Scott Burns: Cutting taxes after age 70 gets tricky
Q: I have been taking the mandatory distributions from my IRAs for several years (I am 75). I am a part-time worker, making $10,000 or so a year. I have not contributed to an IRA for the last five years that I’ve been working.
I think I am eligible to still contribute to an IRA up to $35,000. Is there any advantage to contributing to an IRA while still taking mandatory distributions? I’m thinking the money could be invested in a new low-cost account.
A: You can’t contribute to a traditional IRA after age 70½, but you can contribute to a Roth IRA after that age if you are still working for income. You’re still working, so you can make contributions. The contribution limit for 2013 is $5,500, plus an additional $1,000 for those over age 50.
If it were possible to contribute to a traditional IRA, your tax-deductible contribution would work to offset a portion of the taxable income from your required minimum distribution. But they figured that out in Washington, so you can’t.
Contributing to a Roth IRA won’t reduce your income-tax bill, but it would start to build an account you can withdraw from in the future without creating what the IRS calls a “taxable event.” That would give you more flexibility vis-à-vis your taxable income in future years since withdrawals are tax-free.
Q: If you had several CDs maturing and no need for the money in the foreseeable future, which would you choose? A five-year CD at 2.15 percent, or a seven-year CD at 2.7 percent?
I am tempted to go out seven years, as interest rates don’t seem likely to be going up anytime soon, but I would like your thoughts on which you would choose.
A: Go for the seven-year CD.
One way to look at this is to ask how much you are being paid in each of the two additional years — years six and seven. If you total the expected interest for the 2.7 percent seven-year CD and subtract the 2.15 percent interest on the five-year CD, it turns out that you are, in effect, earning at about a 4.075 percent interest rate in each of the last two years. Not bad.
This is based on measuring what economists would call your “incremental return” when you add two years to the maturity of the CD.
While the additional yield is spread out over seven years, you would not get it without committing the additional two years. So your effective yield on those added years is materially higher.
Q:My wife and I have a two-family house that we don’t live in. It is currently valued at about $400,000, and we owe less than $150,000 on it at 6 percent, with 23 years remaining.
We also own our one-family home valued at $425,000, with a mortgage balance of $195,000. We refinanced this house two years ago at 4.25 percent.
I am looking to refinance the two-family investment home at about 3.75 percent, but my wife suggests we just pay it off and have no mortgage.
We are both in our 60s and can afford to take the money out of savings without touching any IRA account money.
Based on current market conditions, would it be prudent for us to leave the money in investments, or take it out and pay off the house?
A: Since you have tax-deferred accounts and can pay the $150,000 with cash from other investment accounts, paying off the mortgage is a good choice.
It will save you $9,000 a year in interest costs (it will also increase your taxable income by that much), and you’d need a lot more than $150,000 to earn $9,000 a year in any other investment.
Doing this is particularly good for someone your age. If you are considering retiring, you have to be thinking about what you can do to increase the income from your savings.
Significantly, many people are looking for real-estate properties that they can buy for cash, simply because they will generate a net yield they would not be able to earn elsewhere.
You might also investigate yet another refinancing of your own home mortgage since you might knock another 0.75 percent off the rate.
Copyright, 2013 Universal Press Syndicate