Only 1 Spouse’s Benefits Available
Q. I am a 64-year-old widow and still working. My husband died at age 67 before he had claimed any Social Security benefits. Upon retirement, may I claim both widow’s benefits and my own? What happens to my Social Security benefits if I invest the life insurance proceeds I got when my husband died? --A.W .
A. Upon retirement, you are entitled to claim the greater of the benefits--either your own or those your husband was eligible to receive at the time of his death.
Your life insurance proceeds should not directly affect Social Security benefits. Only being employed can reduce your monthly payments. This year, recipients under 65 lose $1 for every $2 they earn in excess of $8,040 a year; Recipients 65 and older lose $1 for every $3 earned after they have earned $11,160 in the year. There are no earned-income restrictions on recipients older than 70.
That said, you should still understand that Social Security recipients who do not work but still have what the government considers substantial annual income do face taxation of Social Security benefits. This is where invested insurance proceeds could affect your Social Security payments--not directly, but through the tax collector.
Last year’s sweeping changes in the rules governing taxation of Social Security income are too detailed and complicated to describe here. Although the changes involve the internal revenue code, your local Social Security representative should be able to explain how they apply to you. You should also consult the Internal Revenue Service pamphlet “Social Security Benefits and Equivalent Railroad Retirement Benefits.” To order a copy, telephone (800) 829-3676. The American Assn. of Retired Persons is also giving away a publication titled “Will Your Social Security Benefits Be Taxed?” To order it, call (202) 434-3870.
Home Value Transfers Cannot Be Reversed
Q. In a recent column, you mentioned that some counties are pulling out of the special program that allows older homeowners to transfer the assessed value of the residence they are selling to the new home. Does this affect homeowners who have already taken advantage of the transfer? --J.L .
A. No. Once homeowners have received the exemption, they will not be affected by a subsequent decision of the county to drop out of the program. For readers who may not be aware if it, California voters approved an initiative in 1988 allowing homeowners 55 or older to transfer the assessed value of their previous home anywhere within the state, as long as the value (or purchase price) of the new residence was equal to or less than the net sale price of the old. The initiative stipulates that homeowners could take advantage of the exemption only if the county to which they were moving opted to participate in the special property assessment program created by Proposition 90.
So far, the boards of supervisors of 12 counties--Alameda, Inyo, Kern, Los Angeles, Marin, Modoc, Orange, Riverside, Santa Clara, San Diego, San Mateo and Ventura--have agreed to participate. At one point, Contra Costa County had joined, but it has since withdrawn, and Riverside County supervisors have indicated an interest in following suit.
State officials say that once taxpayers are granted the Proposition 90 exemption, it is theirs as long as they remain owners of the home. Because homeowners are entitled to a single exemption over their lifetimes, the exemptions may not be transferred to a subsequent new home purchase, regardless of whether the county of residence is a member of the Proposition 90 program.
Bond Proceeds Lose Tax-Free Status in IRA
Q. If I bought municipal bonds for my individual retirement account, would the interest from the bonds be exempt from taxes when I withdrew the funds? S.P .
A. Despite what you might have read or been told by some hustling investment counselor, municipal bonds, or any other tax-exempt investment, are poor choices for an individual retirement account. Why? All withdrawals of previously untaxed money from an individual retirement account are taxable, regardless of the type of investment the funds are in.
So even if the funds are generating what would otherwise be tax-free interest, because they are in an IRA, that interest is taxable at the time the money is withdrawn. You do not want to put your IRA savings into tax-exempt securities, which typically earn less interest than their taxable counterparts, if those funds are going to be taxed anyway when you withdraw them.
Advertising Investment Yields: Yearly Is Rule
Q. Why do banks and savings and loans advertise their interest rates and yields exclusively in annual terms? It seems unfair to list an annual yield when an account term is less than one year. --S.T.A .
A. Yields of accounts of less than 12 months maturity are “annualized” to make it easier for customers to compare rates. Why? Because there is no other commonly accepted method of advertising and comparing investment rates. Perhaps more important, thrifts are required by federal law to post only annualized yields, to help customers compare various investment opportunities, regardless of the term.
Is the practice of annualizing yields unfair if an account runs for less than one year? That’s a matter of some debate. Clearly, a $1,000 certificate of deposit earns less in six months than it would if invested for a full year, but that difference is so apparent on its face that investors should hardly be surprised. Furthermore, as long as all investments are advertised and measured by the same yardstick, savers can easily decide which is best.
