Deferred-Compensation Plan Not Same as Tax-Deferred Savings Plan

Q: Before I retired, I was enrolled in a deferred-compensation plan that I now want to begin to tap. Is there some way I can roll this money over into an individual retirement account first? I want to be taxed only on the amounts I actually withdraw over a period of several years.

--J.K.

A: A deferred-compensation plan is not the same as a tax-deferred retirement or savings account. Once a taxpayer takes possession of the account, the funds are entirely taxable. However, once you have paid taxes on the account, you can deposit the money into an investment that generates tax-free or tax-deferred income.

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Q: I am in my late 70s and have been withdrawing the required minimum amount from my IRA account for several years. I have thought about making a single lump-sum withdrawal of the entire remaining balance. I thought I read somewhere that I could report the income under a 10-year income averaging plan. But another book says the averaging plan is not permitted. Which is correct?

--I.K.

A: Direct withdrawals from IRA accounts do not qualify for income averaging. Perhaps the article you read actually discusses withdrawals from 401(k) and Keogh plans, for which five- and 10-year income averaging is permitted for lump-sum withdrawals.

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Q: I know that real estate held in joint tenancy passes to the surviving spouse without the hassle or expense of probate. Does the same hold true for stocks and other property?

--W.C.D.

A: All assets held by a couple--real estate, stocks, collectibles--are treated the same. If the vesting is in joint tenancy, probate is avoided for all the assets. If the vesting is as community property, the value of the assets is stepped up to that as of the date of death of the deceased spouse.

Although there is still some debate in the legal community, many attorneys advise their clients that they can take advantage of the best of both community property and joint tenancy systems of holding property.

The following statement was drafted by Marvin Goodson of the Los Angeles law firm of Goodson & Wachtel: “We hereby agree that all of the property we hold in joint tenancy is truly and completely community property and we are holding it in joint tenancy for convenience only. We do not intend to change the character of the ownership of the property by holding it in joint tenancy.”

Goodson recommends that married couples sign and date the statement, preferably before a witness, and file it with their wills. Goodson says the solution has been upheld in IRS Ruling 87-98.

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Q: Do you recommend investing pension funds in annuities? It seems to me that putting tax-protected money into a tax-protected vehicle would be counterproductive. Yet this is what my financial planner has suggested. I am a physician and want to be sure that I am doing the best I can for my retirement.

--C.H.F.

A: In general, our experts discourage taxpayers from engaging in the redundancy of putting tax-sheltered pension funds into a tax-sheltered investment such as an annuity. In fact, Tom Lancaster, a pension specialist with Royal Alliance in Lake Forest, says there are few reasons ever for putting pension funds into annuities.

Annuities are popular among many financial advisors because they generate better commissions for them. According to Lancaster, a typical investment of $500,000 in a mutual fund that charges a load will generate a sales commission of 1.5%, or $7,500. An annuity of the same amount will generate a 6% commission, or $30,000.

We can’t ascribe any motives to your financial planner, of course, but the advice does raise some red flags. Perhaps it’s time to get a second opinion, doctor.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com