Cents and Sensibility
Cents and Sensibility
Question: I was wondering if you knew whether the state Legislature has approved the increase in the Roth IRA limit to $3,000? Rule changes are good
news for retireesAnswer: It's a done deal! The recent passage of Senate Bill 2824 brings Hawaii law into line with the federal law.
Q: I was told by my accountant that it was foolish to contribute after-tax dollars to my IRA because I will be taxed again on the eventual proceeds. Is he correct in this thinking?
A: Your accountant is wrong. After-tax contributions to an IRA are not taxed upon withdrawal. The taxable portion of a distribution is calculated based on the proportion of pretax contributions in the account. Let's say your IRA consists of $9,000 of pretax money and $1,000 of after-tax money for a total of $10,000. In this case, 10 percent of your withdrawal would not be taxed. So if you took out $1,000, $100 would be tax-free, and $900 would be taxable. Commingling pretax and after-money in an IRA requires careful bookkeeping and the filing of tax form 8606 each year a distribution is taken.
Q: I'm confused about the laws concerning taking money out of my retirement plan. Can you explain them?
A: The Treasury Department approved an overhaul of the required minimum distribution (RMD) rules from qualified retirement plans and IRAs. The rules are effective for distributions on or after Jan. 1, 2002. The new rules for calculating RMDs are less confusing and make the amount you withdraw each year easy to calculate.
In many instances, IRA accountholders will be able to reduce the amount they are required to withdraw. The smaller the distribution, the smaller the tax bill. Additionally, the new rules offer more opportunities for tax-deferred growth and benefits to heirs.
Other ways the new regulations simplify the rules include:
>> Providing a simple, uniform table that all accountholders can use to determine the minimum distribution required during their lifetime.
>> Permitting the required minimum distribution during the accountholder's lifetime to be calculated without regard to the beneficiary's age (except when required distributions can be reduced by taking into account the age of a spouse beneficiary who is a more than 10 years younger than the accountholder).
>> Permitting the beneficiary to be finalized as late as the end of the year following the year of the accountholder's death.
>> In most cases, permitting the calculation of post-death minimum distributions to be based on the beneficiary's single life expectancy, thus allowing distributions in all cases to be spread over a number of years after death.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com