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There's no way around paying taxes on IRA investment

Personal Finance editor


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By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published May 19, 2002

Q. About five years ago I invested my individual retirement account worth $31,000 in a viatical fund that was to mature in two years. I have yet to receive any money. The problem is that because of my age, I am required to take minimum annual distributions. The IRA custodian told me I would have to fill out "distribution in kind" forms. I did and received a 1099 tax form for $2,400, which I reported and paid taxes on for my 2001 tax return. I was advised this was the only way it could be handled since there was no money in my account. Do you know how I could get out of paying taxes on money I never received?

A. I'm afraid not. If an IRA has value and you've passed age 70 1/2, you are required to take annual distributions and pay taxes. Failure to take a required distribution means a penalty of 50 percent of the amount you should have withdrawn but did not.

When you invest in a viatical, you buy a life insurance policy (or an interest in a group of policies) on the life of someone who is not expected to live long. When the insured person dies, you collect all or part of the death benefit. But as long as the person remains alive, you get nothing.

"These are horrible investments for an IRA," said IRA expert Ed Slott, an accountant in Rockville Centre, N.Y.

One problem is that an IRA investment needs to be valued each year before you can calculate the amount of the required withdrawal. If the IRS thinks the value is too low, it could challenge it. This is an issue not just with viaticals but with limited partnerships and any other illiquid IRA investment.

Then there's the problem you mention of paying taxes on money you didn't receive. When you took a "distribution in kind," you transferred ownership of part of your investment from the tax-sheltered IRA to a taxable account. The only good thing about this is that the $2,400 on which you paid taxes became the tax basis for the transferred investment. If this investment later becomes worthless, you can declare a $2,400 capital loss on your income tax return.

* * *

Q. My mother-in-law passed away more than 20 years ago and my father-in-law seven years ago. While going through their effects, we came across a U.S. savings bond my mother-in-law purchased in September 1973 for someone else. It has the word "gift" typed above the recipient's name, along with my mother-in-law's Social Security number. The problem is that my wife does not know the recipient or why her mother would have bought a bond for that person. Is there any remedy for this situation?

A. Yes, but probably not the one you were hoping for. The person whose name is on the bond is the rightful owner. If you are not able to locate the person, your best bet is to mail the bond, along with a note of explanation, to the Bureau of the Public Debt, 200 Third St., Parkersburg, WV 26106-1328.

"We'll retire the bond and wait for a claim," bureau spokesman Pete Hollenbach said. Of course, the odds are that no claim will be filed and the government will keep the money.

* * *

Q. What happened to the stock listing for Minnesota Mining & Manufacturing Co.? It used to be in every day.

A. The folks at 3M changed the company's name to 3M Co. on April 8. Since that's what everybody called the company anyway, they decided to make it official. That means the stock is now listed in the Ts (for three) instead of in the Ms (for Minnesota.)

Online money map

If you're the type who likes to get something for nothing, most big mutual fund companies are prepared to accommodate you. Educational brochures about investing are only a phone call or a few mouse clicks away. For a glimpse of the available offerings, go directly to your favorite fund company or check out columnist Dian Vujovich's Web site. Also available on Vujovich's site are fund companies' ticker symbols, telephone numbers and Web site addresses.

-- 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.

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