Q. My husband and I are both 65 and retired. For 5 years we have lived on an average of $1,800 per month, funded by $1,350 from Social Security and $450 from IRA CDs. At this rate of income we are not paying income tax. We have the following in IRA accounts:: $150,000 in CDs, $32,000 in Vanguard short term Federal, $48,000 in Index 500, $10,000 in Special Health, $71,000 in Wellesley, and $90,000 in Wellington. In addition we have a non-IRA investment of $25,000 in Fidelity Magellan.

We have two questions: 1. Is there a formula we can use to help us determine how much we should take out of our IRAs now to minimize our total tax bill now and after 70  ½? 2. Would you recommend any changes in our investments?

---D.W., Richardson, TX

  

A. The "formula" changes every year because both the standard deduction and personal exemptions change with an inflation adjustment each year. For 1996 a married couple has a standard exemption of $6,700 with an additional blind or elderly exemption of $800. The personal exemption is $2,550. That means you can have a total of $12,600 in income or IRA withdrawals before you pay any federal income taxes.

Since you are only taking $5,400 a year from your IRA account you could take an additional $7,200 a year before you would have to start paying income taxes. If you invested the money in a taxable investment you could later draw down the principal to avoid increasing your taxable income.

You could take an additional $11,300 a year and only pay at the Federal income tax rate of 15 percent.

When the amount you take from the IRA accounts exceeds a total of about $23,900 a portion of your Social Security benefits will become taxable. Each additional dollar will be subject to 15 percent Federal income taxes… and will subject a dollar of Social Security benefits to the same tax rate. In effect, every dollar of IRA account income over about $24,000 will be taxed at a 30 percent rate. At age 70  ½ your joint expectancy will be about 18 years, indicating a need to start withdrawing from the IRA accounts at about 5.5 percent of $22,000 a year--- right at the threshold of having your Social Security benefits taxed.

You can avoid or put off this event by making withdrawals from your tax deferred accounts NOW and building your fund of taxable assets so that you can draw down taxable assets instead of tax deferred income in the future. In your case, it should not take much effort to avoid ever paying taxes over 15 percent.

Fundamentally, you've made very good investment choices. You should consider moving your IRA CD investments to get a better return in a fund such as Vanguard GNMA or split between that and Vanguard short term federal income.

Another thing you can do is to start spending more money. You can afford it and you might like it.

  

Q. My wife and I have a combined yearly income of about $100,000 and are planning on purchasing our first home within the next twelve months. My mother has generously offered to give us up to $30,000 for a down payment. My question is: would there by any tax-related benefits to receive a portion of the $30,000 in increments of $10,000 this year and $10,000 next year?

--- T.M., Dallas, TX

  

A. Under the Unified Gift and Estate Tax Credit rules it is possible to give $10,000 a year to EACH of any number of individuals without reducing the estate exemption. So the smart way to gift the money would be for your mother to gift $10,000 to you and $10,000 to your wife in 1996 and then follow with an additional $10,000 to you in 1997. Q. Please tell me your opinion on tax deferred variable annuities. I need to make a decision soon about investing in this. I already have a substantial amount invested in mutual funds, but I was told that this would be a good way for me to defer some of my taxes. I am 50 years old. Would this be a smart move for me?

---A.R., Cedar Hill, TX

  

A. There are hundreds of tax deferred variable annuities out there so it is not possible to offer a blanket opinion. My biggest reservation about them is the additional cost burden of the insurance contract--- an average of 1.2 percent a year, over and above the annual expense ratio of the underlying mutual funds. There is a high probability that you would do as well or better by buying a low cost index fund such as the Vanguard Index 500. You would also enjoy almost the same level of tax deferral… without the expense.

The reason the index fund is so tax-efficient is that it has a low turnover rate and most of its income comes from long term capital gains which are realized very slowly.