Withdrawing IRAs With Different Tax Statuses

Q: I am trying to figure out how to handle distributions from my three individual retirement accounts when I turn 70 1/2 and must make withdrawals. The problem is that I have both tax-deferred IRA contributions and after-tax contributions in these accounts. Of my total of $183,000, $10,000 was invested in IRAs on a tax-deferred basis, $165,000 was rolled over--tax-deferred--from my pension and $8,000 was contributed to an IRA on an after-tax basis. May I withdraw the after-tax money first? If not, how do you figure the correct mix? Do I have to withdraw proportionately from each of my three IRA accounts? Help! --M.F.A.

A: Relax, your problem sounds more complicated than it really is. But you still must be careful when your IRAs include both pretax and after-tax investments. Here’s what you do.

The government wants you to think of your IRAs as having a taxable basis that is determined by the ratio of the initial after-tax contributions to the total current value of all the accounts. And the government wants you to apply this ratio to whatever money you withdraw from your accounts, regardless of from what account the withdrawal is made. The government doesn’t care what account you take the money from; it only cares that the correct ratio is used when determining what percentage of that withdrawal is taxable.

Here’s how the ratio is arrived at, using simple round numbers. Let’s say your IRAs have a current value of $200,000 and that $50,000 of this was contributed on an after-tax basis. This means that one-quarter of your first withdrawal would be tax-free and three-quarters would be taxable. For your second withdrawal, you would calculate the ratio by dividing the remainder of your initial after-tax investment--the $50,000 minus whatever share of the first withdrawal is attributed to your after-tax funds--by the current total value of the investments.

In your case, the ratio of your first withdrawal would be determined by dividing $8,000 in after-tax contributions you made to the IRAs by the current value of those accounts. Remember, only the initial after-tax contributions are withdrawn tax-free. The interest these investments have earned is still taxable; this is why you must always consider the total current value of the accounts when calculating the appropriate taxable/tax-free split of your withdrawal.

2 Guides for Collecting Small Claims Judgment

Q: In a recent article you mentioned a book about collecting a small claims judgment. What was its name? --W.R.

A: The name of the book is “Collecting Your Court Judgment.” The $24.95 book is available at many local libraries and bookstores or by calling its publisher, Nolo Press in Berkeley, (800) 640-6656 for California residents, or 1-800-992-6656 for out-of-state residents. Supplies of the book are low, Nolo reports, because an updated version is due out late this summer.

However, you may be interested in a considerably less expensive manual available right now from the state of California’s Department of Consumer Affairs. The 78-page “Collecting your Small Claims Judgment” outlines step-by-step procedures for you to enforce judgments you are awarded. The manual contains copies of the appropriate forms you will need in your crusade for repayment.

The guide costs $6.45, including sales tax. Send a check or money order to: Department of General Services, Documents and Publications, P.O. Box 1015, North Highlands, Calif. 95660.

FDIC Coverage Applies to Time Certificates

Q: Are “Investment Time Certificates” offered by thrift and loan associations covered by the Federal Deposit Insurance Corp.? I started to buy an ITC recently, then noticed that the certificate said: “This is not a certificate of deposit.” It made me wonder if it had the same level of insurance coverage as a regular CD sold by banks. --H.N.

A: You are wise to check matters out before plunking down your money, but in this case you have nothing to worry about; ITCs are covered by the FDIC.

Investment Time Certificates are the thrift and loan industry’s equivalent of a certificate of deposit. Except for the name, the two investments are virtually identical, says the state Department of Corporations, which regulates thrift and loan associations.

Why the difference? It’s historical. Banks traditionally sold certificates of deposit, and they were covered by the FDIC. Later, savings and loan associations sold them, and they were covered by the Federal Savings and Loan Insurance Corp. In the wake of the recent S&L; crisis, the FSLIC was merged into the FDIC. Beginning last July, the state of California required thrifts to get FDIC coverage, a move that gave their investment offerings the additional protection of federal insurance.