On money

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

© St. Petersburg Times,
published December 9, 2001

Break down the benefits of beneficiaries and annuities

Q. My financial adviser told me to put my annuities into the name of my trust with my son and daughter as trustees. I did this, but another adviser at a seminar I attended told me to take them out of the trust and make my son and daughter beneficiaries. I was told that this would save money. What should I do?

A. What matters is not your ownership of the annuities but the beneficiaries. It is simpler to name a direct beneficiary rather than a trust for an annuity, life insurance policy or retirement account. However, what's simplest isn't always what's best, particularly when you have multiple beneficiaries.

An annuity is a contract between you and the insurance company. Contracts vary, so you have to read each one. The annuity might permit your beneficiaries to take their distributions over a period of years, which would save on income taxes. But before getting too excited about this, find out if your beneficiaries even like the idea. Many would rather have a lump sum than wait years for their money.

A second key issue is what each insurance company would do if one or more of your beneficiaries died before all the benefits were paid. Would the money go to a surviving beneficiary? To the children of a beneficiary who died? To your estate? One advantage of naming a trust as beneficiary is that you can easily spell out the order of inheritance.

If your estate is fairly large, talk to a lawyer who specializes in estate planning before making any changes.

Q. In 1987 we established our first IRA. Since then we have established nine more IRAs have tried to diversify them. They have a total value of $56,000. We are thinking that perhaps we should consolidate these accounts. However, somewhere I read that we could be creating an expensive accounting fee nightmare when it comes time for any distributions/withdrawals because the original IRA was created in 1987. Apparently any activity such as reinvested dividends, capital gains, account fees in the IRAs created after 1987 and transferred into the 1987 account would have to be segregated for accounting purposes. Is this true and if so why?

A. No, it is not true.

"There is no different tax treatment," IRA expert Ed Slott said. The only significant thing about 1987 is that it was the first year you could make nondeductible IRA contributions.

When you start taking withdrawals, all your IRAs will be lumped together to calculate how much you need to withdraw and how much of it will be taxable. (It's all taxable unless you made nondeductible contributions.) What you paid in account fees and how you reinvested your dividends is irrelevant as long as all the activity occurred inside your IRA.

Although you consider all your accounts when doing withdrawal calculations, you can take the actual withdrawal from any one or more of the accounts.

You would reduce your paperwork and simplify your life by consolidating your accounts. My own rule of thumb is to build an account up to at least $10,000 before opening another account. Five or six funds is plenty for someone with $56,000.

Q. My income this year will be so low that I can convert part of a traditional IRA to a Roth IRA without paying significant taxes. I heard that such a conversion must include part deductible and part nondeductible contributions in proportions that take all my traditional IRAs into account. However, none of the IRA material I requested from the IRS says anything about this. Can you tell me where to find the details?

fffA. You need IRS Form 8606 and the instructions for completing it. Anyone who has made nondeductible contributions to an IRA must use this form to report withdrawals, including any that are converted to a Roth IRA. You can download a copy of the form and instructions from the IRS Web site (www.irs.gov) or have one mailed to you by calling toll-free (800) 829-3676.

Online money map

If you've got an interest in investment gurus and the newsletters they publish, check out Forbes' online section on the subject. The site includes info from the gurus, from Hulbert Financial Digest, which follows the newsletter industry, and Forbes commentary.

-- 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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