My husband and I are very confused on taxes . We went to a lawyer yesterday and I am even more confused now. We asked about putting our resources(401K and Ira's) in a trust. 401k/34,000 Trad. Ira/52,000. He said it would be a bad idea as taxes would be at least 25,800 (30 o/ox86,000) and no benefit now. IS THAT CORRECT? I thought taxes on Ira's was only on the interest we earned and not every thing we put in. Is this the right percent? We live in Indiana and our only income in 2007 will be my husband's SS and pension equaling 19,080 next year. Thanks for any assistance.

He is correct. Transferring tax-deferred money from traditional IRAs and 401K plans will result in an early distribution penalty of 10%, plus make taxes due at your current marginal tax rate, so 30% sound about right.

Your assumption that only the interest is taxed is incorrect. When you funded the traditional IRA, you deducted the amount of funding from your tax return as an adjustment to income. That makes the money contributed to the IRA pre-tax money. Traditional IRAs are tax-deferred, NOT tax-free, which means taxes will be due when you make withdrawals from the IRA.

Now, a ROTH IRA is funded with after-tax money (you get no tax deduction for putting money into a Roth IRA), but it DOES grow tax-free, and can be withdrawn anytime after five years of the initial funding with NO tax consequences at all.