Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 7, 1995 TAG: 9508070009
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
A: Larry Harding, Roanoke area coordinator for the U.S. Savings Bond program, said the decision cannot be undone. A cashed bond is a cashed bond, he said.
People who need income would be well advised to convert E and EE bonds to HH bonds in order to obtain semiannual interest payments. People who do this will pay tax on the interest income they receive, but they further postpone payment of taxes on the accrued interest.
Bonds issued prior to December 1965 accrue interest for 40 years. Bonds issued starting in 1966 receive interest income for 30 years. People who fail to cash or convert their bonds prior to this final maturity are presumed to have made a decision to cash them in, and taxes become due on the accrued interest. People who own older bonds should look at the dates and take some action before final maturity, Harding said.
Q: Most of my retirement savings are in three T. Rowe Price mutual funds. They are sort of in the middle; they didn't go down as much as other funds did last year. I was 68 last January, so I've got more than a year before I must start taking money at age 701/2
A fellow is trying to get me to transfer the money to an annuity that would pay from 4 percent to 10 percent. He said they usually pay about 6 to 7 percent. Some I transferred is paying 7 percent. He said it would avoid probate, and I wouldn't have to worry about all those capital gains when I have to cash in the mutual funds to take the money out.
A: Andrew M. Hudick, a certified financial planner with Fee-Only Financial Planning L.C. in Roanoke, said he assumed the retirement savings account is an IRA.
He called it an oxymoron to "worry about all those capital gains" in an IRA. It is also an incorrect statement to state that an annuity will avoid probate while an IRA would be an asset subject to probate.
"Hearing those two statements would make me suspect that any other information provided by the annuity salesman is less than correct," Hudick said.
The only way an annuity would avoid probate, he explained, is if the owner of the annuity irrevocably decided to receive a life income from the annuity. Referred to as "annuitization," this would indeed remove the asset from your estate and, therefore, remove the asset from probate.
Because you have removed the asset from probate, you also have removed your ability to leave the asset to a beneficiary. If you are married or have an heir, it may be a better financial decision to leave the asset in your estate and pay the probate fees, Hudick said. He noted this is 33 cents per $1,000 by Roanoke Valley local governments, while the state charges $1 per $1,000 of value for assets subject to probate.
Because all assets distributed from an IRA are subject to ordinary income tax rates upon distribution from the IRA account, Hudick said, capital gains decisions are never relevant. In other words, there are no capital gains taxes levied against an IRA.
He said it is difficult to offer an opinion about comparing the T. Rowe Price mutual funds to a fixed annuity without knowing which funds you own. T. Rowe Price offers several mutual funds that have historically outperformed a fixed annuity. If you own funds that have performed well, Hudick said, you may be well-served to simply keep these monies invested in the T. Price Rowe mutual funds.
Depending upon your current and projected income tax bracket, he said, you may consider taking an IRA distribution prior to your mandatory IRA distribution age of 701/2. Your tax preparer can likely help with this calculation.
by CNB