Question: I am retired and gross $156,000 per year in income from my retirement account. I net $9,998 after taxes per month. I donate $400 per month to my church. How much of that is deductible and how much does that reduce my tax bill? T.W.
Answer: Assuming that you itemize deductions and are married filing a joint tax return, your contributions will be fully tax deductible in the (estimated) 28% tax bracket. As a result, you’ll cut your federal tax bill by about $1,300. In addition, you’ll cut your state taxes by about $240 for a total tax savings of about $1,540.
Question: I’ll turn 70½ in February 2013. Am I allowed to take a distribution from Thrift Savings before that date, namely, this year, or do I have to do it after February 2013? V.F.
Answer: Once you turn age 59½, you are allowed to take distributions from retirement plans such as your thrift plan or an IRA without penalty. In the year that you turn age 70½, you must begin taking distributions no later than April 1st of the year following the year you turn 70½. Yep, it’s a bit confusing. For example, if you turn 70 ½ in February 2013, you are required to take a distribution prior to April 1st of 2014. If you wait until 2014, you must take two distributions in 2014…one for your 2013 Required Minimum Distribution (RMD) and one for your 2014 RMD. The amount you must take each year is based on a government table of life expectancy and therefore rises each year. Note that the penalty for failure to take your RMD is 50%.
Question: I am a 67 year old Civil Service employee planning to retire next August. I have a Thrift Savings Plan with about $46,000 based solely on my contributions. Tax wise, am I better off taking money out this year or waiting until next year? Also, should I opt for an annuity check or a lump sum withdrawal assuming I have some back-up money to help pay bills? P.M.
Answer: At this point, it certainly looks like Congress will fail to reach a compromise on tax reform before the end of the year so I suspect the Bush tax cuts will expire and taxes will go up for everyone beginning in January of next year. Having said that, I also expect Congress to pass new tax legislation next year that restores the lower tax rates for individuals earning under $200,000. Your tax bracket (and taxes) may be lower next year because you’ll have earnings for only nine months versus a full year. The answer to your question about taking a lifetime annuity versus a lump sum is a more challenging question. If you elect lump sum and don’t use all the money during your lifetime, you can pass what’s left to your heirs. The annuity has the advantage of the guarantee of a lifetime income. Generally, I prefer the flexibility of a lump sum rollover to an IRA. Consider visiting with a Certified Financial Planner, CPA or other professional to help you make this important decision.
Question: Because of a drop in my income, I had to cash in a pension plan. The amount before penalties and taxes was $21,000. I have 60 days to roll part of it into another IRA, but I’m not sure what type of IRA to roll it in to, or what happens to the penalties and taxes when I roll part of it back in an IRA. What happens when December 31 comes, but my 60 day rollover period will end the end of January? I’m trying to avoid losing any more of it than necessary. A.C.
Answer: First, any distributions that you take before age 59 ½ are subject to a 10% federal penalty as well as being reportable as ordinary income in the year taken. Second, if you roll a portion of your distribution into an IRA within the 60-day period, that money is not subject to taxes or penalties. The fact that you might not roll the money over into an IRA until next year is not a problem because your 2012 income tax return is not due until April 15, 2013. Simply wait to file your tax return after you have completed the rollover. This IRA rollover account can be easily set up through an online broker such as Schwab (www.Schwab.com), a bank or brokerage firm. There should be no costs to do this. If you already have an IRA account, rolling the money over to that account is an option as well.