Avoid IRA Tax Pitfalls
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,
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
"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."
Available at Amazon.com:
- How to Tell if You Have a Good 401k Plan
- Insurance for Boomerang Kids
- Boomers Take On 'Necessities' May Not Be Grounded in Reality
- Avoid IRA Tax Pitfalls
- New Rules Slash Credit Card Fees
- More Consumer Protections on Bank Overdrafts May Be Coming
- Most Okay With Higher Social Security Taxes
- How to Retire Gradually
- Plan Ahead For a Comfortable & Potentially Rich Retirement
- To Understand Your 401K Plan Just Focus on the Fees
- Buying Coupons for Deep Discounts Carries Risk
- How New FTC Rules for Debt-Settlement Firms May Protect You
- 529 College Plans Not Completely Trouble-Free
- New Website Helps You Navigate Health Insurance
- Prepare For the Rising Cost of Long-Term Care
- How Much Life Insurance Do You Need?
- The Great College Scholarship Scramble
- The New High-Risk Health Insurance Pool: Common Questions
- Misunderstandings Rampant on Health Care Reform & Medicare
- How to Talk to Your Parents About the Estate Tax
- Should Young People See a Financial Planner?
- 10 Ways to Ruin Your Retirement
- Understanding the Psychology of Retirement Planning
- Five-Year Rule for Roth IRA Withdrawals: A Primer
- Hard Times Triggering Spike in Consumer Fraud
- New Sites Empower Students to Build Their Own Scholarships
- 10 Things You Didn't Know About Social Security
- Costly 'Add-On' Insurance More About Profits Than Benefits
- Teaching Your Child Money Habits for Life
- Retirement Living Decisions Don't Require Hand-Wringing
- Sears Brings Back the Christmas Club
- Will You Run Out of Money Before You Run Out of Years?
- Best and Worst Places to Build a Nest Egg
- 21 Ways to Make Extra Money in Retirement
- Do You Trust Financial Services Companies? Trust Index Says Not So Much
- Don't Be Intimidated by Medicare Labyrinth of Letters
- 2010: Good Year to Die For Your Heirs' Sake
- The Dangers of DIY Estate Planning
- The Economy's Lasting Impact on Your Retirement
- Unconventional Retirement Investing Strategies
- Another Retirement Challenge for Women: Income Gender Gap
- Launching Your Own Business After Age 50
- Key Questions to Ask Before You Hire a Financial Adviser
- The New Good Life: Living Better Than Ever in an Age of Less
- 15 Ways to Tell if You Are Ready to Retire
- How to Maximize Your Social Security Benefits
- How Working Longer Helps Build Retirement Security
- How to Find a Low-Tax Place to Retire
- Investing Your Social Security Check? Consider These Factors
- Alternatives to Traditional Retirement
- Change On the Way for Retiree Health Benefit Programs
- Two New Medigap Plans to Consider
- Sizing Up Your Retirement Nest Egg Needs
- Biggest Sources of Retirement Income
- Assembling a Sturdy Retirement Portfolio
- Withdrawing from Retirement Accounts Early without Penalty
- Social Security Inflation Adjustment Debate
- Biggest Sources of Retirement Income
- Don't Neglect Long-Term Care in Retirement Planning
- How the Health Care Bill Impacts Retirees
- Jobs With the Best Retirement Benefits
Personal Finance - Avoid IRA Tax Pitfalls
(c) 2010 Humberto Cruz