Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 25, 1991 TAG: 9103230042
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
A: Your friends are right. You should deposit the money into an Individual Retirement Account as soon as you receive it. You have a 60-day deadline in which to accomplish this transfer, and you should not co-mingle the money with any other IRA. This is a called a conduit IRA because you could, if you wished, transfer the pension money to the plan of a subsequent employer.
Anyone born prior to 1936 should seek professional advice before setting up a conduit IRA, however. That's because people born earlier have the option of 10-year forward averaging on taxes. Such people should crunch numbers both ways before choosing an option. Your husband would be too young to take advantage of that option.
Andrew Hudick of Fee-Only Financial Planning in Roanoke said your husband, if he uses the money for anything else, would be forced to pay federal income tax on the entire amount - plus a 10 percent penalty because your husband is under the age of 59 1/2.
The money would be taxed in the 28 percent bracket by the federal government and another 5 percent by the state. That would wipe out a third of the proceeds before the $7,100 penalty, leaving you with only slightly more than $40,000. You would have none of that money for your approaching retirement.
Hudick said there is a way to tap into your IRA for some money to help pay your mortgages, however.
People under the age of 59 1/2 can take regular withdrawals from an IRA provided the amount is based on life expectancy. Hudick said your husband, at the age of 54, has a life expectancy of about 31 years more. He calculated that your husband could withdraw about $2,500 a year, which would give him about $240 a month toward your real estate mortgage payments. Taxes would apply only to the portion withdrawn each year, and you would avoid the penalty. Your husband should ask the IRA trustee to help him with the exact calculations.
Once that option is chosen, you must continue withdrawals for five years or until you reach the age of 59 1/2. At that age you can handle the IRA account as you wish without a penalty although you would still pay taxes on any money withdrawn.
Reconsider this bond
Q: As a senior widow, I sold my home and put my earnings in a tax-free bond from Sovran Bank. I was told this was insured by the Federal Deposit Insurance Corp. The bond was sold to "IDA Danville Memorial Va. Hospital Facility Revenue Bond."
As I know that some day I will need assisted living, I need to know if the hospital is a solid investment. I would be comfortable knowing what kind of hospital this is.
A: The IDA stands for the Industrial Revenue Authority of Danville, which issues municipal bonds in the name of the locality. Industrial revenue bonds are paid from the revenue of the private construction project involved, in this case expansion of Danville Memorial Hospital. IDAs have no backing at all from the local government.
Your investment, however, differs from someone who owns bonds directly. You have a share of a tax-free variable rate note. It was issued by the Danville authority in its own name for the benefit of the hospital. That means you have some different options.
Bonds have set interest and maturity dates. The note is liquid in that you can get out of this investment at any time after giving the bank a week's notice. The interest rate floats, changing every week, and recently has been dropping along with all interest rates. Sovran said the note paid an average 5 1/4 percent last year, which is the equivalent of 7.7 percent if the proceeds were taxable. Recently, however, it has been paying 4.05 percent, the equivalent of a taxable 6 per cent, assuming you're in the 28 percent tax bracket.
The note is not insured by the FDIC. The note is backed by revenue from the hospital and a letter of credit from Sovran Bank in its own name.
Holding the bond does not give you any tangible interest in the hospital, which is an acute-care facility.
Whether this is a good investment for you depends on your tax bracket. If you are in the 15 percent bracket, for example, you would do much better with a higher taxable rate regardless of the circumstances.
Even if you are in a higher tax bracket, you would obviously earn more money in an insured bank certificate at current rates than you are receiving from this note. You should consult the bank investment department or an adviser you trust to consider your situation.
Start with a will
Q: My brother and I are trying to help our mother, who is almost 70, plan her estate. It includes a home with property, several rental units and government retirement. She is not comfortable with handling money and business as our late father always did this. What type of professional - banker, certified public accountant, lawyer - would be best to consult and what should we consider before going?
A: Estate planning requires a will, so you should start with a lawyer whose specialty is wills and estates. The lawyer can call in a certified public accountant, but that probably won't be necessary in your mother's case. Handling of your mother's property should be coordinated carefully with the provisions of her estate. Before you consult a lawyer, your mother should list all of her assets and consider how she wishes to dispose of her property.
Of risk and age
Q: Conventional wisdom states that the closer one gets to retirement, the more your retirement savings should be shifted from equities to fixed income. This is done for protection so you are not forced to liquidate your equity holdings during a down market. What sould be appropriate percentages for the equity portion of a portfolio as one goes from age 30 to retirement? Also, after retirement shouldn't some assets be used as a hedge against inflation to protect your purchasing power?
A: You rightly note that your financial strategies change with age. But they also vary according to your tolerance for risk and the conditions of the market.
In your 20s and 30s, you would probably want to have at least 50 percent, and maybe as much as 80 percent, of your portfolio in stocks and stock mutual funds. A large portion of this money would be in growth-oriented funds.
You would gradually reduce this as you get older. In retirement you would probably have 10 to 20 percent in stock mutual funds. The reason, as you point out, is to protect against inflation. The focus would change, however, with the money invested in more conservative balanced funds.
by CNB