ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Monday, December 25, 1995 TAG: 9512260018
SECTION: MONEY PAGE: A-16 EDITION: HOLIDAY
COLUMN: Money Matters
SOURCE: MAG POFF
Q: I am a 26-year-old, self-employed, married person. I also have one very young child. I am concerned about life insurance and Individual Retirement Accounts.
Presently, I have term life insurance of $150,000. I am also putting $2,000 per year in an IRA, which I plan to do until age 58. I have been putting the IRA money into mutual funds that have been returning about 20 percent annually. In 30 years, the term insurance will expire when I am age 56.
If I die between the ages of 26 and 58, will my dependents be able to withdraw from my IRA without paying penalties, or will they have to wait until I would have turned 59 to withdraw without penalties?
Also, am I going to be financially able to not carry life insurance after the 30 years has expired because my IRA at age 59 should be greater than the death benefit of the term insurance.
A: James E. Pearman Jr., a certified public accountant and certified financial planner with Fee-Only Financial Planning in Roanoke, said the first question that should be addressed is whether you have an adequate amount of insurance.
Your primary need is for income replacement, Pearman said. You did not specify your current income, so this issue cannot be accurately addressed. But Pearman would guess that, at this stage of your life with a young child, your current insurance is inadequate. For example, he said, if you have income of $25,000 a year, you would need about $600,000 to replace this income assuming an investment return of 7 percent and inflation of 3 percent.
Your use of term insurance is appropriate, Pearman said, However, your need would not be this high for 30 years. You would need to plan on this amount of income until your child reaches the age of 18 - or 22 if college is in your plans.
Assuming you do not use tobacco and are in good health, Pearman said, you could obtain a 10-year guaranteed renewable term policy in the amount of $450,000 for about $367 a year. While the cost of this insurance would increase as you get older, your income and other assets should also be increasing. Thus, you could reduce the amount of coverage at each renewal and keep the cost of the insurance relatively stable.
Pearman said you are doing the right thing by contributing to an IRA early. He would caution you that you should not expect your returns to average 20 percent over a long period of time. A more reasonable assumption, based on historical returns for equities, would be 10 percent to 12 percent. Even at 10 percent, he said, you would accumulate $444,503 by age 59 if you continue making these $2,000 contributions.
As a self-employed individual, Pearman pointed out, you would also be eligible to establish a SEP-IRA or a Keogh plan and contribute up to 20 percent of your self-employment income.
If you die prior to the age of 591/2, your spouse would be able to make systematic withdrawals without paying penalties. Any withdrawals, however, would be subject to regular income tax.
Based on the limited facts given, Pearman said, there appears to be no reason that you would need to continue carrying life insurance later in life. The term insurance would not build up any cash value and thus would not have any value for retirement or other goals. Your investments should be your primary method of meeting long-term goals such as retirement.
Q: I am a widower and own three or four pieces of real estate that have gone crazy over the years. Now there is an estate over and above the $600,000 exemption by about $300,000 to $400,000.
Surely the 55 percent top estate tax doesn't start immediately. What are the beginning rates for federal estate taxes?
Also, is it true that the state of Virginia taxes are always about 20 percent of the federal estate taxes?
A: Fulton Gaylor, a certified public accountant with the Roanoke firm of McLeod & Co., said the beginning tax rate is 18 percent on the first $10,000 above the $600,000 exemption.
Thereafter, the tax brackets rise by two percentage points for each subsequent $20,000 for lower amounts. For instance, the bracket is 20 percent for the next $20,000 and 22 percent for the next $20,000.
That works through the 28 percent bracket.
The 30 percent bracket applies to the next $50,000, 32 percent to the next $100,000 and 34 percent for the next $250,000.
The brackets keep going up in increments until the tax rates reach 55 percent on estates of $3 million or more, Gaylor said.
Gaylor said you do not have to worry about Virginia estate taxes. The tax paid to the commonwealth is written off the federal taxes as an expense of the estate. In other words, Gaylor said, you pay Virginia taxes, then receive a credit on the Virginia form. The only tax you have to concern yourself with, Gaylor said, is the federal estate tax table.
LENGTH: Medium: 88 linesby CNB