Don't allow some `expert' to goof up your IRA

Proceeds from 401(k) deserve savvy guidance

Your Money

March 28, 2004|By Julie Jason

Many approaching retirement are finding their 401(k) accounts are their largest assets, sometimes more valuable than their homes. And no wonder: It's hard to beat the triple advantages of regular payroll savings, tax-deferred growth and company contributions.

When they retire, many people roll over their 401(k)s into individual retirement accounts, which continue tax deferral.

While tax deferral is a benefit when you are contributing, it can become a handicap when you need your IRA to support you in retirement.

Here's an illustration. A man in his 70s has an IRA worth about $750,000, his only asset. He gets a pension, but that and Social Security benefits don't cover all his living expenses. He falls short by $44,000 a year.

Producing $44,000 a year for living expenses from $750,000 in assets is hard enough in this low interest rate market. Doing that from an IRA is a real challenge because every dollar you withdraw is taxed. To have $44,000 to spend, you need to withdraw $51,764, if you assume a 15 percent tax rate.

In addition, you have minimum withdrawal requirements after age 70 1/2 that have to be considered.

The adviser you choose to work with can help you solve your problem - or create a new one for you.

I spoke with several investment advisers about this scenario, and some of them, surprisingly, recommended completely inappropriate solutions.

Some did not catch that after 70 1/2 , an IRA holder must take minimum distributions from the account. Some simply forgot that any money withdrawn from an IRA is subject to income taxes.

One "expert," who said the solution was easy, suggested closing the IRA and investing $750,000 in 10-year U.S. Treasury bonds at 4.05 percent. This missed a few important consequences, primarily that there won't be $750,000 after you close the IRA, since the money will be fully taxed as income.

And buying 10-year bonds, even U.S. government bonds, is hardly risk-free. When interest rates rise, even Treasuries lose value if they have to be sold before maturity.

When you have a large IRA and you have no other place to turn for living expenses, you need to be cautious. The wrong strategy can wipe you out.

The best solution is to put safety first and lower your demands on the portfolio by spending less.

Do not look to higher-yielding investments that you would not normally consider to overcome the low interest rate environment and the drain of taxes. Remember that by looking at higher yields, you are essentially increasing your risk at a time when you should be looking for safety.

Find an appropriate adviser who is knowledgeable in three areas: investments, IRAs during the mandatory distribution stage and taxes.

Look for experience. Can the adviser articulate the investment problem that he intends to solve for you? Has he solved the problem for other clients? Where did he get his training?

Ask for references. You will want to talk to three clients. Be sure that their situations are similar to yours.

Charming and nice is not good enough. You need experience and skill at this very important time of your investment life.

Attorney Julie Jason is a money manager and retirement finance author who writes for The Advocate in Stamford, Conn., a Tribune Publishing newspaper. E-mail her at

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