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Hello,

 

I'm writing to ask a question,and hopefully receive advice. My husband recently passed away and following his directions to me, I cashed out his TSA and quite ignorantly deposited the money into my bank account. I knew nothing at the time about rolling it over into an IRA or other tax sheltered plan. The time limit has passed, and I'm left with about 40K (withholding has already been taken out but I'll have to report about 60K of income on next year's taxes.) Now even if I want to invest it into mutual funds, I'd have to pay taxes each year on the dividends, interest and capital gains.

 

I have not yet started a 403b plan for myself so this is what I was thinking of doing. I'd invest largely (almost the maximum for me) in the 403b (various Vanguard Funds) right off the top of my salary, and supplement my then **very** meager take home pay with what I got from my husband's TSA. My income taxes would be based on the reduced salary amount, thereby lowering my adjusted gross income. Is this crazy? Do you see any holes in this?

 

Thank you for any insights you may want to share.

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Guest Sierra

Dear GreenHope,

 

I would like to help. But we need more information. How old are you? What kind of work do you do? What is your gross salary? Are you responsible for anyone else? Does your employer provide you with a pension plan in addition to a voluntary 403(b) arrangement? Prior to cashing in your husband's 403(b) how much in liquid (after tax) savings did you have? I assume your husband instructed you to cash it in because you had insufficient on-hand savings. Is this assumption correct?

 

Peace and hope,

Joel L. Frank

 

PS: The law requires the payor to disclose to you that as a surviving spouse you have the right to rollover the distribution to an IRA. Did you receive such a disclosure statement from your husband's 403(b) carrier?

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Joel,

 

I'm a teacher, 54 years old. Gross salary just under 40K, responsible for 2 others, I do have a retirement plan with my state which means that I cannot collect social security. My husband didn't know that his TSA money could be rolled over, I'm sure of that, and when I called the company to receive the lump sum, they did send the forms explaining it all to me. In my widowed ignorance, I just checked the box for lump sum. I am quite embarassed to admit to this now that I understand a bit more.

 

Thank you for taking the time to help me out.

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Guest Sierra

How many days have elapsed since the 60 day rule expired? How do you arrive at the 60K as income subject to tax for 2005? Also, was your husband's 403b with a commissioned based vendor or a no-load vendor?

 

Joel

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It's been 85 days since the date on the check. The TSA was worth 59,500 (approx) and after state and federal taxes were taken out (20%) I was left with 44,600 (approx). My husband's TSA was not a 403b account, just a tax-sheltered annuity from a private life insurance company.

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Greenhope: I think that your current plan is very shrewd, under the circumstances. However, there is no particular point to getting your federally taxable income below $59,400, above which income is taxed at 25% if you file jointly (which you can do in 2005, assuming your husband died earlier this year). Between $14,600 and $59,400, the marginal tax rate is 15%, which isn't bad, and this will probably be your normal future tax rate anyway. But any steps you can take to get your taxable income (including the TSA distribution) down to $59,400 will save you 10% on taxes. Any other income you can postpone to another year, or any deductible expenses you can prepay in 2005, would help. Of course, you don't want to do anything that is going to make your cash flow suffer too much in the future, but for now, you seem to have more cash than you are likely to need for the short-run.

 

Note that maximizing your own TSA savings next year will not have the same benefit, in that it won't change your marginal tax rate. But it is one way to restore some of your assets into the tax sheltered environment.

 

There are lots of other ways to shelter income besides your retirement plan, though, and some of them give you better access to your money if you need it (others, less so). You can buy investments that earn mostly capital gains -- which not only postpones taxes but results in lower tax rates when you do cash it in. Putting money into home improvements can be both a good investment and a tax shelter; home equity loans can be used later if you need access to cash. But as Sierra suggests, one needs a look at the bigger picture to give you specific advice.

 

Also note: though you are under age 59-1/2, the TSA proceeds are NOT subject to the extra 10% tax penalty, since they were paid out due to a death.

 

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Thanks Yanikoski.

 

A few questions:

 

"Investments that earn mostly capital gains" Are you referring to growth mutual funds, index funds and/or individual stocks? "Home improvement" Can you explain that? Is it deductible? If so, a new kitchen might be a plus!

 

My husband died in Dec. so next year I'll be filing as a widow. Aren't the tax brackets similar to married filing jointly when you file as a widow? I'll have to look that up.

 

Thank you so much for your input.

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Guest Sierra

Dear Green,

 

I would run, not walk down to your friendly CPA's office or your attorney and have them request a waiver to the 60 day rule. Time is of the essence so I would do it yesterday!

 

Peace and hope,

Joel

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Guest Sierra

<!--QuoteBegin--GreenHope+Apr 21 2005, 02:43 PM-->

QUOTE (GreenHope @ Apr 21 2005, 02:43 PM)
<!--QuoteEBegin--> It's been 85 days since the date on the check. The TSA was worth 59,500 (approx) and after state and federal taxes were taken out (20%) I was left with 44,600 (approx). My husband's TSA was not a 403b account, just a tax-sheltered annuity from a private life insurance company. <!--QuoteEnd-->
<!--QuoteEEnd-->

Your husband did not have a section 403(b)7 Custodial Account but a 403(b)1 Annuity Contract. Having saying that, after his death and prior to the dispersement did you not get a letter or phone call from the insurance company's representative that serviced your husband's annuity contract?

 

Peace and hope,

Joel

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Joel,

 

No, I didn't hear from a representative. I phoned to let the company know of his death. They sent me the paperwork with the different options. Gosh, it seems like a world ago. Wish I knew then what I know now.

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Guest Sierra
Joel,

 

No, I didn't hear from a representative. I phoned to let the company know of his death. They sent me the paperwork with the different options. Gosh, it seems like a world ago. Wish I knew then what I know now.

GreenHope's late husband's 403(b) carrier was a "full service provider". He paid the life insurer good, hard-earned money (every two weeks) to have a real live person as his financial guide and advisor. Yet upon his demise no one made an attempt to service his widow. No one made the call or wrote the letter.

 

Please remember this case when you hear the term that xyz company is a "full service 403(b) provider". How many more of these terrible stories are out there but go unnoticed because the widow or widower is just too ashamed to talk about it. Ms. GreenHope has performed a remarkable public service by telling her story on this website. I know many will learn from her unfortunate experience.

 

Peace and hope,

Joel L. Frank

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joel, i sat back and waited and i knew if i waited long enough, you would start your ranting about overpriced and overpaid advisors. do us and her a favor and address her questions and needs. i think it is in poor taste that you turn her unfortunate demise into another witch hunt for you. just answer her questions and shut the H*** up! not everything in here is about you. get over yourself.

 

greenhope, let me be the first to apologize for joel's insensitivity. i realize you may think his words to you are sincere (and maybe they are), but his goal on this site is to turn every question and scenario into a stage for him to espouse his beliefs. i wish you the very best and hope that you found some of the things you read on here assist you with your situation.

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Greenhope: You probably should consult with a professional advisor.

 

Mutual funds do earn capital gains, but unfortunately you have to pay them every year, so the tax break is not that good. You can buy individual stocks or, better yet (if you are not a stock picker) you can buy securities like DIAMONDS and SPIDERS that pretty much follow the stock market averages (the Dow Jones and the S&P 500, in these cases) -- and you will not pay capital gains until you are ready to cash them in, though they may also kick off dividends that are taxable.

 

Home improvements are not deductible. However, for they add to the value of your home, and if your home increases in value in the future (as most homes do), a bigger better home will have a higher increase in value than a smaller worse home. You can turn this into cash when you sell your home, or by refinancing or taking a home equity loan in the meantime. Any taxes on your increased home value will probably be payable in the distant future (sometimes not at all), so this can be an excellent tax shelter. If you are thinking of doing this as an investment rather than as a comfort for yourself, though, you might want to talk with a real estate agent about what changes are really going to add to the value of your home. Buying adjacent property, if some comes up for sale, or putting on an addition (new rooms, a garage, a barn, a swimming pool) can put your home in a different bracket when it is time to sell. Adding a fireplace or landscaping might be good. Kitchens and bathrooms also do matter a lot to people. But it really depends on what your home and your neighborhood are like already, and what kind of housing people are looking for in your area. I'm not necessarily recommending any of this, but you might want to consider it.

 

As for the death notification, I wouldn't be too hard on your financial company. They really don't have any good way of knowing when people die, until they are informed by someone. Some companies do keep track of the Social Security death index, but mostly just for older customers. The updates on this index is not quick enough to enable companies to meet the 60-day limit on rollovers even if were to attempt this, so it's not worth their trouble to try.

 

You shouldn't be hard on yourself, either. There's no way most people can think of and take care of all the things it would be best for them to do. Congress sets the rules on rollovers, and it would be a good idea if they extended the time limit in cases of deaths. But it is what it is...

 

 

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Guest Sierra

<!--QuoteBegin--GreenHope+Apr 21 2005, 01:03 PM-->

QUOTE (GreenHope @ Apr 21 2005, 01:03 PM)
<!--QuoteEBegin--> Joel,

 

I'm a teacher, 54 years old. Gross salary just under 40K, responsible for 2 others, I do have a retirement plan with my state which means that I cannot collect social security. My husband didn't know that his TSA money could be rolled over, I'm sure of that, and when I called the company to receive the lump sum, they did send the forms explaining it all to me. In my widowed ignorance, I just checked the box for lump sum. I am quite embarassed to admit to this now that I understand a bit more.

 

Thank you for taking the time to help me out. <!--QuoteEnd-->

<!--QuoteEEnd-->

As for the death notification, I wouldn't be too hard on your financial company. They really don't have any good way of knowing when people die, until they are informed by someone. Some companies do keep track of the Social Security death index, but mostly just for older customers. The updates on this index is not quick enough to enable companies to meet the 60-day limit on rollovers even if were to attempt this, so it's not worth their trouble to try.

 

No, I didn't hear from a representative. I phoned to let the company know of his death. They sent me the paperwork with the different options. Gosh, it seems like a world ago. Wish I knew then what I know now.

++++++++++++++++++++++++++++++++++++++++++++++++

Chuck,

 

I fail to see the relevance of your post. Ms. GreenHope notified the company that her husband died. Why didn't her husband's rep get in touch with her and tell her about her rollover RIGHTS? Surely the 403(b) agent of a full service provider is notified that his/her client died and that the surviving spouse may need some "full service".

 

Peace and Hope,

Joel

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