Lynn Brenner's Family Finance

In a Divorce, Who Pays for COBRA Health Insurance?

Q: My husband and I will soon be getting a divorce, and my only health insurance is through his job.  How long after the divorce can I still use the health benefits from his employer? --BL

 

A: You have a legal right to buy coverage in your ex-spouse's group health plan for 36 months after the divorce. Your divorce settlement should address the question of who pays for it.

The law giving you this right is the federal Consolidated Omnibus Budget Reconciliation Act, better known as COBRA. It requires companies with 20 or more employees to make health coverage available for purchase at group rates to their former employees, and to their employees' dependents who’ve become ineligible for coverage.

If you lose your health insurance because you've been laid-off -- or you no longer qualify for employer-subsidized coverage because your hours have been cut -- COBRA lets you stay in the insurance plan for an additional 18 months. And COBRA lets you continue your coverage for up to 36 months if you no longer qualify as a dependent because of a divorce or a birthday. (Many policies only cover children as dependents up to age 19, for example.) 

The good news is that because this is group coverage, you can’t be turned down for it regardless of your health.

The bad news is that COBRA coverage is expensive: You’ll pay both the employer and the employee’s share of the premium, plus up to 2% for administrative costs.  

You should make sure that your divorce settlement includes an agreement about how this cost will be paid.

If your ex-husband pays your COBRA premiums, for example, the divorce settlement can state that the payments are to be treated as alimony.  That would make them tax-deductible to him, and taxable income to you.

But if the divorce settlement is properly drafted, you could claim them as a deductible medical expense (assuming you itemize deductions), because it's being paid for your health insurance, says Alan E. Weiner, tax partner emeritus at Holtz Rubenstein Reminick in Melville, New York.

Make sure you find out the deadline to apply for COBRA.

The application deadline is usually 60 days after you become ineligible for group coverage because of job loss or divorce. You usually have up to 45 additional days to make the first premium payment.

For example, if your group coverage officially terminated on June 30, your COBRA application deadline would be August 29 -- and as long as you applied by that deadline, your insurance through COBRA would be retroactive to July 1. Your deadline for making the first premium payment under COBRA would be October 15 – but if you waited until then to make the first payment, it would have to cover the cost of your coverage since July 1.

 

 

Is It True That I Bonds Currently Pay No Interest?

Q: I have invested in I Bonds for the last 5 years. Can you tell me what interest rate they are now paying? I’ve heard there is no interest now being given on these bonds. -- MR

 

A: You've heard right. I Bonds’ current interest rate is zero. But don't panic and sell them! This is strictly a temporary phenomenon.

It's true that for the first six months after they're issued, I Bonds purchased between May 1 and October 31 2009 will pay zero interest. And every I Bond out there, regardless of when it was purchased, will earn zero interest for one six-month period.

But that isn't as dire as it sounds. In fact, the bonds are working as they're supposed to.  Even at the current zero interest rate, they’re outperforming inflation.

Here’s what you need to know:

I Bonds are issued by the U.S. Treasury. Unlike traditional bonds, which pay a fixed interest rate, I Bonds pay interest that adjusts to changes in the inflation rate.

The I Bond interest rate is based on two components:

The first component is a fixed rate, which is set for new I Bonds every May and November. This rate remains the same for the 30-year life of each bond. For bonds issued between May 1 and October 31 this year, the fixed rate component is 0.10%.

The second component is an inflation rate, which changes every six months along with the Consumer Price Index.

What you're seeing reflected in the I Bond's current zero interest rate is the fact that inflation was negative from September 2008 through February 2009.

In fact, for that six month period, the annualized inflation rate as measured by the CPI was minus 5.56%.

On November 1, the I Bond interest rate will be adjusted to reflect the CPI from March 2009 through September 2009.

Based on the data so far, inflation for that six month period is likely to be a positive number, says Daniel J. Pederson, who is a former supervisor of the Federal Reserve Bank's Savings Bond Division, and  the author of `Savings Bonds - When to Hold, When to Fold, and Everything in-Between'.  (This is a wonderfully comprehensive and easy-to-understand book that every savings bond investor should own.)

I Bond interest is subject to some dramatic short-term fluctuations because it only reflects the change in the CPI over a six month period, says Pederson. (In the six-month period before this one, for example, the CPI inflation component was 4.94%. The result: people who own I Bonds with a 3% permanent fixed rate component earned 7.94% for six months.) But over time, these ups and downs level out.

Investors typically pay more attention to the inflation component of I Bond interest -- but the fixed rate is the more important number because that's your real yield after inflation.

In other words, over the long-term, the I Bonds that are issued from May through October this year will pay 0.10% above the rate of inflation.

That doesn't sound awfully exciting. If you're planning to buy I Bonds, it's sensible to wait until November; their interest rate's fixed component can't get much lower, and the inflation component will probably be higher. But don't feel bad if you've already bought I Bonds that will pay 0.10% over the long term. That may be more than you'd earn in a Certificate of Deposit.

Here's why:

I Bonds can't underperform inflation - but CDs can, and often do.

Also, unlike CD interest, I Bond interest is exempt from state and local taxes. It is subject to federal tax - but the federal tax can be deferred until the bonds are cashed or until they reach final maturity, whichever comes first.

I Bonds resemble CDs in locking up your money for a period of time. You must hold an I Bond for at least one year. And if you cash it within five years, you forfeit three months of interest.

P.S. If you're doing the basic math, you may wonder why the current I Bond interest rate isn't negative. After all, the fixed rate component on new I Bonds is only 0.10%. Even the highest fixed rate component in I Bond history -- 3.6% -- isn't enough to overcome the current minus 5.56% inflation rate component.

The answer is that your earnings rate on an I Bond can never be less than zero.

 

How Do I Calculate Required IRA Distributions?

Q: I keep hearing about taking minimum annual withdrawals from your IRA after you turn 70 and a half years old. But I'm not sure how it works. If I have $400,000 in my IRA when I'm 70 and a half, and I take out interest every month to live on, does that qualify as part of the minimum annual distribution requirement? I hope so! -- JP

 

A: Not to worry. Of course it does.

The law requires you to start taking minimum annual distributions from all your traditional IRAs after you turn 70 and a half years old. (The rule doesn't apply to Roth IRAs).

 This annual withdrawal is called a required minimum distribution; or, in tax jargon, an RMD.

 The balance inside your IRAs stays tax-deferred, but your annual withdrawals are taxable income.

The government has waited a long time to start taxing this money, and it's not fooling around: There's a steep penalty for failing to take your annual RMD. The fine is equal to  50% of the amount you should have taken out of the IRA, but didn't. In other words, if your RMD was $1,000 and you didn't take it, the fine is $500.

 The deadline for taking your first RMD is April 1 of the year after you turn 70 and a half. (Leave it to Congress to come up with such a cockamamie deadline!) If your birthday is January 1 1950, for example, you'll turn 70 and a half in June of 2021. That means your deadline for taking your first RMD would be April 1 2022.

 The deadline for each annual RMD from then on is December 31.

 For many people, it makes sense to take their first RMD by December 31 of the year in which they turn 70 and a half instead of waiting until the following April 1. The reason: If you wait until the following April, you’ll wind up having to take your first and your second RMD in the same calendar year -- and depending on how large they are, that could push you into a higher tax bracket.

 So how do you calculate your RMD?

 To find out how much you must withdraw, you add up the total balance of all your traditional IRAs at the end of the previous year, and divide that amount by your life expectancy.

In our hypothetical example, you'd use your total IRA balance on December 31 2020 --  the year before you turned 70 and a half. To find your life expectancy, you'd look at an IRS actuarial table called the Unisex Uniform Lifetime Table. You'll find it in the Appendix of IRS Publication 590, which you can download at www.irs.gov.

 At age 70 the IRS says your life expectancy is 27.4 years. So if your total IRA balance on December 31 2020 was $400,000, your first annual RMD would be $400,000 divided by 27.4 -- or $14,598.54.

To keep things simple, let's round that up to $14,600.

 If you wanted to take the entire RMD by December 31 2021 instead of using April 1 2022 as your deadline, you could take it as a monthly $1,216.66 withdrawal starting in January 2021.

Of course, you can withdraw a lot more than the minimum if you want. There’s no maximum distribution limit. But everything you withdraw is taxable income for the calendar year in which you take it.

 

How Can My Heir Avoid Probate?

 

 Q: I'm a naturalized U.S. citizen of Japanese descent, living in New York. I am single, retired, and have no family. I own a house, and have a checking account and modest savings. I also have a will. My heir is a Japanese citizen living in Japan. How do I plan so she will receive her inheritance from me without having to go through probate, and without unnecessary travel to the U.S. –ST via email

 

A: There are two ways to accomplish your goal.

For readers who don’t know, probate is the legal process in which a state court accepts your will as a valid document. In New York – unlike some other states -- the probate process is actually quite fast and inexpensive. Most  state residents have no reason to try to avoid it.

 But your situation is an exception because your heir lives overseas.

 One option is to transfer your assets into a living trust, naming your heir as the trust beneficiary, says Eric Kramer, a Uniondale New York estate lawyer. As the trustee, you would still control the assets during your lifetime.

 Another is to list her as a beneficiary on your bank accounts, and have the deed to your house changed to make her a 1% joint owner with right of survivorship. (If you later decide to sell your house, however, as a 1% joint owner, your heir will have to sign off on the sale, notes Kramer.)

 Either way, your friend won't have to go through probate. Trust assets,  assets that are jointly-owned  with right of survivorship, and accounts with named beneficiaries, don't go through probate because they don’t pass to their new owner through your will.

 Your friend will still need a lawyer in New York to handle the sale of the house and the transfer of the assets to her after your death. But she won't have to travel to the U.S.

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

 (c) Lynn Brenner, All Rights Reserved