November 17, 1997

Q. Like most of your readers who have their retirement money in tax-deferred savings plans such as Keoghs or 401(k)s, I will find myself fully invested or nearly fully invested in stocks and bonds when I reach age 70 1/2, the age at which mandatory withdrawals are dictated. The amount of these withdrawals is based on the life expectancy of the taxpayer and the beneficiary, and the first withdrawal on a $300,000 account might be about $18,500. Assuming a person does not receive that amount in earned interest from the investments, then the taxpayer will be required to sell investments to make the payment -- perhaps at a time when it is not advantageous to do so. In other words, you have to be fairly liquid to comply with the withdrawal rules after age 70 1/2 -- or perhaps be faced with selling investments at a loss. How does one manage to avoid this?

J.M., Andover

A. The important thing to remember is that there are no tax consequences from changing investments within a tax-deferred plan.

Thus a person who will shortly face mandatory withdrawals might lock in gains by selling equities when the market seems high, replacing them with fixed-income securities that might either provide enough income to meet the required withdrawals, or that at least would provide some significant income while offering limited downside risk.

Most people don't focus a great deal on this situation because these are long-term investments. Even if you've chosen lackluster stock-market instruments, the odds are high that over the years you will have earned a profit, at least on paper.

And because there are no tax consequences of changing IRA holdings, people who have made poor selections for IRA holdings tend to change them once they decide the investment was a mistake.