In a previous Merriman Insight article, we wrote about the “free spousal” strategy for married couples. Shortly after that article was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd. The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date.
Many recent articles have been written about the new law changes, so we won’t reinvent the wheel here. Instead, we’d recommend this article for a detailed discussion of the changes. The main highlights are:
The new rules are not retroactive; anyone currently employing a “file and suspend” or “restricted application” strategy will continue to be grandfathered under the old rules, as well as those who “file and suspend” by April 30, 2016 or who plan to use a “restricted application” and are at least 62 by the end of 2015
Survivor benefits and claiming strategies are unaffected by the new rules
“File and suspend” claims initiated after April 30, 2016 will now suspend all benefits based on the claimant’s earnings record (including spousal, ex-spouses, and dependent benefits)
“File and suspend” claims initiated after April 30, 2016 will no longer allow the claimant to reinstate their benefits back to the original suspension date and receive a lump sum payment
“Restricted applications” for spousal-only benefits will no longer be available to those who are not at least 62 by the end of 2015
If you believe the new rules will impact your situation, we recommend contacting your financial advisor to review your options.
Shortly after the article below was published, Congress passed the Bipartisan Budget Act of 2015, which was signed into law on November 2nd. The Budget Act contained many provisions affecting Social Security. One such provision effectively ended the ability to employ the “free spousal” strategy after the 180 day transition period from the Act’s enactment date. Read the highlights of the new law changes here.
In helping our clients make smart decisions with their money, we often spend a lot of time on the subject of Social Security. The rules are complex, but the decision of when and how to claim Social Security can have a big impact on the quality of life for most families. Thus, it’s a very important decision with long-term ramifications. The good news is your advisor can help you evaluate your options so you’re well positioned to make the best decision for your particular situation.
Evaluating all of the available claiming strategies for Social Security is beyond the scope of this article (and would bore most people to tears), so I’d like to focus on one particular strategy that I think has tremendous value: the “free spousal.” I’ll describe it using a real life example, although I rounded the numbers for simplicity.
“Henry” and “Wilma” are both 66. Henry is still working, and although he is qualified to claim Social Security benefits now, he decides to wait because they’re able to live comfortably on his salary alone. His benefits at age 66, which is full-retirement age (FRA) in this example, would be $2,700 per month, but delaying the benefits will earn him 8% more each year until age 70. By that time, his benefits would jump to around $3,600 per month.
Wilma is retired and has her own Social Security benefits. She’d receive $1,800 per month if she claims at FRA, but $2,400 if she waits until age 70. Since they don’t need the extra money right now, she also decides to wait.
Everything seems fine, right? They’ll receive their higher benefits at 70, which will maximize their monthly income for the rest of their lives. I’d wager that most people would be thrilled in this situation!
But they’re leaving free money on the table.
Henry should “file and suspend” his benefits at FRA. Then, Wilma should file a “restricted application” to claim her 50% spousal benefit against Henry’s earnings. By restricting her claim to just the spousal benefit, Wilma’s own benefits can continue to earn the delayed credits. At 70, they can both claim their own higher benefits, just like they had always planned to do. But by jumping through a few hoops, Wilma could receive a spousal benefit of $1,350 per month between ages 66 to 70 for free—that’s an extra $64,800 in their pockets over the four years—without impacting their original plan. Hence the term free spousal!
There are some important steps in this strategy that must be adhered to strictly. First, Henry must file and suspend his benefits before Wilma submits her application because Wilma cannot claim spousal benefits unless Henry has started his claim. The “suspend” part of this strategy allows Henry to continue earning the 8% per year delayed credits, even though he has now filed for benefits. Secondly, Wilma must clearly indicate that her claim is restricted only to the spousal benefit and not her own benefits based on her earnings history. Although she is entitled to both, she can only ever receive one at a time, and while her own benefits are higher than the spousal benefit ($1,800 at FRA instead of $1,350 for the spousal, in this example), if she elects to take her own now, she would lose out on the 8% annual increase.
If the strategy and steps above are a little confusing, that’s okay. The goal of this article isn’t to fully explain the free spousal strategy; instead, it illustrates one of the many planning opportunities your financial advisor can help you with that go beyond your investments. Maximizing your Social Security benefits can be complicated, but you have a wonderful resource at your disposal to help make this very important decision. We’re always available to help!
Another year flew by and the holidays are already here. Snowflakes are falling, houses are decorated, and families are reunited! In the midst of all the joy, it’s easy to put your finances aside. However, if you will be over 70.5 years old by the end of the year, we want to remind you that it’s time to take a Required Minimum Distribution (RMD) from your IRA or retirement account. An RMD is designed to ensure that you withdraw at least a portion of the funds in your account over your lifetime – and that you pay taxes on those funds. Taking your RMD is important because the stakes are high! Failure to withdraw the required minimum will result in a hefty penalty: The amount that was not withdrawn is taxed at 50%. In other words, if the RMD on your traditional IRA is $8,000 in 2013, but you only withdraw $3,000 during 2013, you will be subject to an excise tax of $2,500 (50% of the amount by which the RMD exceeds your actual distribution). It’s quick and easy to arrange your RMD by calling your financial advisor. We recommend you do so by December 15th to ensure plenty of time for the distribution to occur before the end of the year. The sooner you get it done, the more time (and money!) you will have to spend with the ones you love.
We have great news for people making charitable gifts this year! Thanks to the American Taxpayer Relief Act of 2012 (ATRA), IRA owners can once again make a qualified charitable distribution (QCD) from an IRA to a qualified charity of their choice.
For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.
Here’s how it works:
For this year, IRA owners who are 70 ½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to a qualified charity(ies). Additionally, the IRA owner can exclude the amount of the QCD from his or her gross income on their 2013 tax return. The amount of the QCD excluded from the gross income is not included when determining any deductions made to qualified charitable organizations.
As with many IRS provisions there are a number of fine print items to keep in mind.
You are only eligible to make a QCD if you are 70-½ or older.
Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
Donor advised funds and 30% public foundations are not eligible to receive the QCDs.
The QCD must be made directly from your IRA to the desired charity, meaning that the check issued from your IRA must be payable to the charity. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
The QCD cannot be a split-interest gift, meaning that 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor. The donor cannot receive any economic benefit as part of the gift.
At this time, the QCD provision is only extended through the end of 2013. We do not know if the provision will be renewed in years beyond. If you are interested in making a donation directly from your IRA to a charity, reach out to your advisor to get started and make 2013 a year of giving!
It’s no surprise that women tend to live longer than men. Therefore, it should be no surprise that women tend to need long-term care more often than men. In fact, Genworth Financial, a leading provider of long-term care insurance (LTCi), estimates that two-thirds of their benefits paid go to women. However, up until recently, insurers were not allowed to charge different rates based on gender. That may all change in April, when Genworth is allowed to restructure new policies to incorporate gender-distinct pricing, which may increase the rate for single women by as much as 40 percent. Genworth was the first carrier to win approval from state insurance commissions to raise rates on new policies for single women, but it is expected that other carriers will soon follow suit. Long-term care insurance will become much more expensive for this segment of the market.
What should you do? If you are a single woman considering LTCi, you should consider making a move soon. If you are unsure whether LTCi makes sense for you, talk to your financial advisor or a licensed insurance agent as soon as you can.
Medical insurance can be a major expense for retirees.
The government segments Medicare plans into four categories: A-D, which I will explain at a high level below. There are also standardized supplemental plans available, known as Medigap policies.
Understanding the Medicare program in its entirety can save you money and ensure you are well taken care of.
A – Hospital Insurance
This portion of Medicare is free if you or your spouse have paid into Social Security through employment for at least 10 years.
What’s included in Part A?
– Inpatient hospital services, along with some skilled nursing and hospice care.
Important info about Part A
– Most people do not have to pay a premium. However, deductibles and co-pays will apply.
B – Medical Insurance
This supplemental plan is an optional program, with a monthly premium that can be deducted from your social security check.
What’s included in Part B?
– Doctor’s services, diagnostic tests and outpatient care.
Important info about Part B
– You may have coverage for Part B through your employer if you are still working.
– If you don’t sign up at age 65, your premium increases and will remain elevated for the rest of your life.
– A premium, deductibles and co-insurance will apply.
C – Medicare Advantage Plans
In its simplest sense Part C aggregates Part A with Part B. They are private plans that may provide more coverage than the first two parts would independently.
What’s included in Part C?
There are two coverage options:
1) Medical only
2) Medical with prescription drug coverage
Important info about Part C
– Most states allow for pre-approval if you sign up within six months after you turn 65.
– Monthly premium and fixed co-pays will apply. Certain plans also have a deductible.
Medigap, Medicare Supplement Plans – Alternative to Part C, Medicare Advantage
Medigap is a group of 10 standardized plans available through the private market that assist with out-of pocket expenses.
What’s included in Medigap?
– Medigap covers the gaps in Medicare Parts A and B.
– Drug coverage requires the addition of a stand-alone prescription drug plan, just like Medicare Part C medical only coverage.
Important info about Medigap
– Unlike Part C, it does not aggregate with Parts A and B. Rather, it serves to fill in the gaps of A and B.
– Monthly premium will apply. Copayments and co-insurance are plan dependent.
D – Prescription Drug Coverage
There are two ways to obtain Part D coverage: 1) through a Medicare approved stand-alone plan or 2) Through a Part C Medicare Advantage Plan with prescription drug coverage.
What’s included in Part D?
-Each plan maintains its own list of covered drugs.
-There is a “donut hole” in the program. The hole begins when your total retail cost of drugs (your cost plus Medicare Part D’s contribution) reaches $2,970. It ends when your actual out-of-pocket costs reach $4,750. Note: these are 2013 figures, which are subject to change.
Important info about Part D
-Monthly premiums and co-pays are plan dependent.
Doing your homework can save you money or enhance your coverage for the same price. A good place to start is with the Medicare Plan Finder, found on Medicare’s website.