Searching for a Super Safe Place for IRA Funds
Q: I have an individual retirement account of well over $100,000 and want to maintain it in a safe and insured institution. I know it is too large to be insured in a single account at one institution. May I transfer a portion of the money to another institution and get full insurance coverage? --D.N.
A: Absolutely! As long as the move meets all other applicable rules, you should be able to have some of your IRA funds transferred to another IRA account at another savings institution without penalty.
You should pay especially close attention to the maturity term on your existing savings account because if you transfer funds before the investment term on your account expires, you are likely to be liable for an early withdrawal penalty.
By the way, Federal Deposit Insurance Corp. rules are far too lengthy and complicated to repeat here, but to be absolutely sure that your money is covered by the FDIC’s $100,000 insurance limits, remember the Rule of One: One bank, one person, one account under $100,000.
A complete set of the rules governing FDIC insurance is contained in a pamphlet titled “Your Insured Deposits.” This booklet should be available at your local branch, but if it is not, send a self-addressed, stamped business envelope to the Consumer Affairs Office of the FDIC, 550 17th N.W., Washington, D.C. 20429.
Tax on Inherited Savings Bonds
Q: I inherited some savings bonds that cost my grandmother $15,000 and are now worth $50,000. No income taxes were ever paid on the accrued interest. Estate taxes were paid on the $40,000 value of the bonds at the time of her death. I want to cash the bonds in now. What part of the $35,000 gain is taxable, given the fact that estate taxes were already paid when the bonds were worth $40,000? --E.S.K.
A: If your grandmother never paid any income taxes on the bonds’ accrued interest--including her final, posthumous tax filing--you are liable for taxes on the full $35,000 gain.
However, be attentive. Your tax bite is not as bad as it might seem. At the time you cash in the bonds and pay the taxes, you are also entitled to a deduction for the estate taxes already paid on the bonds’ appreciation. For example, if the estate taxes on the $25,000 interest ($40,000 value at grandmother’s death minus her $15,000 cost) amounted to $100, you would deduct that amount from your income tax bill for the $35,000 appreciation.
Withdrawing From Retirement Accounts
Q: I know that after turning age 70 1/2 I must start making withdrawals from my tax-deferred retirement accounts. I have both a 401(k) account and an IRA. May I make a single withdrawal from one type of account to satisfy my entire disbursement requirement? --M.C.H.
A: No. You may make your total required 401(k) withdrawal from a single 401(k) account and your total required IRA withdrawal from just one IRA account. But you may not satisfy your one retirement plan disbursement requirement with a withdrawal from another type of plan.
However, if having all these accounts is too confusing for you, you are allowed to roll your 401(k) plan into your IRA. However, be advised of a new federal law that went into effect Jan. 1. The law requires taxpayers who elect to cash out of their old employer’s 401(k) or other qualified pension plan to pay a 20% withholding tax on the disbursement if they take possession of the money rather than have it rolled over directly to a qualified individual retirement account.
Even if the taxpayer puts the pension money in an IRA himself within the allowed 60 days, the 20% tax is applied.
It is important to note that the new rules do not apply to IRA transfers made within the allowed 60 days or any IRA transactions. These rules apply only to distributions from employer-sponsored pension plans that are eligible for rollover into tax-deferred IRAs.
Keeping Tax Break on a Vacated Home
Q: My wife and I intend to travel throughout the country for as long as three years while volunteering for the park system. We hope to lease our home while we are on the road. We will come home a few times every year to visit doctors, etc. We expect to return here at the end of our travels and want to keep this as our permanent residence to take advantage of all the tax breaks associated with an owner-occupied home. What can we do? --O.G.M.
A: Everything you do should be aimed at showing in as clear a way as possible your intention to keep this house as your home. If you rent out the house, you should consider month-to-month terms rather than a long-term lease. Any payment from the renter should be as modest as possible, taking into account your need for a house sitter as well as the renter’s need for shelter. You should not depreciate the home on your taxes as you would a piece of income property.
You should also keep your California voting record intact and pay your California state taxes to prove that you still consider yourselves residents of the state.