Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 14, 1990 TAG: 9005110859
SECTION: BUSINESS PAGE: A7 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Medium
If he were planning to invest this amount for a period of 10 years, from age 60 to 70, would it be better to roll the sum over into an IRA and let it ride for the next 10 years?
Or should he take the amount and pay the taxes under the 10-year forward averaging which he could not later use when withdrawn from the IRA? The best course means how to receive the most from the lump sum.
A: Many retiring workers face your quandary. Unfortunately there is no easy answer. The best course varies with the situation of each individual and must be determined on the basis of complicated calculations.
J. Gregory Tinaglia of Investment Management Corp. ran some calculations based on the situation you presented.
He assumed that you are in a 28 percent tax bracket and that your investment would earn an average of 9 percent a year. He projected that you would need income of $20,000 a year starting at age 71.
Tinaglia's computer program is a sample only and cannot be controlling in your case without knowing additional facts.
If some of the plan money was contributed prior to 1974, for example, you may elect taxing of that portion of the money at a capital gains rate. This could further reduce your tax under the 10-year forward averaging approach.
The results of the example, however, proved dramatically the impact of tax deferral.
Using the 10-year forward averaging, you would pay total taxes of $64,096. Of that amount, you would pay $14,471 in taxes up front.
Under that option, you would get $20,000 a year through the age of 80 and about $13,136 at the age of 81. Then the account would be exhausted.
With an IRA rollover, you would pay total taxes of $98,567 over the years.
Tinaglia's example gave you $20,000 a year, plus an amount needed annually to pay taxes on your income. Thus the annual withdrawals varied from $26,451 to $33,758.
The fund, however, would pay you an additional two years through the age of 83.
The reason for the difference is the interest earned over the 10 years on the full, untaxed amount rolled over into the IRA.
Tinaglia pointed out that you have a third choice. You can do a partial rollover.
Although this example probably suggests your best course, you and others in your situation should consult an accountant or financial planner to crunch your numbers. It might be better, for example, to make the tax payments from other assets.
As you point out, you have the option only once in a lifetime. For many people, this will be the biggest financial decision they ever make - both as to tax strategy and investment options.
Even with those precautions the future is uncertain because Congress can't seem to resist tampering with the tax laws.
Tinaglia noted that you suggest a single IRA. He pointed out that you can diversify your investment by rolling over into more than one account.
Worried, but safe
Q: Last year I persuaded my mother to take her savings from a savings account and invest in CDs.
Three weeks after placing the investment with a "rock solid, market wise" investment firm, I read that the savings and loan where our CDs were invested was to be taken over by the federal government.
I called the investment firm rep the day after the newspaper article, and he assured me I had nothing to worry about.
I understand it is federally insured to $100,000, but if the assets are frozen, when will I receive my money from the S&L?
Does this major investment firm have any liability to clients for placing funds in questionable S&Ls? What about any delay from receiving the money after maturity?
A: Your mother was wise to follow your advice in moving her funds out of a low-paying standard savings account. The return is too small for anyone with enough money to get into something more rewarding.
Banks and S&Ls in trouble are generally the ones that offer above-market rates and which accept brokered investments. Investors go for the higher rate and hope for the best.
If the thrift is operating under government supervision, nothing much has changed. The thrift would be open and doing business as usual.
An exception might be the interest payment that the government could drop to a market level.
If, on the other hand, the thrift has been closed, your mother should receive her principal within a few weeks. This would seem to be the less likely alternative if you haven't received direct word of the situation.
You can always take a broker to arbitration if you have a dispute, but your mother would have difficulty proving negligence by the broker or even any damage. As long as her money is federally insured, she cannot lose her investment.
If she is concerned about potential problems when the certificate matures, she can reinvest the money in a familiar bank or thrift closer to home.
by CNB