How well do you grasp details of retirement planning?
Making the right decisions in retirement planning is often a matter of grasping details and fine distinctions. For example, you may understand the difference between various Social Security benefits. But how well do you understand their relationship and the tradeoffs of choosing one or another?
The following true-or-false quiz covers important issues that are commonly misunderstood.
1. Once you are divorced, you lose all Social Security benefits associated with your previous marriage. True or false?
2. If you file for a survivor benefit, and you haven’t yet filed for a benefit based on your work record, you will not be able to file later for a benefit based on your work record. True or false?
3. If you convert a traditional IRA to a Roth IRA over several years, the five-year holding requirement applies to each Roth conversion. True or false?
4. If you wait until age 70 to apply for a Social Security benefit, your spouse will receive a spousal benefit based on your age 70 benefit. True or false?
ANSWERS
A1. False. You do not lose all of your Social Security benefits after a divorce. If your marriage lasted at least 10 years, you may be eligible for benefits. Which benefits you are entitled to depends on your marital situation. Even if you remarry, you may be entitled to a benefit from the former marriage, depending on your age when you remarry.
If you are single, even if you remarried after your divorce, you may be entitled to a spousal benefit and/or a survivor benefit. Even if your ex has not filed for his/her Social Security work benefit, you can still file for a spousal benefit two years after your divorce. However, if you do file for a spousal benefit, Social Security will assume you are also filing for your Social Security benefit based on your work record. You are only entitled to whichever is higher between the spousal benefit and the benefit based on your work record. If you do file for a benefit prior to reaching your full retirement age, your benefit will be discounted permanently.
If you are single, after your divorce you are still entitled to a survivor benefit if your ex predeceased you. Survivor benefits are more generous than spousal benefits. If you have reached your full retirement age (FRA), your survivor benefit will be equal to 100% of your ex’s Social Security benefit at the time of his/ her death. A spousal benefit is only as much as 50% of your ex’s Social Security benefit. A survivor benefit is available starting at age 60. But if you apply prior to your FRA, your survivor benefit will be permanently reduced.
If you remarry after age 60, you will still be entitled to a survivor benefit if your ex predeceases you, even if your current spouse is alive. You are entitled to this benefit only if the amount of the survivor benefit is greater than the Social Security benefit you are receiving either based on your benefit from your work record or from your spousal benefit based on your new marriage.
If you remarry, even after 60, you will no longer be able to receive a spousal benefit based on your previous marriage. However, you will be able to receive a spousal benefit from your new marriage, assuming that benefit is greater than your benefit based on your work record.
A2. False. Even if you are receiving a survivor benefit, you are still eligible to file for a Social Security benefit based on your work record as long as that benefit is greater than the survivor benefit. For example, you can delay filing for your Social Security work benefit up to age 70, in which case your benefit based on your work record would increase by 8% per year after you reach your FRA. In that case, your benefit would increase. The important point to remember is that a survivor benefit is independent from a benefit based on your work record. You are not entitled to both benefits, but you are entitled to whichever benefit is greater.
A3. True. However, if you already have established a Roth account and have made contributions to that account, those contributions are not subject to the five-year rule. When you withdraw from Roth accounts, contributed amounts are distributed first. These withdrawals are not taxable or subject to the early distribution penalty, even if made before five years or before age 59 ½.
A4. False. Your spouse will receive a survivor benefit based on your age 70 benefit, but a spousal benefit would be based on the retirement benefit you would qualify for at your full retirement age.