Traditional IRA Might Be a Better Choice Than Annuity

Question: I am eligible to receive funds from a former employer’s retirement plan in a few years, when I turn 55. I can elect from several options. I would prefer to elect the annuity option, which guarantees monthly payments for the rest of my life, and put those funds into a Roth IRA until my Social Security kicks in at 66. Can I do that?

Answer: You asked a fairly narrow question, and the fairly narrow answer is that you can contribute only $2,000 a year to a Roth IRA. (Next year, the limit rises to $3,000, plus another $500 if you’re over 50.)

But your question begets other questions. Presumably, you don’t need the money if you want to put it in a Roth IRA. So why would you choose to start a life annuity--which would be taxable income, by the way--if you don’t need the money right now?

You might be better off, if you have the option, of taking a lump-sum distribution from the retirement plan and rolling it into a traditional IRA.

The advantage of taking a lump sum and rolling it into an IRA is that your money can continue to grow free of income taxes until you need it. If you like the idea of guaranteed income for life, you could consider buying an immediate annuity when you’re ready to retire. Immediate annuities, provided by insurance companies, promise a stream of income that will last as long as you do. The payments almost certainly will be larger than what you would get if you started getting payments from the pension plan at age 55.

Once you roll the money into a traditional IRA, you also could consider converting the account to a Roth IRA if your annual income is less than $100,000 (conversions aren’t permitted if your modified adjusted gross income is above that limit). You’d have to pay income taxes on the conversion, but you may be better off in the long run, as Roth IRA withdrawals in retirement are tax-free.

You really need a professional, such as a financial planner or a tax preparer, to help you run some calculations. Once retirement decisions are made, they’re often impossible to undo. It pays to have some expert help in this complicated area before you commit.

Computer Donation a Small Deduction

Question: I itemize my deductions and this year will be giving my 6-year-old computer to a school. Is this a legitimate deduction? What documentation do I need? How do I find the fair market value?

Answer: You can deduct your computer donation if you itemize, but don’t expect huge tax savings.

Most used computers are worth only a fraction of their original price, and that fraction dwindles rapidly with time. Furthermore, your savings are determined by your tax bracket, so a computer that’s worth $200 now would save you only $70 in taxes if you’re in the combined 35% federal and state tax bracket.

That doesn’t mean you shouldn’t donate, especially if the school is in need.

Document your donation by taking a photograph of your equipment and getting a receipt from the school. To determine the value, check classified ads or current bids for similar computers on an online auction site such as EBay. Clip the classified ads or print out the bidding results so you’ll have a copy to show the IRS in case of audit.

Estate Planning Is Not Do-It-Yourself

Question: I have a married uncle who lives out of state. He is very pigheaded and thinks he can write his own will and set up his own trust. He has $3 million to $5 million in his estate and is 80 years old; his wife is 67. Can you help me to advise him?

Answer: Pigheaded is right. Anyone who tries to do his own estate planning with an estate that large has, like the lawyer who represents himself, a fool for a client. The best thing you can do for him is to help him find a qualified attorney who specializes in estate planning. The bar association in his state should be able to give you some referrals.

Debit Card Not Best Dinner Companion

Question: I read with interest your response to the individual concerned about debit card security, particularly your suggestion to “never let the card out of your sight.” This makes perfectly good sense to me but I am wondering about the etiquette involved, particularly at a restaurant where the server says “I’ll be your cashier” and whisks one’s card away in a folder. Your help in dealing with this situation will be much appreciated.

Answer: Well, you could get up and follow him or her back to the kitchen, sweetly murmuring “Oh, don’t mind me” on the way. But discretion being the better part of etiquette--not to mention common sense--it might be best not to give the server a debit card in the first place. Use a credit card or cash any time a purchase must be done out of your direct line of sight.

As mentioned earlier, debit cards can be a great convenience, but they involve some risk. Debit cards can be used like a credit card--no personal identification number required--but the purchases come directly out of your checking account. Debit cards with Visa and MasterCard logos have “zero liability” policies that ensure you’re reimbursed for fraud, but the best policy is to reduce a thief’s chances by using a debit card only for transactions that you can monitor directly.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.