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Beware the 'Tax Torpedo,' Spousal Benefits and Mortgage Deductions

Our money expert answers your financial questions

Jane Bryant Quinn

AARP

Jane Bryant Quinn is a personal finance expert for AARP.

Q: My wife and I were shocked to discover that when we start taking the required distribution from our individual retirement accounts at age 701/2, our Social Security taxes will jump and we will be in a higher tax bracket. We're 69. What can we do?

A: It feels natural not to tap an IRA early because those investments accumulate tax deferred. But as you've learned, a "tax torpedo" awaits. If your IRA is large, it's often smarter to live on it for a few years after you retire while putting off filing for Social Security. You'll shrink the IRA and hence the size of your required withdrawal at 701/2. Meanwhile, your Social Security account will grow by a guaranteed 8 percent for every year after 66 that you wait to collect, up to age 70. Social Security income is taxed less than IRA income, so this strategy often brings you out ahead. At this point, unfortunately, there's nothing you can do. But I hope that your question will help others!

Q: You wrote that a divorced wife can collect spousal benefits on her ex's account when she's 62. Social Security says I can't get half of his benefit until I'm 66.

A: We're both right. If you were married at least 10 years, you get half of his benefit if you claim at 66, but less if you file at a younger age. If he dies, you can get survivor's benefits as early as 60 (50 if you qualify as disabled). But again, claiming early means that your check will be reduced.

Q: I have a small mortgage on an investment condo. I can pay it off but I'd lose the tax deduction. What do you think?

A: The "value" of the interest deduction is a scam foisted on us by the mortgage industry. A deduction is not a gift! OK, in the 25 percent bracket, you write off $25 for every $100 paid in interest, but it costs you $75 out of pocket. How is that good? You're always ahead when you have no debt.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.

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