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Using interest from an annuity; investing $10,000 for income; limits on a Keogh plan vs. IRA

Income from an annuity Q Last September I retired from teaching at age 61. The major portion of my savings has been invested in a tax-sheltered annuity with a major insurance company. I wish to keep the principal amount in savings, but use the interest it earns for travel purposes. What would my best plan be? Shall I draw the money out totally and roll it over into an individual retirement account with more flexibility? (I could then draw out amounts as I wished each year and assume the taxes for these amounts.)-- G. R. You have a number of options, says Mary Malgoire, a financial planner in Washington. You could, as you mention, take the money out and put it in an IRA within 60 days of withdrawal, to avoid taxes. Now that you're over 591/2, you can make withdrawals as you choose without penalty. Starting at age 701/2, withdrawals are based on life-expectancy tables, which are revised upward every year you live after that.

Another option, Ms. Malgoire says, would be to leave the money in the tax-sheltered annuity and have the insurance company purchase a new annuity for you that would make periodic payments to you. This is the most conservative option and would probably result in a lower yield, Malgoire says, but you would not have to worry about investment performance.

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You would have to be concerned about investment performance in the third option, which would be to simply withdraw the money, pay the taxes, and invest it any way you liked for income.

Before deciding on any of these, however, consult a financial adviser or accountant who understands and can explain the options. Interest from $10,000 Q I am a 71-year-old widow with $10,000 to invest. I need the interest at least biannually. What is the best thing for me to do with it? Can a person of my age open an IRA?-- E. P.

We asked Mary Malgoire for ideas on this one, too, and she feels that with this amount of money, your choices are somewhat more limited than in the question above, but she offered two options, both of which emphasize security:

First, you could buy a 10-year Treasury note and have it held in an account at a discount brokerage (you don't need to pay for investment advice to buy a Treasury security) and have the semiannual interest credited to a money market mutual fund. Then, you would be able to write checks on the fund account. Treasury notes are now paying about 10 percent.

A second option would be to put the money in a money market deposit account at a bank or savings-and-loan, where it would earn a bit over 8 percent, but the money would be easily available.

Finally, you are no longer eligible to open an IRA; that possibility ended at 701/2 years of age. IRA limits when a Keogh is used Q I am self-employed and have a Keogh retirement savings account. I know I can also open an IRA, but I was wondering if the same limits apply to an IRA for self-employed people as for those working for another employer.-- E. W.

Yes, the same limits do apply. You can put up to $2,000 a year in an IRA. There is, however, a little twist you need to be aware of. If self-employment income is used as the basis for the IRA contribution, your Keogh contributions must be subtracted from total self-employment income first.

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For example, let's say you earned $50,000 in self-employment income and are making a $10,000 Keogh contribution, which is the maximum allowed under current rules. With $40,000 left, you still have enough to qualify for a $2,000 IRA contribution. If your Keogh deposit had left your income below $2,000, your IRA limit would be the amount that was left over.

If you are working for an employer and doing free-lance work, it is possible to qualify for three retirement plans: your company pension, an IRA, and a Keogh. Deducting education expenses Q For the last several months I have been working as a salesman for a relatively new (less than two years old) computer company. My employer has suggested I take some computer courses so I can understand the technology better. Because it is a start-up company, the firm cannot afford to reimburse me for tuition. Are these costs deductible?-- M. C.

Yes. If additional education is required by your employer to keep your salary status or job, or by law or regulation, the costs are deductible. You can also take the deduction if the education is needed to maintain or improve skills needed to perform your present job, which sounds like the case here. You may not take the deduction, however, if the schooling is required to meet the minimum requirements of the job, or if you are taking the courses to qualify for a new job or business.

Deductible expenses include tuition, books, supplies, laboratory fees, and some expenses for local transportation and travel away from home. See your tax adviser to find out exactly which of these expenses you can deduct. Estimating taxes Q I have a full-time job and also do some free-lance writing in my spare time. My employer withholds taxes, but my free-lance checks arrive without anything withheld. How much free-lance money can I earn before I have to pay estimated taxes?-- G. H.

This depends on your tax liability. If you have a minimum estimated tax balance of over $400, you should make an estimated tax payment each quarter. The limit rises to $500 starting with the 1985 tax year. You can find out if you meet this test by filling out the 1040ES (Estimated Tax for Individuals) form available from the IRS.

In your case, though, the money being withheld by your employer may be enough to cover 80 percent of your estimated tax, since many people have more taxes withheld than they need. If this is the case, you can file as usual, without paying an estimated tax. You could also ask your employer to increase your withholding so you reach this 80 percent level.

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