Some misconceptions about Social Security

Posted on February 22, 2023February 22, 2023 by Danielle

I hear these all the time. Maybe you know all this already, but there’s a lot of misinformation and outdated information, so browse through this as a self-check!

1. You can collect at 65.
Well, technically true—in fact, you can collect at 62, but you’re going to give up a lot. The full retirement age is NOT 65 and hasn’t been since the year 2000. If that one somehow slipped by you, don’t feel bad—most corporations are still designing their retirement programs around age 65 and don’t seem to have caught up with the change, either. If you were born in 1960, or later, your full retirement age is 67.

2. If you’re divorced, you lose all rights to a spouse’s Social Security.
Again, nope. If you were married at least 10 years, you can collect based on your own benefit or ONE HALF your spouse’s benefit as it would be at their full retirement age, whichever is higher. If you claim benefits, the Social Security Administration will give you whichever benefit is higher. Even if your ex-spouse is remarried, you can still collect. If they have multiple spouses, they can ALL collect, and this does not affect yours, theirs, or the ex-spouse’s benefit. You cannot sign away this right in a divorce settlement (and there would be no reason to do so). As long as you do not remarry before age 60, you can choose to collect off the record of whichever spouse (current or ex) has a higher benefit to you.

3. You can choose to collect only a spousal benefit, then switch to your own at 70.
Nope, not anymore. That benefit went away several years ago.

4. A married couple can only get one Social Security benefit.
Again, nope. Each spouse can collect their own benefit based on their work history. If one has a large benefit and the other has a tiny benefit, the spouse with the small benefit will be paid ½ the other spouse’s benefit if higher. Let’s say spouse #1 has a monthly benefit of $2,400 and spouse #2 has a monthly benefit of $900. Spouse #2 will get $1,200. If #2 has a monthly benefit of $1,300 on their own work record, they’ll get $1,300.

5. Once you collect on your own record, you don’t get survivor’s benefits.
If one spouse dies and has the highest benefit, the surviving spouse can collect the full amount of the highest benefit, but will then lose their own. So, the surviving spouse from #4 can collect $2,400, but lose any spousal benefit and will switch from their own lower benefit. For a divorced spouse this is good news, but may be bad news for a married surviving spouse who will now lose some of the income they had as a couple. Don’t depend on Social Security to automatically make this switch–claim it. I’ve seen too many widows who haven’t collected the higher survivor’s benefit for years after they were entitled to it.

6. You’re better off not reporting tips or cash income.
Well, you already know this is illegal. Yes, it probably puts more money in your pocket today, but in the long run you’re screwing yourself out of Social Security benefits as well as (potentially) disability benefits and survivors benefits for your family if you die while the kids are young. Lots of people (hairdressers, food servers, contractors) try to get away with this but if continued for years, really comes back to bite you in retirement benefits. Think again.

7. You should get your money as soon as possible. Social Security will go away.
I first heard this about 45 years ago. Social Security is still here. The American voter (you!) has some say over this—Republicans want to reduce it, make the retirement age even older, and “sunset” the law every 5 years. Yes, Social Security is in trouble, but there are many fixes—including taxing all income, not just amounts under $160,200. Yes, you read that right—people making over $160k pay no further Social Security tax. Maybe there will be changes, but it will probably affect workers earlier in their career, not retirement age. Nevertheless, no one should depend on Social Security for their full retirement income if they can find any way to save.

If you claim early (say, 62) you’re losing about 8% a year in benefits. AND, if you still work from 62 to 63, you give back $1 for every $2 you earn above $21,240. And then there’s that “great” idea that people say they’ll take the benefit and invest it. Will your investments produce a guaranteed 8% return PLUS cost of living increase every single year until your full retirement age and make enough to compensate for your lifetime reduced benefits? Um, no. If you even do save it, which pardon me but I doubt it.

8. I’ll get the dollars it says in my benefit statement.
You’ll get those dollars minus payments for Medicare. So your check won’t actually be as much as your statement says.

9. I don’t need extra health coverage, I have Medicare.
Medicare pays for a whole lot, but not everything—there are deductibles and quite a lot of things it doesn’t pay for. You need some supplemental (known as Medigap) or a Medicare Advantage plan.

10. Medicare Advantage is very low cost or free compared to the Medigap plans. Why shouldn’t I go with it?
Advantage plans can be free, but be sure you look at the deductible, which can be quite substantial, and resets every year. They also have some serious limits on physical and occupational therapy, should you need it. It may be the only choice if policy price is the major consideration, but be aware that it operates much more like an HMO, and your choice of doctors and hospitals may be limited, and procedures denied or reviewed. They may appear to give you a lot of things not covered in a Medigap policy, but this is a teaser for things that are easy and cheap to provide, while they save on more expensive things or choices.

Once you choose an Advantage plan, you generally cannot switch to a Medigap plan. The opposite is not true—those with a Medigap can usually switch to Advantage. Why do you think that is? Because insurance providers make more money for less service with Advantage plans. If you were happy with an HMO, an Advantage plan may work for you, but I don’t favor them in most cases.

When to claim, and all the ins and outs surrounding claiming after a divorce are, of course, somewhat complex and decisions should be made based on your own financial situation. I’m here to help.

Changes to retirement programs while you were on Christmas break

Posted on January 26, 2023January 26, 2023 by Danielle

The so-called Secure Act 2.0, signed into law December 29, 2022, has changed some of the basics of retirement programs for 2023 and beyond, so do be aware.
The maximums you can contribute have gone up, and this may be the greatest benefit for most people who can afford to contribute.
1. Roths now have a contribution of $6,500, with a $1,000 additional catch-up if you’re over 50. This is $500 more than last year. Same for traditional deductible IRAs.
2. If you have a 401k, 403b, 457, or Roth 401k, you can contribute up to $22,500; over 50 you can add another $7,500 for a total of $30,000, up from $27,000 in 2022.
3. HSAs can now snare $3,850 for individuals and $7,750 from families, with $1,000 catch ups.

Another change was that you can delay required minimum distributions from your 401k, 403b, and traditional IRAs until 73 beginning in 2023, and until 75 beginning in 2033. I’m not sure this is actually a good idea, for several reasons:
• It encourages people to keep on working, when maybe they should consider that it’s time to stop, enjoy life, and make way for somebody younger.
• It staves off urgency to save, because, well, you may as well just work forever.
• Once you start RMDs, the required amount will be larger and could possibly kick you into a higher tax bracket where you’ll pay more taxes on your money in a shorter period of time.
• If you never actually get to spend your money, your heirs will probably be in their highest earning years and so they’ll pay more taxes on the money than a retired person might have.
Still, given the hits to investments in the past year, many people will be glad to let their investments ride a little longer without being forced to sell off in an already low market.

It’s depressing to think that the French are going to the mat to protest increasing the retirement age from 62 to 64, while Americans are faced with being forced, er encouraged, to work longer and longer or face retirement poverty on the relatively puny Social Security. And pensions—what’s that?

There are a number of other changes that depend on the discretion of plan sponsors, not individuals. For example, plan sponsors may allow linking of accounts to an emergency fund, consider student loan payments as deferrals for matching, and make emergency withdrawals available. What they actually do offer remains to be seen, and will depend somewhat (as usual) by pressure from employees or their unions. We’re likely to see that pressure exerted on big employers, but more than 99% of people work for small employers—and many don’t even offer retirement plans. So, one faint cheer for better workers’ rights.

Changes to college savings

Posted on November 30, 2022November 30, 2022 by Danielle

Change your thinking! Don’t get stuck following old rules. Tax-favored college savings plans (know as 529s) have had several changes in the last couple of years, and more are upcoming for 2023-2024.

1. You can use them for a kid’s elementary and high school tuition, whereas they were only available for college in previous years. Why would you want to do this? Maybe the child is going to an expensive private school pre-college, but you’re expecting a somewhat cheaper, perhaps state university. Or, the grandparents have set aside significant money or promised to fund college. Or you have stock grants that will vest in 3 years, in time for college but not available now. Usually, the big-ticket item is college, but not necessarily.

2. Federal aid formulas will no longer count grandparent contributions withdrawn from a grandparent-owned 529 plan as student income, as of 2023-2023. It will not be counted against the student for financial aid determinations. Of course, this is only important if the student would be actually eligible for federal student aid. Private colleges can ask about anything they want, and use it in their own private formulae for awarding their own, non-federal funds.
Nearly all private colleges will require the family to file a FAFSA form, but even if a family doesn’t qualify for federal aid, they may still qualify for aid from a private college, especially if the school is seeking to attract the student. But don’t depend on it, and don’t brush off saving with the tired, “My kid is so smart they’ll get a scholarship”. So is every other kid. Don’t bank on it (pun intended).
3. You can contribute more, and you can front-load (as in, you got a bonus or windfall). In 2023, the annual gift tax exclusion rises from $16,000 to $17,000. This applies to each beneficiary, from each donor/giver. Each single yearly gift to each recipient cannot exceed $16,000/$17,000. In addition, there’s a provision for “front-loading” by giving 5 years’ worth of exclusions in one lump sum ($80,000/$85,000 per donor), using up the gift tax exclusion of each donor. But what if you wanted to give more—say, $20,000 to a grandchild per year? The grandparents will need to file a gift return documenting how much more they’ve given, which will count against their lifetime exclusion of $12.6 million. If you anticipate your estate will exceed $12.6 million, your heirs will need to present copies of your gift tax returns. Note: no gift tax is due at the time you give the money—you’re only creating a record to be applied against your estate. Most people will not have a estate that meets the $12.6 million threshold, so likely no gift tax will ever be due. You just need to keep the record and file the form.

4. You can rollover a 529 account to an ABLE account, up to the annual contribution limit In the tragic event that your child becomes disabled before age 26, the money can be transferred to an ABLE account to fund qualified disability expenses, including housing and education. This is a somewhat complex procedure and you’ll probably need to see me about your specific circumstances, but it does allay one fear of contributing—that the money will not be lost or taxed if the child doesn’t go on to further education.