Series I bonds, SS benefits and other reader questions
Q: I am 65 years old. Does it make sense for me to purchase a 30-year Series I bond if it is likely I won’t be around when it matures?
A: Although the I bond has a 30-year maturity, you can redeem the bond after one year. If you hold it for less than five years, you lose three months’ worth of income, but after five years, you will receive all the interest due without penalty.
Q: I thought that dividends were taxed at a lower rate than other income. When I filled out my tax return, I noticed my dividends were taxed at the same rate as other income. Is that right? A:
Only qualified dividends are taxed at a lower rate than ordinary income. IRS Publication 550, “Investment Income and Expenses,” explains which dividends are qualified. When you are considering making an investment for dividend income, and are concerned about the tax rate, you should review whether a significant amount of that investment’s prior dividends have been qualified.
Q: If I hold a 30-year Series I bond to maturity, the income tax will be very high on the interest. Does it really make sense for me to purchase one? Doesn’t a bond with an earlier maturity date make more sense? A:
It only makes sense if you are receiving a higher interest rate for the alternative investment. The return you receive associated with I bonds is very high in comparison to other investments. If you are concerned that after 30 years, you will have a significant income tax when you redeem the bond and will be in a higher marginal tax bracket, you can always redeem the bond prior to 30 years.
Q: I intend to wait until age 70 to file for
my Social Security benefit. My wife is 62. What are the pros and cons of her applying for a spousal benefit at 62? A:
When an individual files for a Social Security benefit at 62, any benefits are discounted permanently relative to their amount if applied for at full retirement age.
Many individuals are under the false impression that when they reach their full retirement age, they can reapply and then receive a higher benefit. That is incorrect. Benefits are permanently discounted, be it a benefit based on your work history or a spousal benefit.
The only exception is related to survivor benefits. Your survivor benefit is based on your age when you apply. It is discounted between age 60 and your full retirement age. If you apply for a survivor benefit at your full retirement age or later, you are entitled to 100% of the Social Security benefit your spouse was receiving, if that benefit is greater than the benefit you would receive based on your work record.
Q: I intend to retire in a few years at my full retirement age. My wife never worked at a job covered by Social Security. She was a teacher and receives a relatively small pension. I have been told that she won’t receive a full spousal benefit or survivor benefit because of her pension. That can’t be right. Is it? A:
Unfortunately, what you have been told is correct. When an individual receives a pension from work outside of Social Security, it impacts the amount of spousal benefit and/or survivor benefit he or she is entitled to. This is known as the Government Pension Offset (GPO).
Spousal benefits and survivor benefits are reduced by two-thirds of the pension received from work done outside of the Social Security system. For information regarding GPO, a fact sheet is available at www.ssa.gov/pubs/EN-05-10007.pdf. A GPO calculator is at www.ssa.gov/planners/retire/gpo-calc.html.