(Do you have a question about your financial affairs? Financial planning consultant, Robert S. Pennartz, CFP® takes calls at 1-302-654-5556, extension 138 or 1-800-366-0632, extension 138. A selection of these questions and Pennartz’s responses are published in this column. Anonymity is assured.)
Q. My husband and I are planning to retire next year (we’ll be 66 years old then). We understand that for Social Security, if you delay taking it, your benefit will grow each year until you do take it. Is it a good idea to delay?
A. That’s a great question. The answer is “it depends”. You are right that your retirement income benefit will grow by 8 percent for each year that you delay (between age 66 and 70). Questions to ask are:
1. Do you need the Social Security retirement income money now, or can you afford to delay?
If you need it now, take it now.
2. Does longevity run in your family? It could take to age 79 before you receive more total
income from a delayed benefit, so you need to ask yourself, are you likely to live that long?
Another option is to consider “file and suspend”. Under this arrangement, next year (at full retirement age), the higher income worker can file and suspend his (or her) benefit in order to start spousal benefits (50 percent of the higher income workers benefit). As a couple, this lets you start with a smaller benefit at age 66, while building up to a larger benefit later on.
As you can imagine, there’s a lot to consider here. I recommend that you consult with your financial planner to go over these choices.
Q. I understand that there is a new 3.8 percent tax on investment income starting next year. How can I plan around this?
A. You are correct. The new health care laws will start this 3.8 percent surtax in 2013 on investment income. This applies to individuals with modified adjusted gross incomes over $200,000 and couples filing jointly over $250,000. What’s taxed is investment income: interest, dividends, capital gains, annuity income, passive rental income, etc.
If you can defer or avoid these items, you won’t have to worry about the extra 3.8 percent. One thing to consider is that taxable income from all sources can push you over the $200,000 threshold, so watch out for taxable distribution from IRAs and retirement plans.
A Roth Conversion in 2012 will eliminate future taxable income in 2013 and beyond. There are no longer any income restrictions on Roth Conversions. They’re available to everyone. In a Roth account, the earnings in the account must stay there for five years (without penalty), and since it’s a retirement account, there is the age 59½ requirement.
Also, pre-tax contributions to 401(k)s and IRAs can help reduce your modified adjusted gross income to possibly keep your income under the threshold amount.
Please review your situation with your financial planner or tax preparer to discuss the details of your particular situation.
Robert S. Pennartz is a Certified Financial Planner Practitioner at the Financial House, a Registered Investment Advisor, in Centreville, DE. Bob lives in Pocopson Township with his wife and children. He is a registered representative offering securities through Lincoln Financial Securities Corporation, Member SIPC. Lincoln Financial Securities Corporation and The Financial House are not affiliated. Lincoln Financial Securities Corporation and its representatives do not offer tax or legal advice. You should consult your individual tax or legal professional regarding your individual circumstances.