Finance

How a Roth IRA rollover can cause unforeseen problems

Dear Liz: I’ve been contributing to my young adult children’s Roth IRA accounts for the past few years to get them started with retirement savings. My oldest just quit her first job to go back to graduate school. Since her income will be low this year, I advised her to roll her defined contribution plan with her former employer into her Roth IRA to consolidate her retirement savings. Will this conversion affect the maximum amount I can contribute to her Roth beyond the normal maximum contribution rules?

The answer: The conversion could do more than affect her ability to contribute to a Roth. It could also increase her tax bill, reduce her eligibility for financial aid and affect any health insurance subsidies she receives. The conversion may still be a smart move because Roth IRAs offer tax-free withdrawals in retirement, but she should understand all the implications before following your advice.

The amount your daughter converts from her 401(k) or other defined contribution plan will be considered a taxable distribution and will be treated as income. That could affect her eligibility for tax credits, such as education tax credits and Affordable Care Act subsidies, as well as her ability to contribute to a Roth. (In 2023, an individual’s ability to contribute to a Roth phases out between modified adjusted gross incomes of $138,000 to $153,000.)

Also, to be eligible to contribute, she must have an income at least equal to the amount he (or you) plan to contribute. A retirement plan distribution is not considered earned income, so she would need wages, salary, tips, bonuses, commissions, or self-employment income to qualify.

The conversion could affect her financial aid in future years. Federal aid calculations are based on tax returns from the previous two years, so her 2023 tax return could affect her aid if she is still in school during the 2025-26 school year.

Also, she needs to figure out how to pay the conversion tax. Converting a regular retirement account to a Roth may make sense if one expects to be in a higher tax bracket later, but the math starts to fall apart if one has to raid the retirement account itself to pay taxes.

Your daughter should consult with a tax professional who can review her situation and provide personalized advice.

Old uncashed insurance policies

Dear Liz: What advice can you give people when they come across old life insurance policies that may never have been cashed?

The answer: My siblings and I have personal experience with this after coming across two policies in our late father’s papers. We learned that one policy had indeed cashed in, but the other — purchased in the 1930s, with a face value of $5,000 — was still in effect.

You can usually use a search engine to determine if an insurer is still in business or has changed its name or merged with another company. (Unsurprisingly, the insurer that issued the policy in the 1930s was involved in several mergers in the following decades, but it only took us a few seconds to find the current incarnation.) If you’re having trouble finding a company, contact insurance, contact insurance. regulator in the country where the insurer was originally located.

Once you have the insurer’s current name and contact information, you can call and ask if the policy is still in effect. If the policy has value, the insurer can guide you on how to make a claim.

Benefits for survivors of divorce and remarriage

Dear Liz: I am a divorced man receiving Social Security survivor benefits based on the earnings records of my ex, who died. I am 63 years old. Can I get married and still receive benefits?

The answer: Yes. People receiving family benefits can remarry at age 60 or later without losing benefits.

Survivor benefits are based on the earnings record of the deceased spouse or former spouse. This is different from spousal benefits and divorced spouse benefits, which are based on the earnings record of someone who is still alive. People who receive divorced spousal benefits cannot remarry without losing those benefits.

Liz Weston, a certified financial planner, is a personal finance columnist for NerdWallet. Questions can be directed to her at 3940 Laurel Canyon, ext. 238, Studio City, CA 91604, or by using the “Contact” form at asklizveston.com.

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