Q: I have municipal bonds in my traditional IRA accounts. Is the interest I receive nontaxable? I am older than 73, and required to take required minimum distributions from my IRA yearly.
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A: Unfortunately, the interest you earn on municipal bonds will be taxable. Your custodian will notify you by January 31 of the year for which the required minimum distribution (RMD) is due. That RMD will be based on the value of all of all your investments in your traditional IRA accounts and your age. The balances in your traditional accounts will include the interest you earned on your municipal bonds.
The amount of the RMD will be taxable at ordinary income rates. So, the result will be that the interest you receive on your municipal bonds will be taxable at ordinary income tax rates.
You should invest in municipal bonds with funds that you hold outside of taxable retirement accounts. If you want to continue to hold some bonds in your traditional IRAs, I recommend that you invest in vehicles that return more than municipal bonds. You can consider long-term U.S. treasury bonds or long-term CDs.
Q: My wife recently passed away. Both of us applied for our Social Security benefits at age 62. I was told by a Social Security representative that I was not eligible for a survivor benefit. I am 70 years old. Why am I not entitled to a survivor benefit?
A: You would be entitled to a survivor benefit only if the value of the survivor benefit exceeds the Social Security benefit you are now receiving based on your work history under Social Security.
For example, if your wife had been receiving $25,000 per year when she passed away, and you are now receiving more than $25,000 per year based on your work history, you would not be entitled to a survivor benefit. You are entitled to whichever benefit is higher, the amount of your wife’s benefit at the time she died, or your current Social Security benefit.
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If you had not filed for your Social Security benefit yet, you would then be eligible for a survivor benefit of 100% of her work benefit until you filed for your own benefit based on your work record.
Individuals who have reached their full retirement age are entitled to 100% of their deceased spouse’s Social Security benefit as a survivor benefit if they have not filed for a benefit based on their own work record.
Q: My wife worked for several years for federal agencies. She was not covered by Social Security in those jobs, and she did not work long enough to receive a pension for these jobs. When the legislation was passed that revoked the provisions of GPO, the government pension offset, she applied for a spousal benefit based on my work under Social Security. She was told she was not entitled to any additional benefit. Is that correct?
A: Yes. Social Security was correct. Because she was not receiving a pension for her work done outside Social Security, there would not have been any reduction of spousal benefits she was entitled to. If she had received a pension from work outside Social Security, then there would have been a 2/3 reduction of spousal benefits based on her pension..
Q: My wife worked several years for a school that did not participate in Social Security. She has been receiving a pension for several years. I am receiving a Social Security benefit based on my work record. Is she entitled to additional spousal benefits because of the repeal of GPO?
A: She may be entitled to additional spousal benefits if Social Security had information regarding her pension. She should definitely contact Social Security to determine if her spousal benefits had been reduced because of her pension. She also could be eligible for a larger survivor benefit if you predecease her.
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Elliot Raphaelson welcomes your questions and comments at [email protected].