friend and his wife. Suppose his Social Security benefit at FRA is $3,000 a month, while his wife’s benefit at FRA is $1,000 based on her own earnings record. To keep things simple, we’ll also assume her FRA is…
Read more » Last Call
James McGlynn | May 14, 2019
WERE YOU BORN between 1950 and 1953, have been or are currently married, and haven’t yet filed for Social Security benefits? There’s a loophole you may want to take advantage of—before it disappears. For couples, settling on the right strategy for claiming Social Security benefits is critically important, because it affects the size of each spouse’s benefit or spousal benefit, as well as the survivor benefit. But the payoff can be especially large for the group I’m discussing here—those born between 1950 and 1953. In 2015, Congress changed some of the Social Security rules affecting couples, including eliminating so-called restricted applications for those born in 1954 and later. But if you were born before 1954, you were grandfathered and can—for a brief time—still take advantage of this filing option. What’s a restricted application? It’s when a husband or wife files for spousal benefits only. They can do so at their full retirement age—66 for the group we’re discussing—or later. Result: They receive 50% of the other spouse’s full retirement age benefit. For a restricted application to work, the other spouse must have already filed for his or her own benefit. Sound good? It gets even better: Once the spouse who filed the restricted application turns age 70, that spouse can upgrade from the spousal benefit to a benefit based on his or her own earnings record—and that benefit would have grown eight percentage points a year over the intervening four years, for a total of 32%, thanks to delayed retirement credits. Whenever folks tell me they were born before 1954 and haven’t filed for their Social Security benefit, I start thinking about whether they should use this strategy. Take my sister and brother-in-law. My brother-in-law was born in December 1953, so he qualifies to file a restricted application, because he…
Read more » Paying Those Premiums
James McGlynn | Sep 14, 2023
I'M 64 AND PREPARING to sign up for Medicare next year. I’ve done extensive research, including earning the Retirement Income Certified Professional designation. I’ve also written articles for HumbleDollar on Medicare coverage, Medicare premiums, Medigap and health savings accounts. In addition, I’ve befriended Medigap salespeople, advised others on which plans to choose, and asked those on Medicare for advice on their experience with the program. I feel as if I’ve been preparing to take the Medicare filing “exam,” and I’m excited to sign up. I plan on enrolling in traditional Medicare—Part A hospital insurance, Part B doctor services and outpatient coverage, and Part D prescription drug coverage. I’m also purchasing Medigap Plan G, which will pay for my medical expenses after I’ve met my annual deductible. My planning doesn’t stop there, however. Once I’m enrolled in Medicare, I’ll no longer be eligible to contribute to my health savings account (HSA). My 65th birthday is next June, so I’ll only be allowed to save in my HSA through May 2024. In 2024, the HSA contribution limit will increase to $4,150 for a solo contributor like me. Because I’m over 55, I can add another $1,000, bringing the annual total to $5,150. Did you know that allowable HSA contributions are pro-rated in the year you enroll in Medicare? Since I’m only eligible to contribute to the HSA for five months next year, I can contribute 5/12th of $5,150, or $2,145. I’ve got around $25,000 in my HSA already, so my final contribution should bring my balance to around $27,000. I’m saving all I can in my HSA because it’s arguably the best tax-favored account around. The contributions reduce my taxable income. The account grows tax-deferred. And if I use distributions for qualified medical expenses, there are no taxes owed on my withdrawals.…
Read more » Retirement Gambit
James McGlynn | Jan 13, 2021
INSPIRED BY THE TV series The Queen’s Gambit, many people suddenly want to master the game of chess. But I’m more interested in mastering the practical world of retirement gambits—and that means matching wits with Congress and the IRS. During my working career, I saved money in taxable brokerage accounts, IRAs and 401(k)s, but never focused on Roth accounts. At age 55, having left my last employer, I had two things that compelled me to begin—time and reduced income. As an experienced investor but a Roth novice, I wanted initially to take it slowly. The first thing I learned is that you should start a Roth IRA by age 55, so you can withdraw all amounts—contributions and earnings—tax-free beginning at age 59½. For your earnings to be entirely free of taxes and penalties, there’s a five-year waiting period, plus you need to reach the magical retirement age of 59½. If I didn’t open my Roth until age 58, I’d have had to wait until age 63 to access everything tax-free. Aware of this rule, I opened a Roth IRA at age 55 by transferring $1,000 from my traditional IRA. This was my first Roth conversion. I made the transfer in December, but that was enough to claim that year as the first year toward meeting the five-year rule. The reason: Under the tax regulations, what matters is the year you start, not the actual month. Next, I had to analyze if there were any other uses for my traditional IRA that should limit how much I convert to a Roth. I came up with three. The first reason for not converting too much: I wanted to use my IRA to buy deferred income annuities and, under the rules that govern so-called qualified longevity annuity contracts (QLACs), I could only do…
Read more » As the Years Go By
James McGlynn | Aug 7, 2019
YOU CAN THINK of retirement as having four phases. Want to make sure you make the right decisions at the right time? An age roadmap can help. Phase No. 1 is the preretirement period beginning at age 55. Why start then? If you leave your employer after this age, you can access your 401(k) without the usual 10% tax penalty on retirement account withdrawals before age 59½. To have this option, keep your 401(k) at your old employer, rather than rolling it into an IRA. Also aim to open a Roth IRA by age 55. To access the earnings from a Roth without owing taxes, the account must be open for five years and you must be age 59½ or older. You can, however, withdraw your original contributions to a Roth IRA at any time, with no taxes or penalties owed. Bear in mind that, if you have a Roth 401(k) that you plan to roll into a Roth IRA, the five-year clock doesn’t start until you have the Roth IRA established. Don’t have long-term-care insurance? This might be the time to buy. The average age to purchase LTC insurance is 59. Phase No. 2 is age 60 to just before 65, and it revolves around Social Security and Medicare planning. At age 60, Social Security survivor benefits are available. At 62, Social Security worker benefits are available, but they’ll only be 75% of your full retirement age amount—assuming your full retirement age for Social Security benefits is 66. Three months before turning age 65, you should file for Medicare if you aren’t covered by an employer’s plan. Don’t wait until you turn 65, because it takes time to process the paperwork. By filing three months before turning 65, you should be covered on the first day of your birth month. Traditional…
Read more » Roth While You Can
James McGlynn | Sep 30, 2021
NEWS OF ENTREPRENEUR Peter Thiel’s $5 billion Roth account, which was funded with PayPal stock, has motivated Congress to look at restricting the growth and size of Roth accounts. There’s talk of limiting Roth account balances to $5 million or $10 million. There are also proposals to limit both backdoor IRA conversions and so-called mega-backdoor conversions. The latter involves funding a nondeductible 401(k) and then immediately converting the money to a Roth. There’s even discussion of not allowing high-income workers to convert traditional IRAs to Roth accounts. In recent years, Congress has nixed Social Security’s file-and-suspend option and compelled beneficiaries to empty inherited IRAs within 10 years, rather than over their lifetime. But both changes were grandfathered, meaning those already using the file-and-suspend strategy and those who already had inherited IRAs weren’t affected. Presumably, it would be a similar situation with existing Roth accounts. The upshot: If Congress limits the ability to take advantage of Roth accounts in future, it makes even more sense to convert to a Roth today, while the door is still open.
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