From: owner-persfin-digest@lists.xmission.com (persfin-digest) To: persfin-digest@lists.xmission.com Subject: persfin-digest V5 #120 Reply-To: persfin Sender: owner-persfin-digest@lists.xmission.com Errors-To: owner-persfin-digest@lists.xmission.com Precedence: bulk Content-Transfer-Encoding: quoted-printable X-No-Archive: yes persfin-digest Monday, January 10 2000 Volume 05 : Number 120 In this issue of the Personal Finance Digest: Sorry again for the duplicates... 401K Limits Re: Take distributions from IRA or from taxable accounts at retirement? Can retired spouse receiving SS contribute to IRA? The messages posted to the Persfin-Digest are opinions and are not intended to substitute for qualified professional advice. Subscribers should seek the services of qualified professionals for such advice. The publisher, Internet provider, and Digest contributors cannot be held responsible for any loss incurred as a result of the application of any of the information provided here. 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Subscribe: e-mail majordomo@xmission.com, text: subscribe persfin-digest Unsubscribe: e-mail majordomo@xmission.com, text: unsubscribe persfin-digest ---------------------------------------------------------------------- Date: Sat, 08 Jan 2000 08:00:59 -0700 From: Jeff Salisbury Subject: Sorry again for the duplicates... Hello, For those of you who are subscribed to the non-digest version of persfin, these next couple of messages will be duplicates. For you digest subscribers, this will be your first copies of these messages. My apologies for the inconvenience. Regards, Jeff persfin admin/owner - - ------------------------------ Date: Sat, 8 Jan 2000 08:02:01 -0700 From: diane_howe@att.net Subject: 401K Limits What are the limits for 401K contributions? There is a flat dollar and a percentage, correct? Does this vary by employer? - - -Diane Howe - - ------------------------------ Date: Sat, 08 Jan 2000 08:03:46 -0700 From: Jeff Salisbury Subject: Re: Take distributions from IRA or from taxable accounts at retirement? Ira Krakow wrote: > > I saw an interesting article in the Motley Fool retirement bulletin board, at: > > http://www.fool.com/retirement/retireeport/1999/retireeport991227.htm > > The author suggests that when withdrawing funds where there is a mixture of IRAs and taxable accounts, it might not be too bad an idea to withdraw from the IRAs first. From the perspective of tax efficiency for the *entire* family (including the heirs), the heirs owe taxes on any part of an inherited IRA (at *their* marginal tax rate) on which taxes haven't been paid, so drawing down the IRA will have a positive benefit to heirs by reducing their tax burden. > > On the other hand, the retiree owes more taxes by using this strategy, since taxes have already been paid on the taxable accounts. The article contains a number of scenarios and charts (variables such as the marginal tax rate of the heirs, and percentage of assets to be withdrawn among these accounts are taken into account). > > Where's the balance between the retiree paying less tax and the heirs paying less tax? What considerations should be given? > > Ira > > - Ira, Sorry for the delay in replying -- things have been very busy. I strongly disagree with the author of the article you cite. I believe there is at least one, perhaps two serious flaws in his argument. However, before I go into them, let's review what the problem is we are trying to solve. The main problem with qualified retirement plans such as IRAs, 401ks, 403bs, etc. (also known as "qualified money"), is that they may be double taxed when we die and these assets are passed to our heirs: 1. If our total estate is large enough (currently over $675K), the qualified money gets hit with estate taxes. 2. All qualified money is subject to income taxes when it is withdrawn because we've never paid income taxes on it until it is withdrawn. The end result is that qualified money can be DOUBLE taxed! Here's realistic example. Suppose that a person has a $1,675,000 estate and part of their estate is a $1,000,000 IRA. Consider how this IRA is taxed: IRA Value: $1,000,000 Estate Tax @ 50%: -500,000 Income Tax @ 40%: -200,000 Net to Heirs: $300,000 Total Shrinkage: 70% (Horrendous!) Note that the IRA is reduces by the estate tax of $500,000, which leaves $500,000 subject to a 40% income tax. Now, having said all this, there are ways around this problem of double taxation. The first and main line of attack is that you don't want your heir's to liquidate the IRA! This is where the author of the article you cite makes his fatal mistake. He assumes that there is no choice for the heirs except to liquidate the account. However, the name of the game is to stretch out the IRA not only over our lifetime, but over the lifetime of our heirs! If IRA accounts are setup properly, they can be inherited by your spouse, then your children, and grandchildren without getting hit with lump-sum taxes (the highest marginal rates). But this almost NEVER happens because of a lack of understanding of what can be accomplished with a retirement account. Incidentally, most company retirement plans (such as 401(k)s, 403(b)s, TIAA/CREF, etc.) are so inflexible that they make it almost impossible for someone to use multi-generational planning. Therefore, one of the most important things you can do is, as soon as you are allowed, to immediately get the money out of your employer sponsored retirement plan and into an IRA where the funds can be treated in a more flexible manner. Surprisingly, most people in the financial world do not understand how IRAs can and should be used. A Forbes study showed that 90% of the IRA account administrators did not know the options available for IRAs. This means that your chance of finding someone who really understands how IRAs should work is small. But don't abandon hope. Keep searching until you find someone who does. It will be worth the effort. Death beneficiary designations are not just about who is going to get your money when you die. They are among the most important selections you will ever make in relation to your retirement money. You need to understand all the consequences of who you designate as a death beneficiary when you set up your IRA. Estate planning and IRA planning should go hand in hand. If your IRA planning is done properly, it should dramatically reduce the total amount of taxes that your family has to pay upon your death. Finally, it is imperative to get good financial help immediately after the death of a participant in an IRA because, if the wrong selections are made, often the spouse's ability to inherit the IRA is eliminated. The children's ability to inherit the IRA as an IRA for them, without it coming out and being taxed, is also eliminated. I hope I haven't rambled too much... Best Regards, Jeff - - ------------------------------ Date: Mon, 10 Jan 00 09:47:22 EST From: juanb@vnet.ibm.com Subject: Can retired spouse receiving SS contribute to IRA? My father is 63, retired early last year and is receiving social security benefits. My mother still works and has enough wages to cover IRA contributions for both ($4000). Can my father still make an IRA contribution or does receiving social security prevent it or have any effect on it? Thanks, Juan - - ------------------------------ End of persfin-digest V5 #120 ***************************** - To unsubscribe to persfin-digest, send an email to "majordomo@xmission.com" with "unsubscribe persfin-digest" in the body of the message. For information on digests or retrieving files and old messages send "help" to the same address. Do not use quotes in your message.