Layoff Candidate Should Be Flexible but Frugal

Q: I am employed by Security Pacific Bank but have the feeling that I will be laid off when its merger with Bank of America is completed in a few months. I will walk away with about $15,000 from my “thrift plan� account and $25,000 more from my displacement package. I have no debts. What is the best way to handle this money? I will have to live on some of it while looking for a job --K.L.

A: You don’t say how old you are, but we will assume that you are under age 59 1/2, the age at which you are eligible to withdraw funds in your thrift plan without penalty. If this is true, you should roll the $15,000 in your thrift plan, which is a form of tax-deferred savings account, into an individual retirement account to preserve its tax-deferred status. You must make the transfer within 60 days of receiving it to avoid its being taxed and subject to a 10% penalty for early withdrawal. By the way, if you made any contributions of after-tax funds into your thrift plan, this money may not be transferred into an IRA.

Your severance package is another matter. Assuming that you are in the highest tax bracket, you will probably receive $17,000 of the $25,000 payment, with the remainder going toward state and federal withholding taxes. Our experts recommend that you deposit these funds into the safest but highest-yielding savings account, which might include a money market fund or short-term certificate of deposit. Because you will need these funds to cover living expenses while you search for a new job, there is no sense in tying the money up in a long-term investment. The key for you is to be flexible, conservative and frugal.

Agreement Spells Out Basis of Fee on IRA

Q: I have a sizable IRA for which a bank acts as trustee. The bank’s handling fee is a percentage of the portfolio’s value. However, one of my holdings is in bankruptcy, and my investment in it, originally $50,000, is now worth just a fraction of that. However, the trustee continues to base its fee on the original $50,000 investment. What can I do? --E.W.

A: First of all, check the original agreement you signed when you placed your IRA with the bank. Did the agreement say that the trustee fee would be based on a percentage of the original investment? Or did it say fee would be based on the account’s “carrying cost� or “fair market value�? In most cases, our experts say, fees are based on an account’s fair market value. If this is the case in your situation, bring it to the attention of bank officials, and fight for your rights under the agreement. (It probably wouldn’t hurt to demand justice retroactively, as well.)

However, if the bank is entitled to base its fee on the original IRA investment, you have two choices: Continue paying the charges or withdraw the nearly worthless investment from the account. You will be liable for taxes on the withdrawal, but they will be based solely on the investment’s current value. (If you are under age 59 1/2, you will be hit with a 10% penalty as well.)

To determine which choice is better for you, do a few simple calculations and compare the cost of the trustee’s annual fee to the tax bite, and possible 10% penalty, you would face if you withdrew the investment. It is quite possible that you would be better off cutting your losses by withdrawing the investment from the IRA and paying your taxes. However, if you believe that the investment will improve if the company emerges from bankruptcy, you should consider the future upside you would forgo by making the withdrawal.

One additional note: If you decide to withdraw the investment, you will need sufficient evidence to show Uncle Sam that its value has indeed plummeted from $50,000 to what you claim as your distribution. You will need to present this proof when you prepare your tax return for the year in which you make the withdrawal.

Assuring What’s Due From Social Security

Q: How does one find out if he or she is getting the correct amount of Social Security? I worked for 40 years and always paid the maximum tax. I retired in 1982 at age 62 and am now getting $656 per month. I have often wondered if I am getting what I am entitled to. --S.F.B.

A: Social Security recipients may contact their local Social Security Administration office for an appointment to review their records. Or they may call (800) SSA-1213 to make an appointment with their local office. Upon request, Social Security representatives will go through recipients’ records to determine if their benefits were properly calculated.

However, administration officials note that its error rate has historically been quite low and ask recipients to request a review only if they suspect that a mistake has been made or that the administration does not have some of their employment and tax records. There is no point in putting Social Security representatives through a lot of “make work� just to assure yourself that you’re getting what you’re entitled to.

But taxpayers who have not retired should periodically check with Social Security to assure themselves that their employment and tax records are being correctly forwarded to the administration. Social Security representatives recommend that workers do so every three years. Statements are available from Social Security at no cost by calling (800) SSA-1213; ask for form SSA-7004 or the “personal earnings and benefits estimate statement.� You will receive a work sheet that you must complete and return. You will then be sent an estimate of your potential Social Security benefits upon retirement.

By the way, based on the full contents of your letter, a source in the Social Security Administration was able to determine that you are receiving the correct level of benefits. However, saying this, let me caution readers that this is not a service that Social Security officials routinely perform but one only to demonstrate that the vast majority of retirees are getting what they’re owed.