Re: persfin-digest V5 #16

From: Harry Matthews <matthews@panix.com>
Subject: Re: persfin-digest V5 #16
Date: Tue, 26 May 1998 23:59:29 -0400
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persfin-digest wrote:

> Date: Sun, 17 May 1998 16:32:46 -0500 (CDT)
> From: T Koyn <koyn@users.anet-stl.com>
> Subject: Choosing IRA beneficiaries Question
>
> I have a few questions on how to choose beneficiaries for IRAs and
> retirement plans.
>
> How should an unmarried person choose beneficiaries to best advantage?

You can name any legal entity you wish -- a person (related or unrelated), a
charity of any sort, or even a profit-making corporation.  Where do you want your
money to go?  Absent specific instructions, the death benefit will go to your
immediate family (parents, children, spouse, siblings) or the state.

> Is there any tax advantage to choosing older or younger beneficiaries?

Under certain circumstances, it may pay to designate a younger beneficiary; check
with an accountant or tax lawyer for details.

> What are the options for how/when money is taken out of an IRA for a
> beneficiary?

The beneficiary only gains control of the money when you die.  If you make
withdrawals while you're alive and well, you're free to disburse the money as you
wish, but your tax liability will be determined by standard IRS regulations.

> How long can tax deferral continue for a beneficiary?

If this question worries you, you should talk to a lawyer about establishing a
trust.

> Can a beneficiary receiving distributions establish a new secondary
> beneficiary?

Maybe.  Talk to a pro.

> Are the answers affected by the relation between the beneficiary and the
> original acount holder?  If so, please answer for a relative rather than a
> spouse.

Sometimes.  This is how tax lawyers make their money and why the IRS has so many
publications.  You can download them from the IRS Web site,

http://www.irs.ustreas.gov/


> Do the answers for these questions differ for a money purchase/profit
> sharing plan associated with a job?

This all depends on how the plan is structured.  As I've said before, you need a
pro to walk you through the details.

> Date: Sun, 17 May 1998 16:33:26 -0500 (CDT)
> From: T Koyn <koyn@users.anet-stl.com>
> Subject: Distribution of IRA over life expectancy Question
>
> I understand that one may distribute an IRA in "substantially equal
> payments" over their life expectancy.  I have a few questions on how this
> works.
>
> How does one calculate the payment amount, considering that the account
> will continue to earn returns during distributions?

The IRS provides a table to guide your calculations.

> Can it be based on % of assets in account?  (Same percentage each year)?

Maybe.  But the presumption is that you want to save for the future, so it would be
improvident, to put it mildly, to use, say, the 1985 percentage for your 1998
withdrawal.  You are, in effect, turning your fund into a life annuity, so
unusually large withdrawals would be a red flag.

> Can payment be varied due to recalculation of balance and life expectancy
> each year or some periodic recalculation schedule, e.g. recalculating the
> payment each year based on how much is in the account divided by remaining
> life expectancy?

No.  You must use the IRS table for life expectancy in the year you start
withdrawals, and you must keep them up at leasrt until you reach age 60

> How much flexibility is there to design a method that
> does not deplete the account, and provides payments that tend to increase
> with inflation?  Can one just take a fixed, non changing percent of the
> balance each year with the dollar amount changing based on returns and
> market conditions?

As I said, the assumption is that you're creating a life annuity.  The IRS has
factored their assumptions of future ups and downs into their life expectancy
tables.

> I understand that once such a plan starts, it must continue until age 59
> 1/2 or 5 years, whichever is longer.

Bingo.  Do remember as well that every dollar you withdraw under such a plan is
taxed as normal income.  (Well, the percentage represented by non-deductible money
is not included.)  All you get for obeying the rules is an exeption from the 10%
additional penalty.

> Date: Sun, 17 May 1998 20:28:27 -0400
> From: riker@worldweb.net
> Subject: Federal Bonds vs. State Bonds
>
> My Mom lives in New York.  Recently, quite a few bonds were called in a
> taxable account she has.  The broker recommended Treasury bonds, with a
> current yield of around 5%.  But they are taxable, providing a net yield of
> 4% to 4.5%.
>
> My Dad (deceased, and therefore no longer available for advice) seemed to
> favor New York State bonds and NYC bonds, which were not taxable.  The
> broker seems to feel that these are riskier bonds.
>
> Any opinions?  Any other suggestions for reasonably safe fixed income paper?

State and city bonds are somewhat riskier, but given the level of NY taxes, it may
make sense to invest here.  You really should talk to a broker familiar with both
public and private bonds about the real net income.  If you're living mostly on
Social Security, the tax savings will be nugatory and corporate bonds could put
more money in your checking account.

> Date: Mon, 18 May 1998 10:07:44 -0400
> From: "Rao, Bharat" <bharat@scr.siemens.com>
> Subject: Not co-mingling converted Roth IRA with new Roth IRA?
>
> I opened a traditional (non-deductible) IRA for 1997 for myself and
> my wife in April 1998, and recently converted it into a Roth IRA. (I
> have no other IRA's before this.)  I now plan to contribute every year
> into Roth IRA's.
>
> I was simply planning to add to this existing (converted) account,
> but was advised by the Vanguard rep to avoid co-mingling IRA's.
> Why is this?

If you convert a conventional IRA to a Roth IRA, the entire balance could be taxed
as ordinary income in the year you make the conversion.  Vanguard is right to
caution you here, though the change may pay off in the long run; consult a tax
professional.

> Second, given that Vanguard charges a $10 maintenance fee for
> IRA accounts under $5K, these accounts will effectively pay a 1/2 %
> fee every year -- I would at least like to bring them up to 5K before
> I open up a new IRA.

Shop around; many custodians (American Century and Strong Funds in my experience)
have waived fees to draw more IRA investments.  If Vanguard isn't treating you
right, check out the competitors.  There are so many funds in so many "families,"
you should have no problems finding a low-cost home for your money.




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