Saturday, August 19, 2000

Savvy strategies

Remove money from IRA tax free

        Problem: You didn't owe taxes last year on your retirement income, but fear that starting IRA distributions could make you pay.

        Strategy: With some planning, you can take money from a traditional IRA — and never pay tax on it.

        Mike Jarrold-Grapes of Niehaus Financial Services offers this specific example:

        Say you are a widow who is 67 and living on $22,400 a year from Social Security, pensions and other savings. The taxable amount from these is about $6,000 from the pension and interest on the savings — but that is offset by the standard deduction and exemption. Therefore no taxes would be due.

        The standard deduction in 1999 was $5,350 with a personal exemption of $2,750. Put these together and the first $8,100 of adjusted gross income was tax-free.

        Therefore, you could have taken $2,100 from your IRA and still pay no tax. The savings on the $2,100 — had it been taxed at the lowest rate of 15 percent — is $315.

        Then, you may convert the withdrawal to a Roth IRA. The investment remains tax deferred and it is not subject to required minimum distributions at age 70 1/2. It also reduces the amount in your traditional IRA that is subject to required minimum distributions. When you take distributions from the Roth IRA you pay no tax. Note that you must have the Roth for five years in order to take distributions without a 10 percent penalty.

        The Roth conversion is especially useful if you hope to pass on assets to heirs. You convert $2,100 to a Roth IRA, pay no tax now and it grows tax deferred until your beneficiaries draw it out. This could extend the tax deferral over decades. Without any tax liability related to its growth, the investment compounds at its maximum rate.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.

        Planners: Share your unique strategies with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati 45202 or e-mail


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