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Tax implications may be few for these IRA holders
By HELEN HUNTLEY, Times Staff Writer
© St. Petersburg Times, published January 20, 2002
Q. Each year my husband and I have been putting $2,000 into traditional IRAs that are now worth about $70,000. Now that we're almost 65, we would like to start withdrawing some of the money since we have no pension or 401(k).
Is there a simple way to calculate how much money to withdraw without paying excessive taxes? During some of these years we made nondeductible contributions, but we have no records of income tax returns prior to 1995. Would the IRS have them on file?
A. You are luckier than you realize as far as taxes are concerned. If you plan to live on Social Security and the income from $70,000 in investments, spreading out withdrawals may allow you to avoid paying taxes on your IRA.
The simple way to calculate this is to add together your standard deduction and personal exemptions. CCH Inc. estimates the standard deduction for a couple both 65 or older will be $9,650, and personal exemptions will be worth $3,000 apiece for the 2002 tax year. That means your first $15,650 in income, not counting Social Security, will be exempt from taxes. And even the next $12,000 or so will be taxed at only 10 percent. If you want to know where the higher tax brackets kick in, check out CCH's Web site (www.cch.com).
At higher income levels, you also have to pay attention to the threshhold at which Social Security benefits become partly taxable. For a married couple that's roughly when half your benefits plus the rest of your pre-tax income exceeds $32,000.
If you will have to pay taxes on your IRA withdrawals, information about your contributions will be important to avoid being taxed twice on the same money. Since you made nondeductible contributions, a portion of every withdrawal will be tax-free.
Copies of back tax returns are available from the IRS by filing Form 4506 and paying $23 for each return requested. But the only return you really need is the one you filed for the year when you made your most recent nondeductible contribution. If you filled out Form 8606 correctly that year, you reported not only your latest contribution, but the total value of your previous nondeductible contributions. The form refers to this as the "basis" for your IRA. If you did not file Form 8606 when you made nondeductible contributions, copies of back tax returns are not going to help.
The mutual fund companies and banks where you have your accounts may have a record of your contributions. Often this is part of the year-end statement, which, of course, you should have saved. If you did not, you may be able to order copies.
The lesson for readers: Save those IRA records until all the money has been withdrawn!
Q. I have power of attorney for my father, who is 90. I am the only heir in his will. Could you please tell me if any of these items will have to go through probate: a checking account in both of our names that I use to pay his bills, CDs in his name in trust for me, CDs in both our names as co-owners and U.S. savings bonds in both our names as co-owners. He does not own any property other than furniture, which I think would have to go through probate.
A. Probate is a legal process for settling creditors' claims and distributing a dead person's property to those entitled to it. Items that are passed to heirs through a will go through probate, including personal property such as furniture. By using co-ownership and "in trust for" ownership, your father took those particular accounts out of his probate estate. Another popular way around probate is to name beneficiaries for retirement accounts and life insurance policies.
Keep in mind that avoiding probate and avoiding estate taxes are not the same thing. If your father's estate is large enough to be taxable, it doesn't matter if it passes to you by will or by having your name on the account as co-owner.
What are you trying to accomplish with your investments? For some helpful hints on setting investment objectives, as well as information on other topics, check out the Association for Investment Management and Research Web site and click on "investor services."
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.