Dear Liz: What can I do to stop my broker from deducting trading fees from my Roth IRA contributions, which I make monthly? Let's say I invest $420 each month, but the broker takes $7, or $84 a year. Shouldn't this be payable from a separate source so that I can invest the full contribution each year, thus reaping the eventual benefits of compounding the extra $84 sum over a long period of time?
Answer: As you understand, $7 per month isn't such a small sum when you factor in how much more you'd get over time by investing that money instead of paying it to a broker. If that money remained in your account, you'd have roughly $8,500 more at the end of 30 years, assuming 7% average annual returns.
All investments have costs, of course, but minimizing those costs typically means you'll create more wealth.
You can ask your broker if there is a way to pay the monthly fee from another account, but any commission you pay would be included in the annual amount you're allowed to contribute. If your broker isn't providing helpful investment advice to justify the commission, you can look into ways to invest for less, such as using a discount brokerage.
Social Security strategies for spouses
Dear Liz: I'm 52 and my wife is 57. I recently retired from the military and will have a small retirement from my new job. When should I take Social Security and when should she take hers? Her letter from the Social Security Administration says that based on her work record, she will receive $88 a month. She has spent most of our married life as a homemaker and caregiver to our children.
Answer: Your wife can't file for spousal benefits until you file for your own benefit, and that can't happen until you turn 62 in 10 years.
You may not want to file that early, though, since that would force you to take a permanently reduced benefit. You would be settling for about half of what you could get by letting your benefit grow, which also means a much smaller benefit for your wife should she outlive you.
A better strategy may be for each of you to wait to apply at least until you reach your own full retirement ages (66 1/2 for her, 67 for you).
Your wife would get her own small benefit until you turned 67. At that point, you could "file and suspend." That means you file so she could get her much-larger spousal benefit, but you would immediately suspend your application so your own benefit could continue to grow.
The "file and suspend" strategy is really helpful for maximizing what married couples can get from Social Security, but the maneuver is available only for those who have reached their full retirement age.
Three years later, when your benefit maxes out at age 70, you can end the suspension and start getting your checks.
It's especially important for higher-earning spouses to avoid locking themselves into permanently reduced checks. If your wife outlives you, she'll have to get by on a single check — yours — so you want the amount to be as large as it can be.
Can unmarried couple file joint tax return?
Dear Liz: Is it possible to file a joint tax return if you are not married but have lived together for more than seven years? We've owned property together for nine years.
Answer: What matters to the IRS is how your state treats your arrangement. Most states don't recognize common law marriages, in which two people live together but don't have a marriage license. But a few do.
The states that currently recognize common law marriages under some circumstances include Colorado, Iowa, Kansas, Montana, New Hampshire, South Carolina, Texas and Utah, according to the National Conference of State Legislatures.
States that recognize common law marriages entered into prior to certain dates include Pennsylvania before Jan. 1, 2005; Ohio before Oct. 10, 1991; Indiana before Jan. 1, 1958; Georgia before Jan. 1, 1997; and Florida before Jan. 1, 1968, according to the NCSL.
Also, most states do recognize common law marriages from those states where they are recognized, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. In other words, if you move from a state where common law marriage is recognized to one where it isn't, your union may still be considered a legal marriage.
Same-sex marriages are somewhat different, Luscombe said. The U.S. Treasury and the IRS have ruled that same-sex couples who were legally married in jurisdictions that recognize their marriage are considered married for tax purposes, even if the state where they currently live doesn't recognize their union.
Confused yet? Talk to a local tax pro who can advise you about the status of your arrangement.
Questions may be sent to Liz Weston, 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the "Contact" form at asklizweston.com. Distributed by No More Red Inc.