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By HELEN HUNTLEY
© St. Petersburg Times, published April 29, 2001
Which investments should be sold to pay for travel?
Q. I am 67 and my wife is 62. We have a $52,000 pretax income from a pension and Social Security. To pay for extensive travel we are planning, we will need to withdraw about $20,000 a year from our investments. We think we can do this without depleting our resources too badly.
We have non-IRA, traditional IRA and Roth IRA investments. Within each of the three categories are individual stocks and mutual funds. We also have $26,500 in CDs, which we think we should leave untouched as emergency money. Which investments should we sell first to fund our activities? What should we consider?
A. Both tax and investment consequences need to be considered. Sometimes what is best on the tax front probably will conflict with what is best on the investment front. Here are a few principles to guide you as you try to strike a balance:
1. Money you will need to spend in the next three years should not be invested in the stock market. Consider setting up a reserve fund containing the equivalent of your required investment income over the next three years. In your case, that would be $60,000. This money should be kept in safe investments such as CDs, short-term Treasury securities or money market investments.
2. Keep your portfolio in balance. Once you decide on the right proportion of stocks, bonds and cash for you, check that balance quarterly. Periodically rebalance, selling some investments and buying others. You don't have to be too precise -- rebalancing once a year generally is adequate -- but you also do not want to let your balance get too out of whack.
3. Put off paying taxes as long as possible. That means first tapping money that already is being taxed. Examples include dividend and interest payments and (after you turn 701/2) required IRA distributions. Then look to low-tax sources such as investments in your non-IRA account that can be cashed in tax-free or at capital gains tax rates. Do not tap your Roth IRA account until you have to.
4. Keep your long-term needs in mind. Because your wife is likely to outlive you, estimate her income and living expenses after your death. Consider how your withdrawal plans might affect her security.
Q. I got hit with an underpayment penalty on my income tax this year and would like to avoid it next year. How much do I have to pay in advance to avoid a penalty? I can't find an intelligible statement in the IRS booklet.
A. The basic rule is that you must pay in advance at least 90 percent of the tax owed on your return. But even if your payment is less than 90 percent, you will not be penalized on your 2001 return if you fall into any of the following categories:
Your total tax due is less than $1,000.
You did not owe any income tax in 2000.
Your advance payments were 100 percent of what you owed for 2000 (110 percent for taxpayers who had an AGI of $150,000 or more in 2000.)
If you are hit with a penalty, you can request to have it waived if hardship prevented you from making payments or you just retired and have a reasonable excuse for not paying.
Q. My husband and I are co-owners of savings bonds that we would like to give our granddaughter for college. The Federal Reserve said we could take my name off and add our granddaughter's as co-owner without a tax. Is this true? How will the tax work?
A. Changing the owner of a savings bond is a taxable event, but changing only one of two co-owners is not.
When your granddaughter cashes the bond, your husband technically will owe the income tax. In reality, the interest will be reported to your granddaughter under her Social Security number on a 1099 form and she will pay the taxes at her rate. The only potential adverse consequence is that this increase in her income could hurt her eligibility for financial aid.
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-- 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, or to firstname.lastname@example.org by e-mail.