Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 19, 1993 TAG: 9307160378
SECTION: BUSINESS PAGE: MONEY EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
A: You should definitely avoid putting a tax-sheltered or tax-deferred investment, such as an annuity or municipal bonds, inside an Individual Retirement Account. That's because you do not want one tax shelter inside a second tax shelter. You keep your shelters separate.
Many people also believe that, given a choice, you should shelter currently taxable income, such as a bank certificate of deposit or a bond fund, inside an IRA.
By contrast, your mutual funds aimed at growth would be outside the shelter of an IRA because your capital gains grow without taxes until you sell your shares. In this way, mutual funds are a type of tax deferral.
This presumes you have a diverse portfolio to spread around.
If you are young and your portfolio is limited, however, you should have most of your money invested for long-term growth regardless of where you keep it.
When to take IRA disbursements
Q: I turned 70 in April and will be 70 1/2 in October. I understand that I can postpone taking a disbursement from my IRA until April of the year following the year in which I turn 70 1/2. Therefore, I plan to take my first withdrawal from the IRA in April 1994.
The personnel office of my former employer advised me against doing this. They said I must make a second withdrawal by the end of 1994, which could affect my tax situation.
When should I take my first withdrawal from the IRA?
A: Valerie Kowalski, a certified public accountant with the Roanoke firm of Kowalski and Associates, said your former employer is correct about the timing. It may or may not be correct about a tax problem.
She said the law requires you to take your first withdrawal at the age of 70 1/2, but the government gives you an extension of time to take this initial money until the following April.
In your case, you have until April 1994 to make your 1993 withdrawal and until December 1994 to take your 1994 disbursement. That means you must make two withdrawals by the end of next year, although you can put the first two within a single year. You must make annual withdrawals after this initial event.
Kowalski said you should take a look at your taxable income projected for the year 1994.
You should determine if a double payment in 1994 would push you into a higher tax bracket, such as from 15 percent to 28 percent or from 28 percent to 31 percent.
If the extra payment would place you in a higher bracket, she said, you should take your initial 1993 disbursement before the end of this year.
If the extra payment would make no difference in the tax brackets, Kowalski said, it should be to your advantage to take both withdrawals in 1994. This would delay taxation of the 1994 disbursement for another year. You might consult your tax adviser if you have trouble determining your bracket or if a lot of money is involved.
Trust can provide for companion only
Q: My live-in companion and I are retired and on fixed income. My income and estate are larger than hers, and upon my death I would like for her to be my beneficiary.
The problem is her children, who are parasites and moochers. She doesn't realize this and is unable to say "no" to them.
Is there any way that I can set up a trust to provide for her and at the same time ensure that the money and property will be for her use only? At her death, I would want the remainder, if any, to go to a charitable cause.
A: Your situation requires a will that sets up a trust for the benefit of your companion during her lifetime. She would otherwise get nothing under Virginia law, which would direct the money to your nearest relatives.
You can easily accomplish your goals with such a trust.
You should have an outside trustee, such as the trust department of your bank. You can direct your trustee to give your companion a specific amount of money each month - too little at any one time for her to squander, for example.
In the alternative, you could direct your trustee to pay specific bills, such as rent and medical costs. This would help her, but would finance only certain items.
Such arrangements are called spendthrift trusts.
Your will should direct that upon her death the balance of your estate will go to a charity of your choice.
You should, without delay, see a lawyer who specializes in wills and estates. Ask your friends for recommendations. Without a will, you are currently allowing the state to write your will, meaning distant relatives would benefit from your estate. The plan you have in mind cannot be carried out without a will.
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
by CNB