Social and Political Commentary

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The IRS will get you every time

... for two cents I'd @#$%!&

by John Averell

I loved my IRAs. How great to put money away for investment when you can afford it, and not pay taxes on the principal or interest! The trouble, of course, is that the "government", in the guise of the IRS, will always exact its pound of flesh when you want to spend it.

OK, I can live with that. No one likes to pay taxes, but I firmly believe in sharing the burdens of this country, as long as everyone else "does the right thing."

HOWEVER, those of us of a certain age, namely over 70.5 years, are required to withdraw about five percent of our total IRA worth each year, and pay income tax on the withdrawal as normal income. OK, I can live with that. After all, the money can be spent or put into a CD, or God forbid, stocks.

HOWEVER, the required minimum distribution (RMD) is based on the value of the IRAs on December 31 of the PREVIOUS YEAR. Again, seems OK, since they are earning money all during the year, aren't they?

Well, anyone who has funds in stocks or bonds this year can tell you that the value since last January has gone down anywhere from a few percent to 90%. Let's say you had $100,000 in IRA funds on 12/31/2007. This year you have to take out around $5000 and pay income tax on it next April. However, your funds lost 60% during the year and are now worth $40,000. That means you are really distributing over 12% of your IRAs. Not only have your funds lost value, your tax bill is higher.

In my case, much of my IRAs were in money funds -- OK on that score. I decided to liquidate my Fidelity Magellan fund, which has been tanking for over a year, to cover my complete RMD. Got the check, put the proceeds in a CD, and am gritting my teeth over taxes due.

Finally, a week later I got the following check from Fidelity (I added the red warning).

What this is for, I have no idea, but I intend to keep it and throw off their books for the next year. For two cents I would rather have had the stamp.

P.S. Late breaking news is that the RMD will be temporarily suspended for the tax year 2009. Better late than never!

January 2, 2009

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