Q: I’m pretty close to retirement and hearing about a possible recession due to tariffs, and government cuts has me feeling nervous. Should I just move everything to cash?

A: It’s a natural instinct to act when things feel this uncertain. Doing something can feel better than just sitting still. But, it often backfires when you act on fear.

It’s important to remember that markets are forward-looking. Today’s stock prices already “price in” a wide set of possible future outcomes. This includes many of the things currently making headlines. Moving to cash is a tough decision on many levels. There is a high probability that you are the batter swinging at a pitch after the umpire has already called a third strike.

Your portfolio should be built around a longer-term financial plan. It’s smart to remove the emotion. Your plan should be built around some key pillars. I’m referring to things like solid diversification, a proper balance between stocks and bonds, and a clear understanding of your own appetite for risk.

Diversification means not having too much exposure to industries vulnerable to tariffs. A balanced portfolio means you hold some riskier assets, like stocks, and you also have more stable ones, like bonds. In the end, your financial plan should already account for some volatility. It shouldn’t require adjustment every time the market gets rattled. The bottom line is, when markets are shaky, it’s smart to revisit your plan, not abandon it.

Q: With the IRS being gutted, my husband thinks it’s safe to say there will be fewer audits. He’s thinking we could just skip filing our taxes this year. We are both pretty sickened by what we’re seeing coming out of the White House. But, what are the real risks here?

A: With everything that’s going on today, finding a way to protest is your absolute right. But, I wouldn’t do it this way. This is not the type of “good trouble” you want to find yourself in!

The IRS gets mountains of data on you. They know a lot about your tax picture, with or without your tax return. Employers, brokerage firms and banks file tax forms, among other sources. Their computer systems fully ingest all of this tax data on you.  If you don’t file your taxes at all, that missing return waves a massive red flag. When their computers spot an inconsistency, they’ll almost certainly send you a notice – sometimes a couple years later – demanding a tax payment along with interest and penalties.

The penalties can be harsh. If they determine you owed them money, and you never filed, the IRS hits you with failure-to-file penalties, failure-to-pay penalties, plus interest on both. And, that’s before mentioning possible accuracy-related penalties if you understate your income by too much. All of this can pile up quickly. Tax evasion is just an unwise form of political resistance. It’ll likely cost you more than you think.

There is a time to speak up.

Democracy and capitalism rely on strong institutions, a true balance of power and clear policies. Elon Musk’s inflammatory actions and President Trump’s chaotic approach have created needless uncertainty. Some might view their tactics as bold. In my view, they are absurdly dangerous. Disruption without public discourse weakens our institutions and our economy.

Our institutions must be defended before they erode further. Musk’s DOGE, an unaccountable entity, has gained access to our nation’s payment systems and the personnel files of millions of government employees. It raises legitimate questions of their true intent. I can assure you, this has created concern for many retirees.

Meanwhile, policy shifts by President Trump are creating mayhem. His wildly confusing tariffs policies, his and Musk’s attempts to gut the federal workforce, his threats to annex and abandon other nations and his slew of orders designed to deepen public divisions are prime examples. While certainly not my only concern, these actions lower confidence and ripple through financial markets.

Trade tensions will disrupt global supply chains and damage our international relationships. Tariffs will raise consumer prices and invite retaliation. In the background are looming threats to hamstring the Federal Reserve’s independence. This all fuels uncertainty, increases volatility, and weakens our economy. But, as we should all know by now, life is about more than money.

Our courts and the free press – key pillars of our democracy – are in the crosshairs. They act as safeguards against tyranny. President Trump’s ongoing attacks on reputable news outlets, his questioning of the legitimacy of judges, and his granting of access to fringe news sources both limit transparency and erode public confidence. Without trust in these institutions, our society is weakened.

Congress plays a critical role. So far, lawmakers appear unwilling to check President Trump’s and Elon Musk’s actions. Among other jobs, our elected officials are supposed to slow things down and ensure that policy changes are seriously considered. When they meekly sit on their hands – fearing their positions more than the lives (and livelihoods) of the people they were elected to serve – the door is open for lasting harm.

Beyond just voting, we also play a critical role. We all share the responsibility to engage in thoughtful discussion, demand transparency, and hold leaders accountable. But, without strong institutions, far too much damage can be inflicted between election cycles. Remaining silent and hoping others will say or do something is a natural instinct. However, history shows that silence is the lifeblood of authoritarians.

This is not about politics. My point is much broader. We should all be able to agree on the importance of stability, respect, fairness, and protecting our institutions. What we are all witnessing should get our attention. It’s time to speak up.

Q: My husband didn’t work last year, but we’d like to contribute to an IRA for him to lower our taxes. We’re in a higher-than-usual tax situation this year. Is this allowed? Also, I participate in a retirement plan at work. Does that change things?

A: Yes, you can contribute to his IRA even though he didn’t work. It’s called a spousal IRA. His contribution limit for tax year 2024 is $7,000, plus an additional $1,000 “catch-up” contribution if he’s over 50. You have until tax time to make his contribution.

Whether his contribution is actually tax-deductible will depend on your family’s overall income. Since you are in a retirement plan at work, it affects the deductibility of his IRA contribution. For 2024, for married couples the deduction is fully phased out at $240,000 of adjusted gross income.

If you exceed this income limit, you can still make a contribution for him, but it would be non-deductible. To better plan for this year, you might double check to see if you are actually maxing out your own retirement plan contributions.

Q: We had a big income year in 2024, but 2025 will be much lower. We don’t think we need to make estimated tax payments this year based on last year’s income. How do we make sure we pay the right amount and avoid any penalties this year?

A: The IRS’ estimated tax rules offer flexibility, but getting it right takes some work.

To avoid penalties, you need to meet a “safe harbor” rule. One option is to pay 100% of last year’s tax liability (or 110% if your adjusted gross income was over $150,000). Since your 2024 income was high, this could cause you to pay way too much tax along the way. With interest rates on savings still pretty attractive, letting the government have that money ahead of time isn’t the smartest move.

A second option is to pay at least 90% of your actual 2025 tax liability. This avoids overpaying but it does mean you’ll have to do some tax planning throughout the year. If your estimated tax payments end up being too low, you could get hit with a penalty.

If you’re retired, it might make sense to adjust your tax withholding on your IRA withdrawals or even your Social Security or pensions payments instead of making estimated payments. The IRS treats this type of tax withholding as if it were paid evenly throughout the year. This way, you can wait until later in the year to do your tax projections, rather than make those large tax payments during the year.

While it can be a pain, checking your numbers throughout the year and making adjustments will help. It’s far less of a pain than paying those underpayment penalties!

As Bob Dylan declared, the times they are a-changin’. The tax picture for Michigan retirees remains in flux. The 2024 tax season now brings us the “50% phase in” of Michigan’s new retirement income tax law.

As a refresher, the new law acts as an “overlay” on top of the old law and retirees get to choose the law that treats them best. Year after year, the new law is slowly winning the battle. Here’s how it works.  

Group A: For those born on or before 1945, there is no change. These retirees get to deduct their retirement income up to about $64,000 (single) / $128,000 (married) for 2024. Retirement income includes things like pension benefits and IRA distributions.

Group B: For retirees born in 1946 through 1952, they either get to deduct $20,000 (single) / $40,000 (married) against all types of income or they can use 50% of the new law’s deductions specifically against their retirement income. They can deduct their retirement income up to about $32,000 (single) / $64,000 (married.) Note, this is 50% of what Group A gets to deduct as shown above. They can choose the deduction level that’s best for them.

Group C: For retirees born in 1953 through 1957, they also either get to deduct up to $20,000 (single) / $40,000 (married) against all types of income – with an added catch – or they, too, can use 50% of the new law’s deductions specifically against their retirement income. 

The catch is the old law’s deduction amount is weakened because it is reduced by the taxable portion of their Social Security benefits and their personal exemptions. With each passing year, the new law crushes the old law.

Note, once people reach age 67, they enter into this group. Thankfully, in the years to come, it’ll completely eliminate the next group of younger retirees.

Group D: For retirees born in 1958 through 1962, the old law provides no deduction. The new law wins, by default. For the 2024 tax year, they also get 50% of the new law’s deductions against their retirement income just like the previous two groups.

Group E: For those born in 1963 through 1966, they will have to wait for the 2025 tax year to see the benefits of the third “phase in” of the new law. They get no deduction in 2024.

Group F: For those born after 1966, they will have to wait for the fourth and final “phase in” during the 2026 tax year. They get no deduction in 2024 or 2025.

To recap history, the 2023 tax year phased in 25% of the full deduction and the 2024 tax year is now phasing in 50%. Looking forward, 2025 will bring us a 75% phase in and 2026 will allow everyone to enjoy 100% of the retirement income deduction. I’m looking forward to 2026!

In a surprising move, Congress just repealed two controversial provisions of Social Security that impact millions of retirees who receive “non-covered” pensions that were earned while opting out of the Social Security system. With Biden’s pending signature, the Windfall Elimination Provision and Government Pension Offset will soon be relics of the past and a great set of trivia questions for finance nerds.

The Windfall Elimination Provision (WEP) started way back in 1983 and is all about retirees with non-covered pensions who also happened to earn some Social Security benefits elsewhere at some point in their careers. WEP’s goal was to prevent retirees with sizable non-covered pensions from appearing to be low-income workers in the eyes of the Social Security system.

By design, Social Security replaces more of a low-income worker’s earnings than it does for a higher-income worker. However, appearing to be a low-income worker – while also receiving a healthy non-covered pension – is not the same as actually being a low-income worker. To account for this fact, WEP worked to reduce a “pseudo” low-income pensioner’s Social Security benefit by about $500 per month. This WEP reduction is now gone.

The Government Pension Offset (GPO) is equally long-standing and is all about Social Security spousal benefits and survivor benefits. It was put in place to reduce or eliminate Social Security spousal or survivor benefits for people who also receive substantial non-covered pensions.

As a spousal benefit, you are entitled to the greater of your own Social Security benefit based on your work history or half of your spouse’s benefit. And, as a survivor benefit, you are entitled to the greater of your own Social Security benefit or your deceased spouse’s Social Security benefit. However, for people with non-covered pensions, they might not have earned much, or any, Social Security benefit on their own during their careers. 

Without an adjustment under GPO, these pension-receiving spouses would effectively be viewed as a “stay-at-home” spouse and would automatically be entitled to a benefit based on their spouse’s work record. But, of course, they would receive their own non-covered pension benefit, too.

To account for this appearance of “double dipping”, GPO basically plugs in a person’s non-covered pension “as if” it is their own Social Security benefit. Given the size of some non-covered pensions, GPO worked to reduce or eliminate any spousal and survivor benefits for many pensioners. This GPO reduction is now gone, too.

With GPO and WEP’s repeal, about 3 million affected retirees will begin to receive about $20 billion more in Social Security benefits. On top of that, they are also slated to receive a year’s worth of retroactive benefits. The details on how these retroactive benefits will actually find their way to retirees’ bank accounts is still being worked out. It’s a massive undertaking.