Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 26, 1990 TAG: 9003270119
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
The Sovran people in Norfolk notify me each year how much money is to be counted toward taxable income from this bond. This amount varies up and down, and the Sovran people in Norfolk ignore my letters asking how it is figured. The local people apparently are unable to tell me. Can you tell me how the amount in question in figured?
A: Sovran forwards to you the information about the so-called "phantom income" on zero bonds that is subject to tax, but the bank doesn't do the calculations.
David J. Capps, vice president at Sovran Investment Co. in Roanoke, said the figures are produced by the U.S. Treasury based on the difference between accrued interest and principal appreciation. The government puts out Publication 1212 which lists the dollars of income for each thousand of face value for every Treasury issue.
Sovran and other investment institutions then assign these income figures to customer accounts.
The government revises the tables every year according to the new allocations of principal and interest.
The formula is based on original issue discount yield, multiplied by par value and divided by the number of years to maturity.
IRA's all yours
Q: Before my husband died in 1986, he placed his retirement funds in an IRA with a five-year term.
I am 68 years old and retired. My only income is my Social Security of $10,060. I have found it necessary to transfer much money for my sons and repairs to the house.
The fine is so much, this IRA will be withdrawn when I am age 70 1/2. Am I eligible for anything?
A: When your husband died, you became the owner of his IRA. You can treat it as your own account.
Because you are over the age of 59 1/2, you can withdraw from the IRA without any federal penalty except for the tax on the amount taken.
Betty Stanley, who supervises IRAs for Dominion Bank, said it is up to each bank whether it waives the separate penalty for early withdrawal from the certificate in which the money is invested.
Dominion Bank's policy is to waive the penalty for early withdrawal if the account owner is older than 59 1/2. Stanley said that is also the policy of most banks, although many thrifts impose the penalty.
You should consult your bank or thrift to determine its policy on waiver of early withdrawal.
You should conserve this nest egg for your retirement emergencies, withdrawing only an amount that you really need.
College Bonds sold out
Q: I am interested in purchasing the Virginia College Bonds for my daughter's college education. I have purchased one in the past year from Dominion Bank.
I have not been able to find any more available for purchase. I would appreciate any suggestions you may have for locating these tax-free bonds.
A: The state issued $50 million of these bonds in June 1989. The first issue was completely sold out, but the state has made no subsequent offering.
The first bond issue was earmarked for financing higher education and the Dulles Airport toll road.
The zero-coupon bonds were issued in $1,000 and $5,000 denominations with maturities ranging from five to 10 years. The income is exempt from taxation.
You might check with a stock brokerage house because a secondary market may develop for these bonds as with other types of bonds. Secondary markets match people who want to buy with others who must sell prior to maturity.
The state will probably offer another bond issue, but no date has been announced.
Stretch your annuity
Q: Because of my approaching 70th birthday in August 1990, I must cash in my tax sheltered annuity with a value of about $30,000. This was accrued as a teacher in the West Virginia public schools.
My question is, can anything be done to soften the tax liability? We are in the 15th percentile tax bracket.
A: You don't have to start drawing the money until April 1 of the calendar year after the calendar year in which you become 70 1/2.
Because you won't reach that milestone until February 1991, you should not have to start withdrawals until April 1, 1992. An exception would be if your annuity contract states otherwise.
You made your contributions to the annuity with taxed dollars. Only your earnings were tax-sheltered. Your payments under the contract will include both contributions and earnings, so you will pay tax only on a portion of your annuity income. The tax bill, therefore, should not be onerous.
***CORRECTION***
Published correction ran on April 2, 1990 on Money Page\ Last Monday's Money Matters column incorrectly stated rules that apply to taxation of annuity benefits at retirement.
Public school teachers, unlike other workers, receive an extra tax break because they can deduct contributions to an annuity during their teaching years.
That means, however, that they are taxed on their entire benefits at retirement. Other workers are taxed only on their tax-sheltered earnings.
If the money isn't needed at the age when mandatory withdrawals begin, the tax bite can be reduced by taking the minimum required by law each year.
Memo: correction