AN INVESTOR’S BEST FRIEND—ASSET ALLOCATION
paying capital gains tax on it, either at ordinary income tax rates or at long-term capital gains rates, depending on how long you held the asset.
Additionally, the balances of these plans must be distributed at some point. The government has imposed minimum distribution rules, which require the qualified plan owner to withdraw a portion of the money each year beginning at age 701/2. (This is discussed in more depth later.) However, you may be subject to penalties for early withdrawal of the money, as well as for failing to take any distribu- tion. In most instances, people are not allowed to take distributions from their tax-advantaged plans until they are 591/2 years of age. Failure to comply with this rule results in a 10-percent IRS penalty. If you don’t take any distribution, you will be taxed 50 percent of the required distribution for not taking any out. So, if you were to take out $10,000 when you were 50, you would pay ordinary income tax on the whole amount plus $1000 for the 10-percent penalty. Like- wise, if you were supposed to take out $10,000 and didn’t, your IRS penalty would be $5000.
TAX-DEFERRED INVESTMENTS WITHIN QUALIFIED PLANS
There are both advantages and disadvantages of holding tax-deferred investments inside qualified plans. For example, I’m not adverse to advising clients to hold an annuities within their IRAs. Annuities have the tax-deferred advantage built into them. (All capital gains, dividends, and taxable interest accrue tax-deferred until the owner begins to make distributions.) However, I believe that owning a fixed annuity inside an IRA helps provide stability to the overall portfolio.
This extends to variable annuities. There are situations in which I recommend to my clients to purchase variable annuities within their IRAs. Annuities have a death benefit guarantee as one of their bene- fits. This means that if you purchase an annuity for $100,000, and at the time of your death the annuity contract is worth $86,000, your heir will receive the $100,000 that you invested. This gives a lot of older, married couples peace of mind because they aren’t very aggressive, and are worried about what their spouses will have to live on after they are gone. Plus, within variable annuities, there are a