June 16, 1997

Q. I am retired and want to use up my 401(k) money, which has never been taxed. Can I set up $10,000 gifts for young relatives' future education from this money -- without paying tax? Can this money be transferred to their names tax-free? Is there any way I can get around 401(k) withdrawals?

J.P., Epping, N.H.

A. As far as I know, you're stuck, unless you're willing to call the grim realer into the picture. If you named the youngsters as recipients, they probably could withdraw the money and pay considerably less in taxes than you would -- but the catch is that you'd have to die, which is an awfully high price to pay to get an edge on the taxman. As I said, aside from that I know no way to get around the rules for mandatory minimum withdrawals, and the attendant tax bill.

Take comfort in this: Back when you were working and these assets were being put away on a tax-deferred basis either by yourself or your employer or both, you probably would have faced a higher tax bill than you do now. And in all likelihood, the fact that these assets have become so substantial as to create a tax problem is likely attributable to the growth of these assets on a tax-deferred basis. Alas, deferral is just that, and the time has come or is approaching when the taxman finally gets his, and I think you're stuck.