Humberto Cruz

Two readers ask about protecting their nest eggs from the taxman -- you can do it sometimes, but not always -- and another offers sage advice for avoiding surprises and protecting your savings:

Q: I took money out of my traditional IRA for several years and paid the taxes on the withdrawals. Then I stopped withdrawing on a regular basis. Do I still have to start withdrawing again when I turn 70 and a half? I think of this money as kind of insurance for my family.

A: It makes no difference whether you made earlier withdrawals or not. Once you turn 70 and a half, you must by law start taking minimum annual distributions from your traditional IRA. (In response to the financial crisis and plunging IRA values, Congress waived traditional IRA distributions for 2009 only, but they are back in force for 2010.)

If your main goal is to preserve the IRA for your heirs, you may consider converting your traditional IRA to a Roth IRA, paying taxes on the conversion but in return avoiding all future mandatory withdrawals. This is a complex topic for which you may want to seek personalized professional advice.

Q: Down the road, maybe when I turn 65, could I convert my six-figure traditional IRA to an immediate lifetime income annuity without taking a big hit on taxes? I'm not sure how this would work.

A: If you cash in your traditional IRA and then buy a lifetime income annuity with the proceeds, you would -- ouch! -- be liable for all taxes due on the entire IRA balance.

Fortunately, you don't have to do that.

You can instead transfer all or part of your traditional IRA into a new IRA that is in the form of a lifetime annuity that pays you a monthly income for life. This, by the way, is what I have done with part of my IRA money.

Insurance companies that issue lifetime income annuities can help with the paperwork so the annuity is properly set up as an IRA. The transfer of the IRA money would not incur any taxes. You would owe taxes only on the income payments you receive from the annuity, which would be considered IRA withdrawals.

Now an excellent reader tip:

"My wife had a certificate of deposit in an IRA at a bank that was taken over by another. When the CD matured, we were preoccupied with other matters and did not check the renewal interest rate. It was two-tenths of a percent!

"To make matters worse, we discovered the bank that took over ours charges a $30 annual maintenance fee when an IRA owner has less than $10,000 in the bank. This fee was clearly spelled out in the terms we received from the new bank. We failed to read them because we assumed they would be similar to those of the old bank. The result is that my wife would have lost money with the IRA because the maintenance fee would have been more than the interest she earned. Fortunately, we discovered the problem before the $30 was due and my wife was able to transfer the IRA money to another institution without penalty.

"My point is not that there was any deceit. The new bank's terms were clear. The most important point is to understand the terms of an investment and to be alert that some institutions charge maintenance, administrative, and other fees even when their interest rates are absurdly low."

Well said.

Available at Amazon.com:

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals

Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire

The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

 

Personal Finance - Avoid IRA Tax Pitfalls

© Humberto Cruz