Financial Strategies

Changes To Social Security Will Take Away Some Key Planning Strategies That Couples Used To Boost Their Total Benefits

As part of recent negotiations between Congress and the White House over the budget, major changes to Social Security took away some key strategies that couples could use to boost their total benefits.

File and Suspend

Under this strategy, a higher earner at full retirement age (currently 66) would claim his benefit, enabling his lower-earning spouse to claim a spousal benefit (generally half of the higher earner’s benefit). He then immediately would suspend  his benefit so that he could earn 8% a year in delayed retirement credits until he reapplied up until age 70. In the meantime, his lower-earning spouse would collect monthly spousal benefits.

This new legislation will change the rules so that if someone suspends benefits, no one can collect based on his earnings record. That puts the kibosh on the spouse’s benefit.

That means that people who are getting benefits now under the strategy will continue to receive them, and those who want to try to maximize lifetime family benefits using this strategy will be able to for a while longer. You must be at least age 66 to use this tactic, and the window will probably close around May 1, 2016.

Another useful benefit of the file-and-suspend strategy is that it can greatly enhance the opportunity to collect benefits retroactively. Generally, Social Security will not pay more than six months’ of benefits retroactively. But, for those who file and suspend at age 66, any benefits due from that point on can be collected retroactively. Let’s say you file and suspend at 66 to earn delayed retirement credits, but become ill at 69. In that case, you could collect three full years worth of benefits retroactively if you were willing to forfeit the delayed retirement credits. This change in Social Security wipes out this option.

Restricting an Application

Under the current rules, if a beneficiary applies for benefits between ages 62 and full retirement age, that beneficiary will be paid the highest benefit he is entitled to — whether that is his own benefit or a spousal benefit. By waiting to full retirement age to claim, a beneficiary has had the opportunity to “restrict an application to spousal benefits only.” The reward: You could collect the spousal benefit while allowing your own benefit to grow thanks to 8%-a-year delayed retirement credits.

The new law will eliminate this option for most future beneficiaries.

There’s a caveat: Anyone age 62 or older at the end of 2015 is spared this clampdown. They will continue to have the option, at age 66, to restrict an application to spousal benefits only.

Since the file-and-suspend strategy is disappearing, this will work only if one spouse is actually receiving benefits. In that case, the other spouse could file a restricted application and collect spousal benefits at the same time he or she continues to rack up delayed retirement credits.

Couples in this situation will have to carefully weigh whether the lower earner should trigger his benefit in order for his spouse to claim a spousal benefit. Equal earner couples who both want to delay their own benefits may want to forgo bringing in income through a spousal benefit so that they can both boost their benefits. Couples who have unequal benefit amounts could find it advantageous to have the lower earner claim his benefit and have the higher earner file a restricted application for a spousal benefit.

The Good News

While these claiming strategies will disappear, some key Social Security rules that allow beneficiaries to boost benefits will remain. Beneficiaries will still be able to earn delayed retirement credits of 8% a year up to age 70 if they wait past full retirement age to claim benefits.

Also, a beneficiary will still be able to voluntarily suspend his or her own retirement benefit at age 66 or later, as a beneficiary can do now. That’s good news for someone who claims a reduced benefit early, but later wishes he hadn’t. Once he reaches full retirement age, he can choose to suspend his benefit to earn delayed retirement credits up to age 70 to erase most of the reduction from claiming early.

Financial Strategies

The Roth IRA “Back Door” Stategy

Roth IRAIf your income is too high, you can’t contribute directly to a Roth individual retirement account, but you can get one in a “backdoor” way.

Step 1: Open a traditional IRA (in your case, it’s nondeductible).

Step 2: Convert it to a Roth IRA. Is it worth it? “It’s a no-brainer if you have the cash to do it,” says Kevin Huston, an enrolled agent in Asheville, N.C. who has clients both young and old doing it to shore up their retirement savings. “It especially makes sense for people who are younger because they have all these years of tax-free growth,” he says.

Basically, you get an extra $5,000 (or $6,000 if you’re 50 or older) each year that grows in the Roth IRA income-tax free. That’s $10,000 (or $12,000) a year for a married couple. Repeat each year, and you can amass a nice retirement kitty. The audience for backdoor Roths is a niche, appealing to those earning too much to contribute to Roths directly but not so much that the extra tax savings doesn’t seem worth the effort. Vanguard says that “backdoor Roth” contributions represented about 2 percent of traditional IRA contributions in 2011. (Income restrictions on conversions were lifted starting Jan. 1, 2010, so anyone—regardless of income—can convert a traditional IRA to a Roth.)

Why go through the hoops of getting money into a Roth IRA? They are an amazing deal, especially for folks looking long-term and expecting higher tax rates in the future. With a Roth IRA you don’t ever have to take money out, and when you do start taking money out, it’s all income-tax-free, including the earnings. By contrast, with a traditional IRA, earnings grow tax-deferred, you have to start taking required mandatory distributions the year after you turn 70.5, and distributions count as income. A Roth can help keep your tax bite down in retirement. (Ideally you want a mix of taxable, tax-deferred and tax-free accounts to draw from in retirement.)

For an example of how one couple is using this strategy to build their nest egg and a more complete analysis, visit the link “The Serial Backdoor Roth, A Tax-Free Retirement Kitty” at

Financial Strategies

Social Security Super Secrets For Married Couples

imagesSocial Security may be broke and busted but it’s still writing checks; get all to which you are entitled before it changes. Here are three “super secrets” for married folks:

1. Pick which retirement you want; yours or your spouse’s. Obviously select the one that pays you the most. Often in a marriage there is a huge difference in wages. But even if the lower wage earner worked and has their own Social Security benefit, he or she may elect to receive an amount equal to half of their spouse’s instead. This is called your Spousal Benefit.

2. Double dip. A person who has reached full retirement age could elect to take his or her Spousal Benefit and delay taking their own Social Security benefit. Working or not, take your Spousal Benefit and delay your own and let it grow until you’re age 70. It doesn’t matter if your spouse is taking their Social Security benefit or not. Upon age 70, if your own benefit is higher than the Spousal Benefit you’ve been receiving, just swap and take your own. That’s more money for you now and potentially more money for you later.

3. Getting paid to wait. Typically, when one spouse hasn’t worked outside of the home as much as their mate, she won’t have much, if any, Social Security benefit and will default to receiving her payments when her higher earning spouse retires and decides to start taking Social Security payments. Do not wait. Once both spouses reach full retirement age, the higher earner (the husband in this example) should go ahead and file for his Social Security benefits. Then the lower earning wife files for her Spousal Benefit and, step three, the husband immediately suspends his Social Security benefit request. His benefit amount will continue to increase (by about 8 percent per year) and then when he reaches age 70, he can re-file to start taking his Social Security retirement benefit. This will give the wife free monthly money instead of thinking she must wait until hubby fully retires and takes a check from Social Security before she can…very cool idea.

Financial Strategies, Taxes

Don’t Ignore Required Minimum IRA Withdrawals

unnamedIRA owners turning 70-1/2 this year must comply with required minimum withdrawal rules — or pay a costly penalty.

If you own one or more traditional individual retirement accounts and will turn 70-1/2 this year, get ready to start taking mandatory annual payouts and paying extra income taxes. In fact, the whole reason our pals in Congress dreamed up the so-called required minimum distribution (RMD) idea was to force IRA owners to pay additional taxes sooner rather than later.

Unfortunately, complying with the RMD rules is not something you can afford to put off. If you fail to take at least the required amount each year, the Internal Revenue Service can assess a 50% penalty on the shortfall (the difference between what you should have taken out and what you actually took, if anything).

Keep in mind that simplified employee pension (SEP) accounts and Simple IRAs are considered traditional IRAs for purposes of the RMD rules. So you have to consider these accounts along with any garden-variety traditional IRAs set up in your name when figuring out how much you need to withdraw to avoid the dreaded 50% penalty.

If you have several accounts, you can take the required annual amount from any one account or from any combination of accounts. Here’s the rest of what you need to know about RMDs and avoiding the penalty for failing to take them.

Initial Year Required Minimum Distribution (RMD)

For the year you turn 70-1/2 and for every year thereafter, you must take an annual RMD as long as you have any traditional IRA balances. The initial RMD for the year you turn 70-1/2 can be taken as late as April 1 of the following year. Alternatively, you can take it by Dec. 31 of the year you turn the magic age. Then for each subsequent year, you must take another RMD by no later than Dec. 31 of that year. If you turn 70-1/2 this year, there is a good reason to consider taking your initial RMD by the end of this year rather than taking it next year by the April 1 deadline. Consider the following example.

Example 1: You turn 70-1/2 in 2011. You decide to put off taking your initial RMD until next year. That puts you in the double-dip RMD mode for 2012. You must take your initial RMD by no later than April 1, 2012 (that one is actually for 2011, the year you turned the 70-1/2). Then you must take your second RMD by Dec. 31, 2012 (that one is for 2012). If you have lots of IRA money, falling into the double-dip mode could push you into a higher tax bracket. For instance, say your IRA balance is $500,000, thanks to money rolled over from employer retirement plans. Being in the double-dip mode for 2012 would force you to take two RMDs totaling about $36,000 next year. If you instead take your first RMD in 2011 and the second one in 2012, the RMD for each year would be around $18,000, and you might pay a lower tax rate. Waiting until next year could also cause you to fall victim to various unfavorable rules that kick in at higher income levels. For instance, it could cause a higher percentage of your 2012 Social Security benefits to be taxable.

Bottom line: If you have lots of IRA money, you may be better off taking your initial RMD this year, even though that will trigger some taxable income that could otherwise be deferred until 2012. On the other hand if you don’t have so much, waiting until next year is usually the right choice.

How to Calculate RMDs

The RMD amount for a particular year equals the combined balance of all your traditional IRAs (including any SEP or Simple-IRA accounts) as of the end of the previous year divided by a joint life expectancy figure found in IRS tables. As you get older, the life expectancy divisor becomes smaller, and the annual RMD amount becomes a higher percentage of your IRA balance.

The joint life expectancy divisor is based on your age and the age of a beneficiary who is automatically assumed to be 10 years younger. This rule applies even if you have no beneficiary or if the beneficiary is actually older than you. The only exception to the rule is when your spouse is designated as the sole IRA beneficiary and he or she is more than 10 years younger. In this circumstance, you’re allowed to calculate RMDs using more favorable joint life expectancy figures based on the actual ages of you and your spouse.

The most important thing to understand is that IRA owners who have reached 70-1/2 cannot afford to ignore the RMD rules. The 50% penalty for noncompliance is too expensive. If you turn 70-1/2 this year, the other important thing to understand is you have an RMD choice to make before yearend. If you sit on your hands, you will be in the RMD double-dip mode next year, which might result in a higher tax rate that could have been easily avoided.

Financial Strategies

“To Convert, Or Not To Convert”….No Income Limits on Roth IRA Conversions Beginning January 1, 2010

roth_20iraPart of the 2006 tax reconciliation bill is about to matter to many of us come January 1, 2010. It’s sort of a good-news/bad-news deal — but more good than bad for many. As of January 1, 2010, there will be no income limits for those who want to convert a traditional IRA to a Roth IRA. That’s good because in the past, households with an adjusted gross income of more than $100,000 have been barred from converting their IRAs to Roth IRAs, and married spouses filing alone have been barred regardless of their income.

As a quick refresher, Roth IRAs are retirement savings accounts where you pay the income taxes due up front (when you contribute to the account) — then, it grows tax-free and your withdrawals are also tax-free (but you don’t get the income tax deduction when you initially contribute the money).

So, for those of you whose traditional IRAs are now worth far less than they used to be worth (that’s the bad news part), converting to a Roth IRA in 2010 could be a great idea: Since the account is now worth so much less, the taxes on the conversion will also be much less than they might have been, and if tax rates go up in the future, as many predict they will, you’ll have already paid the taxes due on the account.

For a good analysis on the ins and outs of the new rules, check out this Wall Street Journal online article. And, as always, please contact our firm for advice tailored to your specific situation…happy reading!