Here’s who can help if you need budgeting aid
Dear Liz: I’m hoping you could provide recommendations, referrals or tips on how to help me manage my money. I’m seeking a financial planner who can help me pay my bills on time, learn to budget and pay off credit card debt.
Answer: When you’re struggling with the basics, a financial fitness coach or an accredited financial counselor may be a better fit than a financial planner.
Financial coaches and counselors specialize in budgeting, debt management, retirement planning and creating better money habits in general. Coaches and counselors in private practice typically charge $100 to $150 an hour, although many work on a sliding scale, said Rebecca Wiggins, executive director of the Assn. for Financial Counseling & Planning Education, which grants both credentials.
These accredited financial professionals also are employed by the military, credit unions and other organizations to provide services for free or low cost. You can start your search at https://www.afcpe.org/.
The value of waiting for Social Security
Dear Liz: This is a follow-up question to one you answered about tapping 401(k)s to delay the start of Social Security. I am 63 and retired early with a good pension that fully covers my basic living expenses. Any additional money would only be “gravy” for vacations and travel. Would I be taxed the same if I start taking Social Security now versus waiting? I could easily tap my 401(k) to put off applying for Social Security.
Answer: When it comes to Social Security, if you can wait, you probably should.
Many middle-income people who have retirement funds will pay higher taxes if they start their benefits early, according to researchers who studied the “tax torpedo,” which is a sharp increase and then decline in marginal tax rates caused by the way Social Security benefits are taxed. The researchers found that many could lessen its effects by delaying the start of Social Security and tapping retirement funds instead.
If you’re married and the primary earner, it’s especially important to delay as long as possible because your benefit determines the survivor benefit that one of you will receive after the other dies.
Reducing taxes in retirement
Dear Liz: I agree with this concept of delaying Social Security to lessen overall taxes and have a further suggestion. My spouse and I are gradually converting our traditional IRA account funds to Roth IRAs. The converted funds are immediately taxable but could continue to gain in value and future distributions would not be taxable. Also, Roth accounts don’t have required minimum distributions.
Answer: Conversions make the most sense when you expect to be in the same or higher tax bracket in retirement.
That’s not the case for most people because they’re in a lower tax bracket when they stop working. Some older people, however, do face higher tax rates in retirement — typically because they’ve been good savers, and required minimum distributions from their retirement accounts will push their tax rates higher.
When that’s the case, they may be able to take advantage of their current lower tax rate to do a series of Roth conversions.
The math can be tricky, though, so it’s advisable to get help from a tax pro or financial planner. You don’t want to convert too much and push yourself into a higher tax bracket, or trigger higher Medicare premiums.
If your intention is to leave retirement money to your heirs, Roth conversions may also make sense now that Congress has eliminated the stretch IRA.
Stretch IRAs used to allow non-spouse beneficiaries — often children and grandchildren — to take money out of an inherited IRA gradually over their lifetimes. This spread out the tax bill and allowed the funds to continue growing. Now inherited IRAs typically have to be drained within 10 years if the inheritor is not a spouse.
To compensate, some people are converting IRAs to Roths — essentially paying the tax bill now, so their heirs won’t have to do so later. Heirs would still have to withdraw all the money in an inherited Roth IRA within 10 years, but taxes would not be owed.