Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 23, 1994 TAG: 9405230115
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Medium
A: David Cissel, a fee-only financial planner with Financial Solutions in Roanoke, pointed out that your 401(k) is a type of retirement plan that allows you to put part of your salary away and not pay taxes on it until it's withdrawn. Although it is tempting to use this money for a major expenditure such as purchase of a home, Cissel does not recommend it.
First, he said, the money available to you would be reduced by taxes. In addition to paying income tax on the amount you withdraw, there is an additional 10 percent penalty on money you take out before you reach the age of 591/2.
The second reason that you would probably be better off keeping this money in your 401(k) account has to do with the effect of compound interest, Cissel said. The longer you can keep the money in your account, the more it will earn. Assuming a 10 percent rate of return, your $20,000 would grow to $680,079 by the time you reach 65 even if you did not add another penny. If you depleted the account now, he said, it would take annual additions of $2,060 at a 10 percent rate of interest to get the same result.
Regulations for clearing checks
Q: I was under the impression that federal regulations require a bank to clear an out-of-state check within three days. I just went through an episode with First Union Bank, which tried to put an 11-day hold on a check. I think that's in violation of federal banking rules.
A: Banks have two days to clear in-town checks and much longer to clear those from another community. The length of time depends on the situation, and the rules are complex.
Jack Cohen, senior vice president and assistant general counsel of First Union Corp., said there are no holds barred if the account is new. If a new customer is opening an account with an out-of-state check, the bank can hold the money for any length of time.
A bank also can hold the money for a long period if a customer has a history of overdrafts or other problems.
If a customer has a good history with the account and the check is for less than $5,000, the bank must make $100 available to the customer the following day. The other $4,900 (or lesser amount if the check is under $5,000) can be held for five days.
If the same customer deposits a check for more than $5,000, the bank must make $100 available the next day and $4,900 available in five days. Any amount above $5,000 can be held for 11 days.
Cohen said you should talk to your branch manager if you believe that the bank violated these rules.
Value of bonds fluctuates
Q: I own some shares in the Vanguard Fixed Income Securities Long-Term Corporate Bond portfolio. I paid $3,029 and have had cash dividends from it.
It is now valued at $2,898 because my dividends are not offsetting the reduction in capital value. There are 320 shares at $9.04, but I'm very unsure of this holding. Should I hold onto this in my IRA? I'm 48.
A: Vanguard is a reputable dealer in mutual funds. Money magazine gives this particular fund a risk rating of 5 on a scale of 1-10.
The problem with bonds is that their value drops as interest rates rise, and vice versa. Because we are in a period of rising interest rates, bonds (and funds that deal in bonds) can be expected to decline in value. Bonds are traditional investments for people who want income, but in this era of volatile rates, the underlying value will fluctuate. If this troubles you, you should get rid of the investment.
House won't be taxed
Q: I am a widow over 65 and own my home. I know I am eligible for the one-time $125,000 capital-gains exemption should I sell my home. But if my home goes to my daughter at my death, will she have to pay capital gains taxes should she sell the house?
A: If your daughter inherits your house, her tax basis would be the fair market value at the date of your death. If she should then sell the house, she would pay tax only on the gain between the date of your death and the date of the sale. Don't give her the house in advance of your death because she would, in that case, take your basis in the property.
Whether you sell now and claim the one-time exemption, or whether you will the house to your daughter, the gain will not be taxed. You should, therefore, make your decision based on what is best for your own living arrangements.
by CNB