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Email Story to a Friend June 18, 2006 Deal with tax laws as they exist instead of guesses DEAR BRUCE: I have a concern about taxes due at time of withdrawal of a 401(k). I'm 44 years old and have no debt or mortgage. My wife and I max out our 401(k) and simple retirement plans, and we have $150,000 invested to date. We all hear and read about the great 401(k). Pre-taxed money and employer match is good, but when I take out after 59+, I am supposed to be in a lower tax bracket. I don't think that is possible or probable. With the federal deficit at $8.1 trillion and climbing, boomers beginning to retire and people not saving for their golden years, the government will need to amend and raise the taxes on retirement money, and I feel we all will lose between 25 percent to 50 percent to take a withdrawal and that is on the total amount including growth. The Roth IRA is a great way to save and build tax free, but I feel those days are numbered. My question is, apart from hiding money under the mattress, are there any other vehicles in place to save after-tax money so the government does not take a large chunk of our savings when we need it? — J.K., Temple, Pa. DEAR J.K.: On the one hand, you're willing to make all kinds of assumptions about the tax rate going up and laws being changed so that you will be penalized. You say the Roth IRA is a great way to build tax free, but you feel, once again, "those days are numbered." If you're having all these "feelings," how in the world would you be satisfied with any answer I might give about a future shelter that will not be affected? I suggest you only deal with the laws as they are now and assume they will not change dramatically. While I understand your attempt to analyze these things, there is no way it can be done accurately. And there's no way to predict a tax-avoidance scheme that will be in place in the future. DEAR BRUCE: Our parents are 84 and 85 years old, with various health issues. Their wish has always been to stay at home as long as possible, but their combined Social Security payments do not cover current home-care costs. We have begun annualizing their retirement funds, which total $90,000 to pay for their home care, but we know that costs will increase as their health deteriorates. They own their house outright, and, in 1991, deeded the property to my siblings in a "living will," stipulating they may live in the house until the time of their deaths. My question: What is the best way to borrow against the house's equity of $300,000? — T.S., via e-mail DEAR T.S.: You've used some terms here that I think have to be clarified. You say they own the house outright, but then you say, 15 years ago, they "deeded" the property to their children in a "living will" with life rights. These are contradictions. First, a living will deals with their wishes regarding health care, etc., not property. I think you may have meant the property was "quit claimed" to the children with the right of survivorship. In that case, the children have to decide how money would be borrowed against the home they "own" since the parents haven't owned it for 15 years. At $90,000 a year, you haven't indicated what the shortfall is? Let's assume it is $20,000 a year. There would be ample resources for 15 years in the equity in the home, but a reverse mortgage, for example, is not possible because the parents don't own the house, the kids do. If money is to be borrowed, it has to be borrowed by the kids and payments have to start immediately. If I were you, I would hire an attorney. I don't think anyone is 100 percent clear as to the current status, and it's important to sort this out. DEAR BRUCE: In the winter of 2004-05, I filed bankruptcy against several credit-card companies for $70,000. I did so with tremendous regret, as I have always felt it is morally wrong, but I had to stop the bleeding. Now I am determined to attempt to reconcile this situation. Although I have no assets to do so, I feel I must try. Can you advise me about the best way to do this, or would I just be opening up a can of worms? — K.C., via e-mail Advertisement DEAR K.C.: I understand the pangs of regret, and you are to be congratulated for having this moral sense. The reality is, the companies involved have long since written off the bankruptcy discharges, and I wouldn't make any effort to contact them. If your conscience needs a boost, you might consider helping someone else in a similar situation, charities of your choice, etc. In my opinion, I would let this no-longer-living dog lie. DEAR BRUCE: I'm 59, single, own my home, car and just inherited funds due to my mother's passing. My financial adviser selected a product that you and other personalities do not recommend. I would like your opinion on variable annuities. I received a contract in 2005. Was this a wise investment of $73,000? If not, when should I terminate? — D.B., via e-mail DEAR D.B.: You mentioned another guy on the radio, and he and I often disagree but we are in lockstep on this one. What in the world did you want a variable annuity for? You're asking when you terminate: I'm not sure of the answer now since there will be severe penalties within the first five to 10 years on an early withdrawal. I believe your adviser gave you lousy advice. I realize the annuity "boasts" of a guaranteed income benefit and, while this is technically true, the "boast" may be for a short period of time. It also talks about the tax advantages of being able to move investments inside without an immediate taxable event. On balance, it's my opinion that variable annuities should be mostly avoided like someone with a communicable disease. I doubt seriously if you can get out now without a penalty, but I would surely take it up with your "adviser" and suggest the advice he offered was very self-serving on a highly commissioned product. Send your questions to: Smart Money, P.O. Box 503, Elfers, FL 34680. E-mail to: [email protected]. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided. Mail Tribune Home | Local News | Sports | Business | Obituaries | Life | Opinion AP News | Archives | Site Map | Community | Classified Copyright © 1997-2006 Mail Tribune, Inc. All rights reserved. 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