Delaying mandatory IRA withdrawal could mean more for the taxman

Moneyline

July 16, 2000|By Neil Downing | Neil Downing,THE PROVIDENCE JOURNAL

I have turned 70 as of March 15 this year. I think I have until April 1 of next year to start drawing a specified amount on my IRA. If I'm correct on this, I'd appreciate an answer.

You're right, but waiting can trigger tax complications.

An Individual Retirement Account (IRA) offers tax breaks to encourage you to save for retirement. In general, the only time the money in your account is taxed is when you withdraw it.

With a traditional IRA, you must begin withdrawing at least a minimum amount each year, starting about the time you turn 70 1/2 .

Technically, you must begin these withdrawals by April 1 of the year after the year in which you reach 70 1/2 . Some people wait until then to make their first withdrawal. Why? They know that, as a general rule, every dollar withdrawn will be taxed.

But this can result in complications. In your particular case, you'll turn 70 1/2 in September. This means you can withdraw at least a minimum amount from your IRA this year and meet the rules.

What if you wait until early next year to make your first withdrawal? That's fine, too. But remember that you must withdraw at least a minimum amount each year. So in your example, you'd have to make two withdrawals next year - one to cover your obligation for 2000, the other to cover your obligation for 2001.

Depending on how much other income you have, and other factors, bunching two withdrawals in the same calendar year could bump you into a higher tax bracket for that year. It may be better to spread out the tax impact, making your first withdrawal this year and your second next year.

Talk with an accountant or other adviser who's familiar with IRA rules and your circumstances and who can tell you which approach is best. Ask, too, about the best way to calculate withdrawals, and the potential impact on your beneficiaries and your estate.

I cashed in HH bonds about a week ago or less, and then I read that I bonds have a very good rate. But I had already sent in my HH bonds for cash, and I want to know if I will be taxed on E bonds that I traded for HH bonds in 1989, or do I have a time limit to buy I bonds so I won't be taxed.

One step at a time:

In 1989 you rolled over Series E bonds - with all their accumulated interest - into Series HH bonds. This let you postpone payment of federal income tax on that interest. The tax comes due only when you cash your HH bonds or when they mature. You cashed your HH bonds. Now tax is due.

New Series I bonds earn interest at an annualized rate of 7.49 percent for the first six months you hold them. You now wish you hadn't cashed your HH bonds; you would have preferred to roll them over into I bonds instead. The rules say otherwise: The only savings bonds you can acquire through rollover is the HH bond, said John J. Foley, spokesman for the Bureau of the Public Debt, which runs the bond program.

Once you get the proceeds from your HH bonds, you can buy some I bonds. You can also postpone tax on the interest that your I bonds accumulate; the only time tax is due is when you cash the I bonds or they mature (30 years from date of issue).

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