On money

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times,
published August 26, 2001

Retirement savings plan tax credit isn't for everyone

Q. I read an update on the new tax laws that said low- to middle-income taxpayers could receive a tax credit for contributions to a 401(k). I questioned my stockbroker and she sent me a publication that shows it's only applicable to individual retirement accounts. Which is correct?

A. The new credit will apply to both, and if you are eligible, it will be a great deal. In calculating the credit, you will be able to use up to $2,000 in contributions to qualified retirement savings plans, including 401(k)s and IRAs. The amount of the credit will be 10 percent to 50 percent of the contribution, depending on income, so the maximum credit will be $1,000.

Of course, there are complications and qualifications. After all, this is part of the tax law. For one thing, the credit will disappear if your adjusted gross income exceeds $25,000 if single or $50,000 if married filing jointly.

But even if you qualify based on income, you might miss out on another front. The retirement contribution credit will be non-refundable, so you will not be able to use it if other credits, such as the child care credit, wipe out your tax liability. And finally, it will apply only to contributions for tax years 2002 through 2006, unless Congress decides to extend it.

Q. Aware that she was dying, my mother signed over her house to my brother using a quit claim deed in 1999. She died in November 2000, and he sold the house in July of this year. The house is in Massachusetts. Is he responsible for any capital gains taxes, state or federal?

A. My advice to your brother is to consult a lawyer in Massachusetts.

If the house was a gift, your brother would owe federal capital gains tax figured from your mother's cost basis. If it was an inheritance, the tax would be based on the increase in value only since her death.

But the legal nature of transactions such as the one you describe can be murky, especially if the deed was not recorded until after your mother's death. Property transfers and probate proceedings are a matter of state law, which is why your brother should see a lawyer in Massachusetts rather than one here in Florida. A Massachusetts lawyer also should be able to advise him on state taxes or refer him to an accountant who can.

Attempts to avoid lawyers and probate can backfire, especially in real estate matters where a clouded title may result. Giving away appreciated assets before death also can create a big tax liability for heirs who otherwise would have inherited them with the basis stepped up to the value at the person's death.

Q. The company I have worked at for several years changed ownership last September. I have a 401(k) with the old company, but they tell me I cannot roll this into an IRA, that I have to wait until the new company starts a 401(k) and roll it into that. Is there a deadline for the new company to start a 401(k)? Why, now that it has been almost a year, can I not roll it into an IRA?

A. That's a question for the company. The tax laws permit rolling a 401(k) into an IRA, but under federal law, a company does not have to give you the money in a retirement plan until you reach retirement age. However, companies are required to abide by the rules they establish for their retirement plans.

My suggestion is that you ask the plan administrator for a copy of the plan rules. Read them and see what they say. If you cannot get the rules or if you don't understand them or think the company is violating them, call the Department of Labor's office in Plantation at (954) 424-4022 for help.

Companies are not required to offer any kind of retirement plan, but many do because retirement benefits are an important tool for recruiting and retaining employees.

Online money map

Business owners who would like to start a retirement plan can find information and guidance online (http://www.selectaretirementplan.org). The site is sponsored by the U.S. Department of Labor, U.S. Small Business Administration, U.S. Chamber of Commerce and Merrill Lynch.

-- 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 huntley@sptimes.com by e-mail.

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