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Cash Flow Planning

Mar 30

How to Survive, Financially, During the Pandemic

By Cash Flow Planning, Financial Planning

Last week Congress passed, and the President signed, a $2 trillion bill to provide relief to American taxpayers and businesses suffering from the economic effects of the Coronavirus pandemic. They named it the “Cares Act.”

Media reports have focused on the $1,200 checks that individual taxpayers will receive. For most who live in major metro areas with high costs of living, this $1,200 will not provide much real relief – especially as our time spent in quarantine extends from several weeks into several months.

There are, however, other elements in the bill that allow you to draw substantial amounts of cash from your retirement savings to pay bills and stay afloat in 2020. First, you can now borrow two times as much from your 401(k). Second, the 10% penalty normally applied to early withdrawls from IRAs and retirement plans will be waived.

Borrowing from your 401(k)

Borrowing from your current employer’s 401(k) plan when your finances have taken a turn for the worst has always been an option. It’s quicker and easier than securing a loan from a bank, has no impact on your taxes or credit score, and is less expensive than maxing out on your credit cards. Yes, you’re paying some amount of interest on the loan, but you’re paying it to yourself. And you have five years to repay the loan.

Previously, you were only allowed to borrow the lesser of $50,000 or 50% of your vested balance. Now, you can borrow the lesser of $100,000 or 100% of your vested balance and you have an additional year (six total) to pay back the loan.

Taking early withdrawls from your IRA

Taking money from your IRA “early” – meaning before you turn 59.5 years old – has always been an option. Unless you met certain hardship tests, a 10% penalty was levied on your withdrawl and the full amount of that withdrawl was included in your taxable income. And you could not simply replace the funds you withdrew. You were limited by the annual contribution limits to IRAs ($6,000 + $1,000 if 50+).

Now, the 10% penalty will be waived on withdrawls up to $100,000 taken anytime through December 31, 2020. The withdrawl will be included in your taxable income, but you will be able to stretch that over three years and you can redeposit 100% of the funds withdrawn over three years. What’s more, if you redeposit the funds, you can file an amended tax return and get back the income tax you paid on the withdrawal.

That $100k withdrawl limit can be extended in certain circumstances. If you have been laid off and are paying health insurance premiums yourself while unemployed, any dollars withdrawn to cover those premiums are considered a “hardship withdrawl” and were already exempt from the 10% penalty.

Oct 16

Social Security Provides Benefits for Older Widows Too

By Cash Flow Planning, Financial Planning, Social Security, Widows and Money

Widows 60 or older (50 if disabled) are entitled to receive survivors’ benefits from Social Security based on their late husband’s work record. This includes divorced women whose ex-husbands have died if they were married to the deceased for 10+ years and did not remarry before the age of 60.

These widows receive 71.5% – 100% of what their late husband would have collected at his full retirement age (“FRA”), which is 66 plus some number of months for those born 1945-1959, and 67 for those born in 1960 and later. The exact percentage of their late husband’s benefit that they will receive as widows depends on the widow’s age and how close she is to her own full retirement age. If she has reached her own FRA, she’ll receive 100% of what her late husband would have received at his FRA. The further away she is from her own FRA, the lower the percentage.

What could this mean, in dollar terms?

Currently, the average Social Security benefit is $1,461 per month, while the maximum benefit for someone who’s reached his FRA is $2,861. Thus a widow could receive something in the range of $1,045 to $2,861 per month in survivors’ benefits. This can provide valuable support while a widow is in transition.

That said, there are a couple of things to think about.

First, for women who work and who have not reached their own FRA(1), these widow’s benefits will be taxed at $1 for every $2 of income they earns above $17,640 (2019). For those who have reached their FRA, their widow’s benefits will not be reduced by any income earned from work.

Second, collecting survivors’ benefits will not impact the retirement benefits a woman can claim on her own work record or that of her late husband.

Third, once she is 62 and can collect her own retirement benefit, a woman cannot collect both a survivor’s benefit and a retirement benefit. Social Security will pay only one benefit, and will pay whichever is the higher of the two.

It’s important for widows to file for survivors’ benefits as soon as possible. The Social Security Administration will pay claims retroactively to the date of the filing, but not the date of death.

(1)66 plus some number of months for those born 1995-1959, and 67 for those born in 1960 and later

Oct 12

Social Security “Survivors Benefits” for Widows and Children

By Cash Flow Planning, Financial Planning, Social Security, Widows and Money

Did you know that Social Security provides “survivor benefits” to widows and their children?

Widows can receive benefits, for themselves, if they are caring for a child under 16 or a child of any age who is permanently disabled. Each child under 18(1) can also receive a monthly check for him/herself, payable to the parent. The benefits paid to the widow and her child will each be equal to 75% of what the deceased father would have received at 67, his full retirement age (“FRA”).(2)

So, what could this look like, in dollar terms?

Currently, the average Social Security benefit is $1,461 per month, while the maximum benefit for someone who’s reached his FRA is $2,861. Thus a widow and her child could together receive something in the range of $2,100 to $4,300 per month in survivors’ benefits.

There are some limitations, however.

For widows who work outside of the home, their own widow’s benefit will be reduced by $1 for every $2 earned above $17,640 annually (2019). Since most women earn well above this threshold, the value of the widow’s own benefit is quickly lost.

That said, no matter a widow’s income, filing for the children’s benefit is a no-brainer. It’s found money. These benefits will continue for each child until s/he reaches 18(1) and will rarely be taxed.(3)

There is a maximum benefit that a family can receive, meaning that your combined benefit, widow’s plus children, is capped at 150-180% of the benefit the deceased father would have received at his FRA.

It’s important for widows to know that collecting survivors benefits now will not impact the amount you will ultimately collect in retirement benefits down the road – whether you plan to collect those retirement benefits on your deceased spouse’s earnings record or your own.

Widows must file for benefits in person at their local Social Security Administration office and should do so soon after their husband’s death. Once the application is processed, the Social Security Administration will pay benefits retroactive to the date the application was filed, not to the date of their husband’s death.

Social Security survivors benefits will not likely replace 100% of a late husband’s income, but they can provide valuable support in a widows transition.

(1)Or up 19 years, 2 months if still in high school full time

(2)67 for those born in 1960 or later

(3)The children’s benefits are only taxed if the children themselves have significant income – about $25k – from other sources