Reader Horror Story (Almost)


Many years ago we purchased two $100,000 fixed annuities from Vanguard. One increased with the CPI and the other increased its payouts by 5% per year. We were in good health then, and are now in our eighties and they have proved to be good supplements to our income. However, during the 2008 disaster, we learned that AIG was the company that handled Vanguard’s annuities. At that time, I checked with the state and learned that the State of Alabama covered up to $300,000 in losses, but not over $100,000 for any one insurance company. I don’t know what the state covers now, but your readers might benefit from knowing what they do cover. Our scare turned out O.K. and our annuities have continued to pay just fine, but had we known, we would have split the money and used two different high quality companies.  Of course, one still has to worry about the solvency of the state and its coverage, but it does offer another layer of protection.  Thank you for all your good advice. M.T.
My response: According to Beth Moody, CFP®, MS, “The Alabama Life & Disability Insurance Guaranty Association changed the limits of protection for consumers effective July 1, 2012. For annuities, regardless of the number of policies you own, your protection is limited to $250,000.” 
As you might remember, in 2008 AIG was on the verge of failing and was saved by the federal government bailout totaling over $180 billion. This reader’s experience points out a real-life case of why it’s important to carefully diversify your money. You can’t always count on a government bailout! 
Reader QuestionI am age sixty-one.  If I take a withdrawal from my IRA for home improvements will it be taxable as ordinary income? M.W.
Answer: Yes. All withdrawals from traditional IRAs are subject to ordinary income taxes. The good news is that because you are over the age of 59 ½, you avoid the 10% federal penalty for early withdrawals. 
Tip: Since it is so close to the end of the year be sure to do a ‘trial-run’ of your 2013 income tax estimate. You may benefit, tax-wise, by withdrawing a portion this year and the balance in January of next year.
Reader Question: I am 65 years old and want to wait until age 66 (my full retirement age) before starting Social Security. I am betting that will pay off as we have longevity in our family and hopefully I inherited that. However, I may need to pull some cash out of my IRA for living expenses until I reach 66.  If I make a withdrawal at 65 do I then have to keep making annual withdrawals once I start or is that only when I reach 70 1/2?  S.H.
Answer: You do not have to continue making withdrawals and you are correct, mandatory withdrawals don’t begin until the calendar year in which you turn age 70½. Technically, you can wait until April 1 of the year following the year you turn age 70½ to make your first withdrawal but if you do wait, you’ll have to take two withdrawals that year (one for the preceding year and one for the current year).