For Social Security, Last Years of Work Are Key
Q: I am age 63 and am retiring after 40 years. During this period, I contributed the maximum each year to Social Security. If I apply for my Social Security benefits now, will my monthly benefits still be as high as if I worked and contributed to the system until turning 65? Or will the benefits be reduced because I stopped working and did not contribute for the last two years? I have had six divergent answers to this question. --P.B.K.
A: Your Social Security benefits are based upon the wages you have paid taxes on during your working career. The higher the total wages, the higher the benefit, up to a maximum benefit level that increases every year.
For most people retiring now, the Social Security Administration uses 35 years of the worker’s wages to compute his benefits.
Your Social Security benefits will not be reduced because you chose not to work for two years. However, by deciding to retire early, you are foregoing the opportunity to increase your benefits. Remember, benefits are based on wages.
During your early years on the job, the maximum wages for Social Security contributions were very low. Only in recent years have the wages increased dramatically.
By quitting work now, you will not be able to include two years of relatively high wages into the 35-year total on which your benefits will be calculated, two years that could replace two of your lowest-earning years.
This will have the effect of putting you at a lower Social Security benefit entry point than if you worked until age 65.
It’s True; Pensions Can’t Be Attached
Q: I am 76 years old. My only income is my military retirement, Social Security and my pension. I own no property except a 7-year-old car. Due to an accident, I ended up with large medical bills that I paid for with my credit card. Now I cannot continue paying these bills and still live decently. I do not want to file for bankruptcy. I was told that creditors can’t file liens or get a judgment against my pension. Is this true in California? --W.K.
A: Yes, in California creditors cannot attach liens against a pension. However, this may prove to be fairly meaningless. If your creditors are determined enough--and most are--they will sue you and can win a judgment against your assets, which can include the proceeds from your pension. Armed with such a judgment against you, your creditors can seize your car, as well. In addition, your credit rating will be rendered virtually worthless.
Although the net effect--walking away from your debts--would still be the same, many of our financial advisers say a personal bankruptcy filing is preferable to the sneakier approach you seem to be suggesting. You may not care about your credit rating, but if you lose your car and other possessions, you could be hard pressed to replace them. Bankruptcy would likely require a lawyer, and you may be balking at the expense. But there are still a smattering of legal aid services available to low-income citizens, and you might qualify. Also, some law offices provide free and reduced-fee services to the needy. You local bar association can refer you to the appropriate service.
Early Withdrawal Loss on CD Is Deductible
Q: Until recently I had $100,000 in a certificate of deposit at Columbia Savings & Loan. Because of its recent troubles, I was afraid that they might not be able to pay the interest when it was due. So I asked that my money be refunded. I had a loss of about $1,250. May I deduct this as a capital loss on my 1990 tax return? --O.H.O.
A: Yes. Capital losses may be deducted against capital gains, dollar for dollar, each year. If you have no capital gains, your losses may be used to offset up to $3,000 of ordinary income each year. Losses in excess of $3,000 may be carried forward and used to offset $3,000 worth of ordinary income in subsequent years until they are entirely depleted.
70 Isn’t Necessarily Too Old to Roll Over
Q: I will turn age 70 in October and must make a minimum withdrawal from my individual retirement account next April. Sometime around October, I will be receiving a lump sum payment from the pension fund I belong to. May I roll this payment over into my IRA within 60 days of receiving it and defer taxes on the money until I actually withdraw funds? --W.J.G.
A: Yes, you may roll the distribution over into your IRA, except the portion of it that constitutes your mandatory minimum withdrawal from that pension plan. The effect of the roll-over will be to increase the minimum withdrawal you must make from the IRA beginning with the distribution for 1991.
For the Self-Employed, a Keough-to-IRA Plan
Q: After having been self-employed for 30 years, I am closing my business. May I close my self-directed Keogh account and transfer its assets to a self-directed individual retirement account? And, if this is all right, may I then take a partial distribution and roll it over into another tax-deferred investment without incurring any taxes? --E.C.P.
A: Your plan is flawless. Just be sure to issue yourself a Form 1099R to show the distribution from your Keogh. As for the partial distribution, it is considered just a second individual retirement account; treat it accordingly.
