Originally created 02/24/01

Woman seeks tax efficiency

At age 45, Kathleen Hurst is already pulling her first pension and starting her second career. The retired military communications specialist has it pretty well figured out.

"Between (my investments) and a double retirement and Social Security, I should be pretty comfortable by the time I settle down," Ms. Hurst said.

That is, if she isn't gouged penniless by taxes first.

Ms. Hurst is participating in The Augusta Chronicle's financial makeover series, in which residents are paired with four financial planners for free advice.

The Chronicle will track their progress throughout 2001 and will have personal finance stories on various issues along the way.

Ms. Hurst has teamed with Jennifer Noah, president of The Monitor Group in Martinez. During their initial meeting, Ms. Hurst said her biggest concerns are tax issues.

"I'm an average, everyday working person," Ms. Hurst said. "I'm not earning too much money; I'm just paying too much in taxes."

Ms. Noah said the first step to tax efficiency is to get a good estimate of yearly tax withholdings using a financial planning computer program.

"We can set withholdings so that you aren't giving the government an interest-free loan, but at the same time you don't want to owe a lot," Ms. Noah said.

Ms. Hurst has received a lot of taxable income from her non-IRA holdings. Ms. Noah suggested she move those assets to more tax-efficient mutual funds.

"Certain funds are very alert to tax efficiency - they offset gains with sales for a loss," Ms. Noah said. "Ultimately, your fund grows, and you sell it when it suits you. That's where you make your real money from mutual funds, not from the annual income."

By law, about 90 percent of mutual fund income has to be distributed yearly. Ms. Noah said distributions you have no control over often cause tax problems.

Ms. Hurst also has some tax woes with her IRA. She's paying heavy taxes because she's converting her traditional IRA to a Roth IRA.

Money invested in traditional IRAs is tax deductible the year it is contributed but is taxable when withdrawn during retirement.

Contributions to Roth IRAs are not deducted, but the money isn't taxed after retirement.

Assuming the Roth IRA would be a better deal in her situation, Ms. Hurst decided to convert about $45,000 in traditional IRA holdings, choosing to calculate the tax and pay it over four years.

But Ms. Hurst is paying taxes on about $10,000 a year that she won't see until she retires.

Ms. Noah said a better option would have been to keep the traditional IRAs and start a new Roth IRA.

"I don't know how long I'm going to live or how much my IRA will grow," Ms. Hurst said. "What I don't want to do is give the government a big chunk of money right now. I'm going to keep it and let it work for me."

But that's a moot point, because Ms. Hurst has two years to pay taxes on the conversion. Now she runs the risk, with an extra $10,000 in earned income, of getting bumped to a higher tax bracket if she gets a heavy dividend or capital gain distribution.

The two will meet again in about a month.

Reach John Bankston at (706) 823-3352 or jbanks15@hotmail.com.


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