The Right Way to Draw on an IRA
Q. I turned 70 1/2 in October and must begin making mandatory withdrawals from my individual retirement accounts. I have a total of about $500,000 in all my accounts. I think my minimum required distribution is $20,805. I have been taking out the interest and dividends generated by my IRA investments each year, a total of about $27,300. Am I meeting the federal requirements? No one gives me a straight answer.-- F.B .
*
A. The easiest way to calculate your required annual minimum withdrawal is to use the “term certain method,” which is based on your life expectancy and, if you want, the life expectancy of your IRA beneficiary. Under this method, you would calculate the annual withdrawal each year by dividing your account balance by your life expectancy, as determined by IRS actuarial tables. These tables are detailed in IRS Publication No. 939, Pension General Rules. To order, call (800) 829-3676.
We asked Palm Springs certified public accountant Howard Gordon to calculate your minimum required annual withdrawal for 1994 using your life expectancy only. The result: about $32,680. (It would be less if you were to add in the life expectancy of your IRA beneficiary.)
Where and How to Buy T-Bonds, T-Bills
Q. Where can I purchase Treasury securities? With rates increasing, these investments are looking more attractive every day. --M .A .
*
A. You’re absolutely right that the recent spike in interest rates is generating interest in government notes. Treasury bonds can be purchased through banks and securities brokers, but you will probably be charged a sales fee of as much as $25 per bond. However, you can also buy bonds directly from the U.S. government and pay no fee at all.
First, here is your range of purchase choices. Treasury bonds, which range in maturity from two years to 30 years, are available in $1,000 increments up to a maximum of $5 million. Treasury notes are sold in two- and five-year maturities and are available in $1,000 increments from a minimum of $5,000 to a maximum of $5 million. Treasury bills, or T-bills as they are often called, are sold in six- and 12-month maturities and are available in $1,000 increments from a minimum of $10,000 to a maximum of $1 million.
Treasury bonds and notes may be purchased directly from the Federal Reserve Bank. In Los Angeles, the Fed is located at 950 S. Grand Ave. You may also buy them by mail by writing the Bureau of Public Debt, Washington, DC 20239. Personal checks are accepted.
T-bills are also available by mail, but the process is a bit more complicated. Your first step should be to open an account with the Fed. You can do this by writing to the Fed at P.O. Box 2077, Terminal Annex, Los Angeles, CA 90051 and asking for a New Account Request form. Complete it and return it. Soon you will receive a note that your account has been opened. Then, you can simply send a cashier’s check to the Fed in the amount of the bill you wish to purchase. Include a note stating the type of security you want to buy and your account number.
As you may know, Treasury bills are sold at discount, with the discount rate corresponding to the interest rate carried by the bill. Buyers should send checks for the full amount of the bill. Reimbursements for the discount are returned to the buyer by mail or direct deposit into a bank account designated by the buyer shortly after the auction.
To Avoid Taxes on a Home Sale, Buy Equal
Q. I am planning to marry soon. My fiance and I have each sold a home that we had owned. We plan to use the proceeds to purchase a new home together. My home sold for $120,000; hers sold for $180,000. The home we want to buy costs $183,000. We are applying our profits (mine were $3,000; hers were $15,000) to the new home and purchasing one that is more expensive than those we sold. Are we doing the right thing to avoid taxes?-- A.G .
*
A. To avoid taxation on any profits you realized from the sale of your respective homes, the two of you must purchase a replacement home equal to the combined total of the two sales prices. This means your replacement home must cost at least $300,000.
If you are unable or unwilling to make such a purchase, you face a tax liability on your gains. One possible way to minimize the tax bite is to put the replacement home in the name of your wife. This will allow her to shelter her gain of $15,000 and expose you to taxation on just $3,000.
$125,000 Exclusion Can Apply Interstate
Q. My husband and I have owned a home in another state since 1964. He lives there; I live in California since being transferred here in 1986. My husband will soon reach age 55. May he sell his residence and take the $125,000 exclusion and relocate to California to live with me?-- M.B .
*
A. Assuming the out-of-state home is truly your husband’s principal residence, your plan should work. One way to verify that the out-of-state home is really your husband’s principal residence is whether he files his income tax from that location. He should, to pass muster.
