Personal Finance: Q&A

Payouts From IRA Can Cause Tax Fuss

Matching funds from employer can make 401(k) more attractive than IRA

QI have an individual retirement which consists of a variety of mutual funds. When I start making periodic withdrawals, will they be considered regular income? Also, what is the best way to make them?

- I.L., Westminster, Calif.

AAll IRA distributions are taxed as regular income, says Gary Schatsky, a financial planner in New York. If your contributions were nondeductible, however, they come back to you free of taxes. If you have made both deductible and nondeductible contributions, your taxes are based on an IRS formula. Earnings - including dividends and capital gains - are taxed as ordinary income.

The best distribution process? That depends on your income and estate-planning needs, Mr. Schatsky says.

Age is also a factor. If you are under 70-1/2, you are pretty much your own boss. You can have your broker distribute earnings periodically, for instance, or occasionally sell some securities and have a distribution made. Over 70-1/2, you must take a minimum distribution annually, based on your life expectancy or the joint life expectancy of you and your beneficiaries. Ensure that sufficient cash will be available to cover your distribution.

You should probably check with your broker or a financial planner to tailor your distributions to your specific needs.

Q What's a better deal, contributing to an IRA or to a 401(k) account?

- M.S., New York

AThe advantage of a 401(k)-type plan is that employers often match all or part of your contribution. If you put in $150 a month, your employer may chip in $75, for example.

Also, IRAs limit your annual contribution to $2,000 a year, whereas 401(k)'s allow far more (as much as $9,500 in 1997). Check with your employer about your maximum allowed contribution.

And in some states, IRA contributions may not be state tax-deductible.

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