Q: We are retired and our income (10 percent tax bracket) is adequate for our needs. In three years, we are required to start drawing money from our 401(k) and IRA accounts. That will increase our taxes greatly, not only on the $22,000 we must withdraw each year, but also because it increases the amount of Social Security income on which we must pay tax. Do you have any suggestions on how to minimize the tax hit?
J.G., via e-mail
A: Congress and President Bush may have given you some assistance here with the tax bill they passed and signed this year. For 2003 and 2004, the law significantly expands the 10 percent and 15 percent income-tax brackets, which should allow you to take more income without paying marginally higher income taxes, says David Bross a certified financial planner in Leominster, Mass.
Mr. Bross recommends taking as much from your retirement accounts as you can now without exceeding the 15 percent bracket. This move would take advantage of the new tax bill and reduce the size of future required minimum distributions.
In addition, the standard deduction for married taxpayers filing jointly increases from $7,850 in 2002 to $9,500 in 2003.
Q: How I determine the gain on an annuity I own depends on the measuring criteria. One criterion is the S&P 500 peak to peak, another one is the S&P 500 average to average. I tend to go with the average, but what would your advice be?
C.A., via e-mail
A: Neither method is better than the other, says Scott Dauenhauer, a certified financial planner and estate-planning expert in Laguna Hills, Calif. Averaging usually moves returns to the middle and has a negative effect on returns in a rising market and a positive effect on returns in a falling market.
Meanwhile, peak-to-peak methods that don't employ averaging may be a little riskier because you're more exposed when the market falls. But you'll gain more when the market rises, Mr. Dauenhauer says.
You may achieve exactly the same return with either method because of internal, permissible tweaking to some of the many adjustable features that this type of investment carries. If it sounds complicated, that's because this instrument, known as an equity index annuity, or EIA, is complex, Dauenhauer says.
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