Taking IRA Payouts Can Be Juggling Act
QUESTION: I will turn age 70 1/2 this year, and I understand that I must begin taking minimum distributions from my individual retirement accounts. However, most of the assets in these accounts are large ($100,000) Treasury bills, government-backed mortgage securities and interests in real estate partnerships. These assets do not liquidate easily in small annual increments, and I don’t want to sell a whole $100,000 Treasury note just to take a minimum distribution and then be liable for taxes on the entire amount. Surely, there must be a way of dealing with such assets.--R. W. P.
ANSWER: You’re right, there are ways of dealing with your situation. According to Ellen Marshall, an attorney with the Costa Mesa office of the Morrison & Foerster law firm, you have at least two alternatives to completely liquidating your assets in order to take the minimum required distribution.
Marshall suggests that you explore the possibility of re-registering into your own name each year a portion of your IRA assets that corresponds to the minimum required distribution. Under this strategy you are not liquidating anything, just transferring legal ownership from your IRA to your personal account. Of course, you would pay the required taxes on this distribution.
Another solution would be to take the full amount of your required distribution from just one of your IRA accounts or investments, rather than tap each account for its proportionate share. This way, you would have to handle only a single account instead of your full IRA portfolio.
You would be wise to consult a business attorney for advice on whether you can re-register your share of the real estate partnerships and other assets.
Q: I would like to report a tax loss on stock I purchased many years ago and kept in my brokerage account. This stock has not been quoted for years and my broker cannot give me any information about the current status of the company. I have tried on my own, but with no luck. In order to take the loss, the Internal Revenue Service says I need proof that the company is out of business. What can I do?--G. P.
A: Frankly, it’s shocking that your broker is so unwilling to tap into the vast resources he has available though his company’s nationwide operations. The truth is that the brokerage has the information you need.
You can pursue the matter through the chain of command at the brokerage by writing to either the manager of the local office or the regional director. Be sure your letter includes all the pertinent information--company name, when you purchased the shares and the fact that you’ve held the shares in your brokerage account for several years. This strategy should produce the desired results.
However, if you just want to get the matter over with, contact Prudential American Securities, a stock research outfit that will do the job for you for $28. Send a check for that amount along with the pertinent information about the research you want done to Prudential American Securities, 747 E. Green St., Suite 100, Pasadena, Calif. 91101.
Q: My wife and I are planning to retire next year. We own our current home free and clear. We also own a rental house. We are now considering moving into the rental unit because it is smaller and better suits our needs. What would the tax consequences of this move be?--B. A.
A: Two important facts were not supplied: How recently the rental house was purchased and your age. Still, we can answer your question.
When you purchased the rental is important because, if you bought it less than two years before the sale of the old house, the rental can qualify as a “replacement dwelling.” If you are allowed to treat your rental as a replacement house, then the tax code allows you to defer paying taxes on some or all of the profits you receive when you sell your original house. You can defer taxation on the entire gain if the rental house cost as much as, or more than, the selling price of your original house.
For example, let’s say you purchased your original home for $25,000 and you sell it for $200,000. Your gain is $175,000. (For the sake of simplicity, let’s leave out of the equation any improvements, closing costs, real estate agent fees and other associated costs.) Let’s assume that the rental house cost $100,000 and you bought it one year ago. If you move into the rental, you can defer taxation on $100,000 of the $175,000 gain and would be liable for taxes only on $75,000.
However, if you purchased the rental more than two years before selling your original house, it does not qualify as a replacement dwelling and you would not be able to defer taxes on any part of your $175,000 profit if you move into it.
The second factor to consider is age. If either you or your wife is over age 55, you are allowed to invoke a one-time exclusion from taxation of $125,000 of profits from the sale of your principal residence. If you are eligible to use the exclusion and your rental property does not qualify as a replacement dwelling, you might consider using this exemption.
However, if the rental qualifies as a replacement house, you have a choice: Apply the one-time exclusion to the taxable $75,000 of your gain--and waste $50,000 of the exemption that you cannot use in this transaction--or save the entire $125,000 exclusion until the year the rental is sold and pay taxes on the $75,000 gain.
Last week’s column discussing divorce-related financial planning contained an incorrect telephone number for the Society of CPA Financial Planners. The correct number is (800) 445-7526. The society’s executive director, John C. Bish, says the group makes referrals on all financial planning matters to its membership, which includes only for-fee certified public accountants who are also financial planners.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
