Lynn Brenner's Family Finance

Will Congress Close Loopholes That Let Me Work and Collect Social Security At The Same Time?

Q: You've written a lot about how to maximize your Social Security income.  From what you say, it's possible for me to collect a Social Security benefit based on my spouse's or my ex-spouse's work record, and at the same time remain in the workforce and earn a salary. Isn't it also possible that the government will close this loophole in the future? --RV, via email

A:  This isn't a loophole. It's part of a law -- the Senior Citizens Freedom to Work Act of 2000 -- that was intended to encourage people to keep working beyond their retirement age. These rules were created to let you collect a partial retirement benefit while you stayed on the job.

At that time, the big concern was that when the baby boom generation retired, the U.S. wouldn't have enough skilled workers to fill the jobs that opened up. Remember all that talk of a 'brain drain' that would make it hard for American business to compete in a global economy?

The government's response was a law that encourages baby boomers to say on the job by using strategies I've written about for AARP magazine  and AARP Bulletin , as well as on this blog. (Look at the many posts listed under Social Security).

Okay -- clearly, today's economy is very different from the one envisioned in 2000. Baby boomers don't have to be encouraged to stay in the work force. They can't afford to leave it!

Nevertheless, from the government's viewpoint this law has a very beneficial effect: It is helping many financially hard-hit people weather a bad economy and a terrible job market. No one on Capitol Hill is going to propose rescinding it now.

As for the future, of course it's always possible for Congress to change a law. Indeed, Social Security rules are bound to change going forward as they have in the past. But it's safe to predict that these rules won't be changed retroactively. In other words, any change will apply to future Social Security applicants, not to people who are already receiving benefits.

Meantime, these aren't loopholes. They're strategies firmly grounded in the law.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved

What Happens if I Leave a Bank Account 'In Trust For' a Person Who Isn't Related to Me?

Q: If I have an ITF ('In trust for') bank account, and I name someone who isn't related to me and also my son as the beneficiaries, what would happen with my account when I pass away? -- BN via email


A:  'In trust for' (ITF) accounts are also known as 'Pay on Death' or POD accounts. They automatically go to the named beneficiaries at your death, so this account would be divided between your son and your friend. Each of them could transfer his share into a new account in his own name.

Be sure you've identified both beneficiaries by name on the bank form, and that the account title makes it clear that you want the account to pass to them. You don't have to specify their relationship to you.

If your name is Cindy Jones, for example, the account title should be 'Cindy Jones in trust for Samuel Johnson and Frederick Jones.' 

Assets with named beneficiaries -- retirement accounts, life insurance policies, and 'in trust for' bank accounts -- pass to those beneficiaries 'by operation of law'. That's legal jargon for 'automatically.'  It means that they don't go through probate, unlike the assets you leave in your will.

You can name anyone you wish as the beneficiary of your bank account; it doesn't have to be a blood relative.

The FDIC covers ITF accounts for up to $250,000 per account owner per qualifying named beneficiary. (In other words, you won't get per beneficiary coverage if you leave an account in trust for 'my children'.)

The $250,000 limit is the new FDIC standard, in effect only through December 31, 2013. On January 1,  2014, the standard FDIC limit will return to $100,000 per depositor for all account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor.

Who is a qualifying beneficiary? Under new FDIC rules adopted in September 2008, any person, non-profit organization, or charity qualifies for per beneficiary coverage. (The old rules pretty much restricted qualifying beneficiaries to a small group of your blood relatives.)

What does 'per owner, per qualifying beneficiary' mean? If you're the sole owner of this account, your two beneficiaries each have up to $250,000 of coverage. In other words, the account is covered for a total of $500,000. You don't get an extra $250,000 of coverage on the ITF account for yourself.

I can hear you wondering, 'But what if I leave the account to a non-qualifying beneficiary, like a partnership or a for-profit corporation? Isn't it covered?'

Yes, it is -- along with your other individual accounts at that bank.

The FDIC provides separate insurance for accounts in each of four distinct categories: individual accounts (those in your sole name); jointly-owned accounts; revocable trust (including 'ITF') accounts; and Individual Retirement accounts and certain other self-directed retirement accounts. Each category except trust accounts gets up to $250,000 of coverage for all the accounts in the category. Trust accounts get up to $250,000 per owner per qualifying named beneficiary.

(Please note that the retirement account category doesn't get per beneficiary coverage! All your retirement accounts at one bank are covered for up to $250,000, period -- no matter how many beneficiaries you have on them.)

Your ITF account is included in the individual account category. Let's say that in addition to this ITF account, you have checking and savings accounts at the same bank. Together, the three accounts are covered for up to $250,000.

For more information about these rules, go to the FDIC's Web site, here.


Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

Can I Combine Inherited Roth IRAs with an Inherited Regular IRA in a Single Account?

Q: My husband recently passed away, and I am the beneficiary of his four Individual Retirement Accounts and a 403(b) account.

I want to transfer the 403(b) into my own 403(b) account.

Three of the IRAs are Roth accounts, and one is a rollover IRA. I was hoping to move all of the IRAs into one account to take advantage of compounding. I assume the best way to do this is to have athe IRAs transferred directly from one custodian to another

Can the Roth IRAs and the rollover IRA be combined in a new account? -- LS, via email

A: No, no!

(The extra no! is because even if you could legally combine them in one account, you wouldn't want to.)

Let's start by pointing out that you are the surviving spouse of the person who originally owned these retirement accounts. That's important because it gives you more options and more flexibility than any other beneficiary.

In other words, non-spouse beneficiaries shouldn't use this post as a guide!

Your 403(b) question first, since it's simpler. The law now allows you to transfer money from one 403(b) plan into another. However, no 403(b) plan is required to accept transfers. Find out what your plan's rules are. If it accepts transfers, the best way to do this is by arranging for your late husband's plan to switch his account directly to your own plan.

Okay, what about the IRAs?

For those who don't remember the rollover IRA, it's a traditional IRA that contains only money transferred from an employer-sponsored retirement plan like a 401(k). By keeping this money segregated as a 'rollover' IRA, you preserved the option to transfer it back into another 401(k) plan at some future date.

Rollover IRAs are no longer necessary, because the law has been changed to permit you to transfer IRAs into a 401(k) plan even if those IRAs weren't originally created with 401(k) plan contributions.

Okay -- you've inherited three Roth IRAs and one traditional IRA. Roth IRAs and traditional IRAs can't be combined because they are taxed very differently.

Your withdrawals from a Roth IRA are tax-free. Your withdrawals from the traditional IRA are taxable. Even if the law allowed you to combine them, it would be foolish to mix a tax-free account with a tax-deferred account. (It's a real headache to take withdrawals from an account that's part tax-free and part tax-deferred. Just ask anyone who's taking money from a traditional IRA that includes both pre-tax and post-tax contributions!)

You can combine the three inherited Roth IRAs into a single Roth IRA in your name. And you can put the rollover IRA into a new traditional IRA account in your own name. And yes, a trustee-to-trustee transfer is always the best way to move IRA money.

Once the traditional IRA is in your name, you can convert it into a Roth IRA, if you wish -- but there's a price tag.  Money you move from a traditional IRA to a Roth IRA is taxable; so if you convert $50,000 into a Roth IRA, you'll owe income taxes on $50,000.

In exchange, you get an account that is tax-free going forward: After you've owned the new Roth IRA for at least five years AND you're 50 and a half or older, all your withdrawals are tax-free. What's more, you never have to take Roth withdrawals if you don't want to. You can let the account keep growing tax-free and leave it to your kids.

By contrast, if you keep this money in a traditional IRA, you will have to start taking withdrawals after you're 70 and a half; and they will be taxable.

And here's a tip from IRA expert Barry C. Picker: If you decide to do a conversion, keep the new converted Roth IRA separate from your existing Roth IRA -- the one you created from the three inherited Roth IRAs -- until after October 15 of the year following the conversion.

The reason: If you change your mind about the conversion, you have until October 15 of the following year to undo it and turn your new Roth IRA back into a traditional IRA. (And yes, if you've already paid the tax on the conversion, you get a refund.) If you keep the converted Roth separate, it's easy to undo the conversion. You can still undo the conversion if you add it to an existing Roth account, but it won't be as simple. You'll have to calculate the appropriate amount to return to the traditional IRA. If you converted to a brand new Roth IRA, you can just move the entire account back.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved