Ask accountant about available tax relief

Dear Bruce: I have an individual retirement account worth $160,000 and a revocable trust worth $300,000. I would like to buy laddered bonds from which I’ll draw income. I have not taken distributions from my IRA and could defer this for two more years. If I put bonds in the IRA and withdraw income, what would the tax implications be? There would be no capital losses because the bonds would be held to maturity. – M.T., via e-mail

Dear M.T.: Your situation is not all that complicated. When you reach the magic age of 70 1/2, you will be required to make structured withdrawals from your IRA. In theory, they are set up so that on the last day of your life you will have made the last withdrawal. In a perfect world, that would happen. Any withdrawals you make from your IRA will be taxable, as the money that went into it has not been taxed. Since you have already passed 59 1/2, there will be no penalties. The money, however, is taxable at the ordinary income rate. The amount of the tax depends on what other income you will be reporting. Since you are now devising some long-term plans, it would be advisable to sit down with an accountant on a one-time basis and explain your goals. Let the accountant plan your investment and withdrawal future, taking advantage of any available tax relief.

Merger may affect stock

Dear Bruce: I am new to the stock game. A few years ago, I bought stock directly through a dividend reimbursement plan in a large company. I recently received notice that the company had merged with (and into) a subsidiary of another company. I am told I’m entitled to receive a small cash payment for my stock. Do I have to cash in, or can I hold onto the stock in the new company? I bought it to hold, as I have a very comfortable standard of living and have been happy with the performance of the original company. Also, does the new company have to offer dividend reinvestment? – B.S., via e-mail

Dear B.S.: You’ve asked a number of questions, none of which can be answered by someone in my position. You should write to the new company and ask what rights you do have. In some cases, you don’t have any option but to take the cash offer. In others, it can be exchanged for stock in the new company, and still others may offer some benefits the old company did or did not. All these questions should be directed to the new entity in writing.

Check with accountant, IRS on house proceeds

Dear Bruce: In 2002, I sold my home and made a large profit. I paid taxes of roughly $18,000 and then purchased a municipal bond for $25,000. In 2004, I cashed this bond out and only claimed the interest of $1,572. I was not trying to conceal the cash out of the $25,000, because I was advised when I purchased this bond that it was like a savings account. It could be closed anytime without paying taxes because it was purchased with cash. Now the Internal Revenue Service wants to tax me on the $25,000. I already paid taxes of $18,000 when I sold my home. It does not seem fair they are going to tax me twice for the same money. Do I owe the tax on the $25,000? – J.J., via e-mail

Dear J.J.: Unless there’s something I’ve missed, while the income on the $25,000 would be taxable, the principal has already been taxed and therefore, when you had the bond redeemed, only the interest would be taxed. I am a bit confused as to why you had taxes due on the sale of your home, unless it sold for a great deal of money ($250,000 if you’re single, and $500,000 if married) over and above acquisition costs, or you lived in it for less than two years. I cannot imagine why they would insist on collecting tax unless there is a misunderstanding.

In the event you can’t work this out, although there would be a fee, you should talk to a certified public accountant or an enrolled agent who surely could present your case to the IRS.

Rethink annuities option

Dear Bruce: My wife and I are both retired. She is 68, and I am 70. We own our home, worth about $350,000. We have two 401(k)s. One is for $180,000, the other for $168,000. We are receiving $2,000 per month from Social Security and $1,520 from our pension plan. Also, I take $1,000 a month from my 401(k). The only debt I have is $360 per month on my truck. We do not at this time draw from my wife’s 401(k) ($168,000). We’ll wait until she is 70 for that.

We also have a certificate of deposit that will be worth $150,000 when it matures early next year. It is now earning 5.5 percent. I don’t know whether to try to renew it when it comes due or to look for some kind of an annuity. I figure our 401(k)s will run out sometime when we are in our mid-80s, and that is when I would like the accrued money from the CD to take over. Do you have any suggestions? Your reply will be appreciated. – R.K. in Arizona

Dear R.K.: From everything you’ve explained, you’re doing very well. The only place I would suggest you rethink is looking for “some kind of an annuity.” While there are annuities that make sense, for the most part, in my opinion, you can do well in other areas. This certainly applies to variable annuities. Often, the salespeople get wildly enthusiastic, overcome by the large commission, rather than your best interests.

Buy-and-hold or go big?

Dear Bruce: I have to make a difficult choice about who will manage my portfolio. I’m a retired male who is 65. I have $500,000, own my home and have no debt. Both advisers are five-star planners and have excellent credentials. One works for a large firm and is a technician, doing all trades directly, investing in exchange-traded funds and laddered bonds. He is very proactive. The other gentleman runs a small financial firm and is well versed in estate planning; he’s a tax attorney. He uses stock and bond funds, but believes in a buy-and-hold strategy. Both would follow a conservative approach and a 60/40 bond/stock allocation. My friends say I should go with the small firm. What do you think? – Reader, via e-mail

Dear Reader: Both firms have something to recommend them, but one thing that stands out, at least to me, is that the smaller company believes in “buy and hold.” While this may be interesting because it keeps the commissions down, I believe your portfolio should be examined regularly, and there are almost always circumstances where some securities should be sold, either to lock in a profit or because the sector is not doing well. While I’m sure the small financial firm is well-credentialed, I would be more comfortable with a firm that examines your portfolio on a regular basis and makes the necessary adjustments.

Investing requires homework

Dear Bruce: I stand to inherit $30,000, and our income has also increased substantially in the past year. We have a debt of $12,000. We are planning to use the inheritance to pay off our debt and invest the rest. Is a financial planner a good investment to help us make wise decisions with our new salary and inheritance? – P.R., via e-mail

Dear P.R.: You mentioned you are paying off a debt, but you didn’t mention what kind. If it is a low-interest debt, it may pay to keep it in place and invest your money elsewhere. On the other hand, if it’s a high-interest debt, by all means retire it. You also didn’t include how much other income you have. Like anything else, volume is material. The same is true in the area of financial advice. There has to be enough money involved so the financial planner can make a reasonable return on the time invested. There is no substitute for doing your homework – reading financial publications, listening to the radio, watching TV or reading local business news publications. While this requires effort on your part, unless you expend that effort, you will be at the mercy of someone whose abilities you are not in the position to evaluate.

Wife wins: Keep the mortgage

Dear Bruce: My wife and I can’t agree on paying off our second home. She says you recommend not paying off a mortgage but investing the money instead. I’ve explained to her that we are already well-invested. We are both in our mid-40s and make $120,000 together annually. Our first home was paid off six years ago. We’ve since purchased a second home for her parents, and that home has a balance of $60,000. Our 401(k)s together total $350,000, and we have two Roth accounts totaling $40,000. We also have CDs holding more than $150,000. Unfortunately, and very sadly, her mother passed away this past year and left her with enough money to pay off the mortgage. Please help us decide what to do with this extra income. – J.D., Las Vegas, Nev.

Dear J.D.: Your wife and I are on the same page. I suspect she has read what I’ve said on this subject. You are young, with substantial income. You would be far better off to keep the mortgage in place and invest your money elsewhere. And your statement about already being well-invested isn’t entirely accurate. As you have income, you will increase your investments with surplus income. But if you pay off the mortgage, you’ll reduce your investments that are producing income and growth. Also, you will be giving up a deduction that is valuable to you. Though you didn’t give me numbers, my guess is that you have a relatively low interest rate on your mortgage.

All things considered, I’m squarely in your wife’s corner. Keep the mortgage in place and invest the money you would use to pay off the mortgage in growth areas. In my view, that is the only way to go for people in their 40s.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.