by Archie M. Richards, Jr., CFP^®
December 20, 2004

Warren has $250,000 of EE U.S. Savings Bonds, including $160,000 of accrued interest that won't be taxable until the bonds are cashed. Warren and his wife are 75 years old. He plans to retire next year and doesn't need extra income now. He asks which of the following options he should adopt:

• Convert the EE savings bonds to HH bonds;
• Cash the bonds when he retires and reinvest;
• Give annual portions to the children; or
• Let the bonds run to maturity in 2016.

Congratulations on continuing to work, Warren. Retirement is overrated. The following ideas might help:

• The government no longer allows EE bonds to be exchanged for HH bonds. The last year you could do that was 2003.

• Whether you cash in the bonds yourself depends on whether you'll need the money in retirement. Assume you'll live for at least 25 more years. You may need large amounts for nursing care and other purposes during that time. Take care of your own needs first. Then come the children, grandchildren, and your political and charitable interests.

• If the estates of you and your wife, including the gifts you make now, total less than $1.5 million in 2005, and you die in 2005, you would own no federal estate tax. Therefore, you wouldn't need to bother with annual gifting of $11,000 per person to lessen the eventual estate tax. Just pass out the funds now. If some of your children or grandchildren are disabled or spendthrifts, put their shares in trust. But remember that $1.5 million isn't all that much to support you and your wife for a quarter century. As I say, your own needs come first.

• Finally, I favor cashing in the savings bonds and buying stocks from all over the world as soon as possible. Exactly when you should incur tax on $160,000 of ordinary income I cannot say. This requires a financial plan. (To find a Certified Financial Planning practitioner in your area, contact the Financial Planning Association via www.fpanet.com. Or call 800-322-4237.)

But I can say this: If you've reviewed all the facts and remain uncertain whether to incur the tax, go ahead, pay the darn tax and reinvest. As a general rule, allow economics to trump tax considerations. Today's economics call for a heavy concentration in stocks.

You have until April 15, 2005 to set up a Health Savings Account (HSA) for 2004. To do so, you must:

• Have a qualified, high-deductible health plan;
• Not be covered by any other health insurance; and
• Not be enrolled in Medicare.

Contributions to your HSA are deductible, even if you don't itemize. The contributions may be made by you, your employer, or both. For individuals, the deductions may run from $1,000 to $2,600. For families: $2,000 to $5,150. If you're over 55, add an extra $500.

Investment accumulations within the HSA account are not taxable.

Withdrawals from HSAs for qualified medical services aren't taxable either. The list of qualified medical services includes vision and dental care, prescription drugs, certain nonprescription drugs, premiums for long-term care insurance, and long-term care services. If you're unemployed or disabled, you may even use the HSA to pay health insurance premiums. Money not used in one year may be carried over and used later.

Other tax considerations:

• If you itemize and claim a deduction for 2004 state and local taxes, you can choose to deduct either sales taxes or income taxes, whichever's best for you.

• In 2005, the contribution limits for IRAs rise from $3,000 to $4,000. For those aged 50 and older, the maximum contribution increases from $3,500 to $4,500.

• The contribution limits for 401(k) plans rise from $13,000 to $14,000. For those aged 50 and older, the maximum increases from $16,000 to $18,000.

The complexity of personal and corporate income taxes really burns me up. The IRS tax code that explains all this nonsense is 60,000 pages long! The nation's total cost of compliance, include the value of time spent, probably exceeds the actual taxes paid. What a ridiculous waste!