Lynn Brenner's Family Finance

Can I File For Social Security While I'm Unemployed, & Then Suspend My Benefit When I Find a Job?

Q: If you are not at full retirement age, can you start receiving Social Security benefits, and then suspend them a few months later?

I'm 64 years old, and am facing being laid off from my job. I'm considering starting Social Security. If I start working full time again, say in 6 months, would I be able to suspend my Social Security payments? Also, can I draw Social Security and at the same time receive unemployment benefits? -- LD via email

A: You're not eligible to 'suspend' your Social Security benefit. But you can still follow the strategy you've described.

You must be at your full retirement age -- in your case, age 66 -- to suspend your benefit and earn delayed retirement credits.

But that doesn't mean you can't 'retire' at 64, and later return to work.

Let's assume you live in one of the 45 states that allow you to collect unemployment insurance and Social Security at the same time. (The exceptions are Illinois, Louisiana, South Dakota, Utah, and Virginia.)**

And let's say you lose your job, and file for both unemployment insurance and a reduced Social Security benefit. At 64, your monthly Social Security payment will be about 20% less than if you'd filed for it at 66.

Six months later, you get another job and return to work until you're 66. Then you retire for good.

Here's what would happen:

Depending on your salary at the new job, the Social Security Administration would start to withhold some or all of your monthly benefit. For example, in 2009 and 2010, you forfeit $1 of benefit for each $2 you earn above $14,160.

If your salary is big enough, you might forfeit your entire monthly Social Security check.

But this loss is temporary.

In fact, when you stop working again at 66, your Social Security benefit will be bigger than it was at 64. The reason: It will be recalculated to take into account whatever amount you forfeited as a result of the annual earnings cap.

It will also reflect any additional benefit that you may have earned by working at that second job.

And what if you like the new job so much that you decide to keep working even after turning 66? In that case, at 66 you'll once again begin receiving your full Social Security payment -- adjusted to make up for whatever amount you forfeited earlier -- because after you reach full retirement age, you're no longer subject to an annual earnings cap.

**The most recent state to repeal its offset law was Colorado, late last year.

Although South Dakota has also repealed its offset law, the repeal was contingent on the state's unemployment trust fund reaching $30 million. The trust fund never got close to that amount. So South Dakota still reduces a claimant's unemployment benefit by 50 cents for every dollar of Social Security he or she receive, says Rick McHugh, a staff attorney at the National Employment Law Project. And although Virginia repealed its 50% offset law in 2006 -- a repeal also triggered by the balance of the state's unemployment trust fund -- the law was revived after the trust fund balance fell due to the current recession.

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

Social Security: Mind the Earnings Cap!

Q: I'll be 62 years old in December. My husband died in 2002 at age 54. I'm working full time and earn about $60,000 a year. I was told I can collect half of my late husband's benefit and continue working with no penalty. I was also told it is a benefit that not many people know and that Social Security won't tell you about it unless you ask. Can you address this? --FJ via email

A:  You don't say who told you this, but they told you wrong. Until you reach your full retirement age, widows' benefits are subject to an annual earnings test, just like retirement benefits.

It's true that you are old enough to file for a widow's benefit -- in fact, you can file as early as age 60.

The maximum widow's benefit is 100% of what your late husband would receive if he were alive. However, when you file for this benefit before reaching your full retirement age -- which in your case is 66 -- you receive less than the maximum benefit.

In 2009 and 2010, you forfeit $1 of benefit for every two dollars you earn above $14,160. The earnings cap applies as long as you're under your full retirement age. Once you reach full retirement age, your benefit isn't reduced regardless of the amount you earn.

If your estimated 2010 earnings are $60,000, the Social Security Administration would have to withhold $22,920 in benefits before paying you anything, says Linda Lauria, an agency spokeswoman in New York City. So unless your benefit is $2,000 a month,  it wouldn't pay for you to apply for it at this time.

You were also told that people don't learn about these benefits unless they ask.

When dealing with any bureaucracy, it is always a good idea to ask what you're entitled to receive, and to keep asking until you're satisfied you've been fully informed.

But let's be clear about this: While it's true that sometimes Social Security staff make mistakes, just like everyone else,  it certainly isn't true that the agency deliberately withholds information! 

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

How to Divide Retirement Accounts in a Divorce Without Triggering a Tax Bill

Q:  My husband and I are getting divorced after 20 years. How should we divide our IRAs and 401(k) accounts so that we don't trigger an income tax? --KG via email

A: With a court order, and only after consulting a tax accountant to make sure you're doing it right!

First, the basic rules:

The division of marital assets in a divorce depends partly on state law. In a community property state, assets are divided equally. In an equitable division state, they're divided equitably. There's an important difference. Equitable' doesn't mean equal; it means fair. It's up to the court to decide what's fair. But when a couple has been married for many years, fifty/fifty is usually deemed to be an equitable split.

What is a marital asset? It's anything that was acquired during your marriage, no matter whose name it's in. This includes the appreciation in your retirement plans. If your IRA was worth $20,000 when you got married, for example, and it's now worth $70,000, the $50,000 increase in value is a marital asset.

When retirement assets are correctly divided in a divorce,  there's no income tax or early withdrawal penalty on the money. `Correctly' is the key word.

If John withdraws money from his IRA, and gives it to Jane, he'll be taxed on that withdrawal. Instead, John must give his IRA custodian a copy of the couple's divorce or separate maintenance decree.

This court-approved document instructs the custodian to transfer an agreed-upon portion of John's IRA into a new IRA in Jane's name. The same order directs Jane to set up a new IRA in her own name to receive the money. (Jane's IRA doesn't have to be at the same institution; it can be opened anywhere. If she opens it at a different institution, the money must be transferred directly from John's IRA custodian to Jane's IRA custodian.)

To divide an employer-sponsored retirement plan like a 401(k) or 403(b) plan, you must give the plan administrator a court order called a qualified domestic relations order, or QDRO.

The plan administrator then divides the account in two. Your former spouse can elect to roll his or her share of your 401(k) into an IRA. 

If your ex doesn't transfer the money into a retirement account, he or she will owe income taxes on it. But in divorce cases, the Internal Revenue Service waives the 10% early withdrawal penalty that would normally apply to distributions by people who are under age 59 and a half.

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

I've Inherited My Late Husband's 401(k). Should I Roll It Into an IRA, or into an Inherited IRA?

Q: I am a 43 year old housewife. I have never worked outside the home. My husband passed away recently, and I'm the beneficiary of his 401(k). It's worth approximately $105,000. What should I do with it? It's currently invested at T. Rowe Price. Should I leave it there or transfer it to a bank? Should I roll it over into a new IRA in my name, or transfer it to an inherited IRA?  --CO via email

A: The best choice depends partly on your financial situation. Do you have other sources of money, or are you likely to have to draw on this retirement account for your current needs?

Ideally, you want to leave a retirement account untouched for as long as possible. If you roll it into an IRA in your own name, you won't have to take withdrawals until after you're 70 and a half. But if you're likely to need this account for near term expenses, you should keep at least a portion of it as an inherited IRA.

Here's why:

No matter which option you take, all your withdrawals from the IRA will be taxable income. But if you maintain it as an inherited IRA, you're allowed to take withdrawals without triggering a 10% early withdrawal penalty regardless of your age.

By contrast, if you roll it into an IRA your own name, you become the account's owner instead of its beneficiary. Any withdrawals you take before age 59 and a half will be subject to a 10% early withdrawal penalty as well as to income taxes.

If you have kids, you will be able to name a conduit trust for them as the successor beneficiary to an inherited IRA, says Barry C. Picker, a Brooklyn NY tax accountant and IRA expert.

If you die before December 31 of the year in which your late husband would have turned 70 and a half, the kids will be able to empty the account over their own life expectancies. (Before that time comes, Picker says, you should move the inherited IRA into an IRA in your own name so that they don't lose that advantage.)

It's worth noting that you have some of these options because you're a surviving spouse. When you inherit an IRA from someone who was not your spouse, your successor beneficiary doesn't get to stretch account withdrawals over his or her own life expectancy.

A conduit trust will preserve the inherited IRA's tax advantages for the kids while they're minors. Another advantage of a trust is that you can pick the age at which the children gain control of the account. (You might decide that a 25 year-old is better able to handle a sizable inheritance than an 18 year-old, for example.)

Once the kids are adults, you can name them directly as the IRA beneficiaries.

If you keep the account as an inherited IRA, you won't have to take required IRA distributions until the year your late husband would have been 70 and a half, says Picker -- but any withdrawals you do take will escape the early withdrawal penalty.

As for your investment management question, I think you should keep the money at T. Rowe Price, rather than transfer it to a bank. T. Rowe Price is a major no-load mutual fund company that offers an excellent selection of low-cost investments -- a much broader selection than you'd find at any bank. Besides, this isn't an irrevocable decision. You can decide to move the IRA at a future date if you want.

Note to readers: This post originally contained errors which I've corrected.

(c) Lynn Brenner, All Rights Reserved