Q. Most retirement investment advice assumes a person's savings are in taxable accounts or a combination of tax deferred and taxable accounts. What is the advice for a retiree when all of their savings are in tax deferred accounts? Is it wise to convert a regular IRA to a Roth IRA? The advantages of a Roth are tangible, but unless you plan to not use the money and intend to pass it along to your heirs, I'm not sure pre-paying the taxes is worth it.

---B.B., by email from Buffalo Grove, IL



A. The IRS has a phrase I've always loved: "taxable event." It's an action you take that creates a tax liability. The phrase is important for people whose only liquid financial assets are in tax deferred accounts because virtually everything they do will be a "taxable event."

That's why I've written columns on why we need diversification of account types as well as diversification of financial assets. If we have different types of accounts we have more control over "taxable events."

This is not a universal concern. The majority of Americans don't face high taxes. A couple filing a joint return, for instance, can have a taxable income of $61,300 this year before they leave the 15 percent tax bracket. Since the same couple would have $6,600 in personal exemptions, a standard deduction of $10,300, and another $2,000 deduction if elderly, a couple can have a gross income of $80,200 before entering the 25 percent tax bracket. (For a single elderly person the comparable figure is $40,350.)

For those in the 15 percent tax bracket, there isn't much reason to do a Roth conversion. There are two common ways to have assets in regular taxable accounts. Many couples downsize their house when they retire. Even if they avoid a mortgage on their new house this gives them an opportunity to keep some of the home equity in a taxable account.

Another path is to withdraw extra money from your IRA account each year. You'll pay taxes but it will help you build a pool of funds that are immediately accessible without creating a "taxable event."

Is there a limit to the amount you should take? You bet. If you are normally in the 15 percent tax bracket, make sure your additional withdrawals won't push you into the 25 percent bracket. Some readers will wonder why they should give up the benefit of tax deferral. The answer is simple: creating a side fund today may save you from being forced into a higher tax bracket with large IRA withdrawals tomorrow. This can happen with a big purchase, such as a new car. It can also happen with medical expenses. And it can happen with Required Minimum Distributions that get larger as you get older.



Q. I am a retiree and have I Savings Bonds that will mature at 5 years this summer. I was planning on cashing them in to purchase a car. My tax advisor told me that not only will I be taxed on the interest they have accumulated over those 5 years, but I will also be taxed on my Social Security benefits because my income will increase by $25,000.

I thought I was being clever by purchasing I Savings bonds with the intent of buying a car which I need soon. My present car is a 1992 Mercury. Is there an alternative?

---C.C., by email



A. You have several alternatives. But the first thing you need to understand is how your Social Security benefits may come to be taxed. A single person with an average Social Security benefit of about $1,000 a month can have other income up to $19,000. Additional income over that amount will cause a portion of their Social Security benefits to be added to their income and taxed. So if you make a large IRA withdrawal for a purchase, redeem a large amount of I Savings Bonds, or make a large withdrawal from a tax deferred annuity, you will not only pay taxes on the taxable amount of the withdrawal, you'll also pay taxes on a portion of your Social Security benefits.

The only way to avoid this nasty event is to talk with your accountant and "walk the line" on your income, trying to avoid triggering this additional taxation.

How do you do that?

First, you avoid big lumps of income. That means making withdrawals gradually.

Second, you consider borrowing the money and repaying it over time. Between car dealers offering low interest loans and an abundance of home equity credit lines, you should be able to smooth out this tax bump.