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Rolling over 401(k) is probably best, but do the math

Q. I am retired and on Social Security. I have a 401(k) fund valued at $91,000 with my former company that I must withdraw when I turn 65 this July. Would it be better to transfer it into an individual retirement account or to take 10-year income averaging on my tax return?

A. You're probably going to be better off with an IRA. Most people find they pay the least in taxes by taking gradual withdrawals over the course of retirement. With the gradual approach, at least part of the money will avoid tax altogether if your other income is relatively limited. However, either five-year or 10-year averaging could be a better deal if you have near-term plans for spending the money, such as buying a house.

The only way to know for sure what is best for you is to get out a calculator or ask an accountant to estimate the tax consequences of each approach. Accountants tell me that most people who ask for that kind of estimate end up rolling over the money.

If you decide on an IRA, be sure to have your former employer transfer the money directly to the IRA instead of sending you a check. That way you will avoid having 20 percent withheld for taxes.

Q. I hold 300 shares of Nutmeg Industries, which is supposed to be taken over by VF Corp. My shares can no longer be traded and I cannot find out what will become of them and who has the money I am supposed to get for them. My security firm knows nothing and I hope you can answer this for me. I am sure many other people in this area also hold these shares.

A. I find it shocking that your broker was too lazy to get this information for you. I suggest that you find a new broker.

The form you need to fill out to tender your shares was mailed to all shareholders the week of Feb. 7, according to Nutmeg. If your shares are registered in your name, the form was sent to your address. If your shares are held in your brokerage account in "street" name, the form was sent to the brokerage firm. If you didn't get the form, call Nutmeg headquarters in Tampa.

Q. My wife and I are 61, retired with a monthly income of $1,903 per month, plus paid health insurance. Our only debt is a home mortgage of $34,000 at 10 percent interest, with payments of $600 per month. We have $115,000 in a credit union IRA account paying 3.75 percent, plus a savings account of $15,000 in ready cash. We really want to pay off this mortgage by taking $34,000 from our IRA account. Is this a good idea and what will our tax bite be?

A. I think it makes sense to pay off your mortgage. For 1994, your income tax will be 15 percent of your first $38,000 in taxable income and 28 percent of income above that.

If all $1,903 of your monthly income is subject to tax and if you take the standard deduction, you can withdraw $26,400 from your IRA before you put yourself into the 28 percent bracket. Under these circumstances, your best bet would be to spread your withdrawal over two years so all of it would be taxed at 15 percent.

However, I hope you noticed the "ifs." When you start collecting Social Security, your circumstances will change. If that's scheduled to happen anytime soon, you need to consider how the IRA withdrawals will affect the taxability of your Social Security benefits. If you aren't able to calculate this yourself, I suggest that you consult a tax preparer to help you decide the best timing for your IRA withdrawals.

If the money in your credit union IRA is readily accessible, you don't need to maintain a large cash account outside your IRA. You could use $10,000 of your cash account toward your mortgage repayment.

You didn't ask, but I'd also recommend that you invest part of your IRA for a higher return. If you are averse to taking any risk to principal, you could assemble a portfolio of Treasury securities with staggered maturities, planning to hold them to maturity. At a minimum, you should have some of your money in higher yielding certificates of deposit.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest interest. Questions must be submitted in writing, but readers' names will not be published. Write to Helen Huntley, The Times, P.O. Box 1121, St. Petersburg, FL 33731.

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