Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, December 5, 1994 TAG: 9412060042
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
We are 58 years old and are interested in adding to our investment programs for growth, keeping in mind safety and the fact that we are nearing retirement.
A: Andrew Hudick of Fee-Only Financial Planning Inc. in Roanoke said his favorite book is "The Wealthy Barber" by David Chilton, published by Prima. The publisher is a Canadian company, but it has a toll-free number for ordering: 1-(800) 665-3913. The cost is $18.95. Hudick said the book is amusing and contains many insights into financial planning.
In the more limited field of investments, Hudick likes "The Money Masters" by John Train, published by Penguin Books. It contains interviews with such financial and investing giants as Warren Buffett, John Templeton and T. Rowe Price.
Classics in the field, he said, are "Security Analysis" by Graham and Dodd and "How to Buy Stocks" by Lewis Engel. The latter is published in paperback by Bantam Books.
The Nov. 21 issue of Forbes also included reviews of financial planning and investment books published this year.
Investing 401(k) funds
Q:It's time to decide how to invest my 401(k) money for the next six months. In the past, I have invested in the common stock fund and made a lot of money in that account. But I wonder what to do now under present conditions. My employer gives a choice of three funds: stable, balanced and common stock.
A: The answer depends more on who you are than it does on today's market conditions. If you are nearing retirement, you must be more conservative and perhaps invest in the balanced fund in the face of a volatile stock market. If you are young, however, you can afford to ride out a downturn in the markets.
The rule of dollar cost averaging states that you will come out ahead in the long run if you invest in stocks in both up and down markets. If the market goes down, the theory states, your money will buy extra shares. When the market turns up again, you will own that many more shares to make the new climb.
The stable fund would be the most conservative choice, especially if interest rates continue upward. Check into its rate of return. Remember that you also take some risk with a stable fund, in this case the risk of erosion by inflation.
Estate taxes
Q: I had an aunt who died recently and left most of her estate to seven nieces and nephews, including me. Her lawyer is in the process of combining all of her assets for the purpose of distributing to the heirs. With the exception of leaving a few personal items to some of us, the house is to be sold and the furniture is to be auctioned. The money is to be added to the rest of her assets, such as a savings account, bonds and certificates.
I have talked to the lawyer, and he said her estate would end up worth $319,000. There will be some expense in settling the estate, and at the present time he is not certain how the taxes will be paid.
I thought estates under $600,000 were not taxed. I would like to know what effect the taxes will have and what percent will have to be paid. Will he pay the taxes before distributing the money or will the heirs have to pay?
A: If her estate is less than $600,000, it is not subject to estate taxes. But those assets such as the bonds, savings account and certificates have been earning money since her death. It is possible that the house and furniture might sell for more than the appraisal at the time of her death. If so, that would represent a capital gain. Those post-death earnings (and possible gains) are subject to taxes. The executor of the estate, which is presumably the role that the lawyer is filling in this case, is supposed to pay the taxes before the money is distributed to the heirs.
Taxing retirement plan funds
Q: I worked for a municipal government in Northern Virginia where I had a retirement plan. When I left to return to Southwest Virginia to take a job here, I wanted to roll over the money into an Individual Retirement Account. When they sent me the check, they had deducted 10 percent for tax withholding.
It was my understanding that I had 60 days to roll over the account to a new trustee. The credit union is holding my check. Can the deduction be amended?
A: The situation, which was created by a congressional tax measure last year, cannot be reversed. The law requires a 10 percent tax deduction unless the money is passed directly from one retirement plan trustee to another. The burden is on the employee to create the IRA first, then have the money directly transferred. The employee must inform the former employer of the new trustee.
Now you must use other funds to make up that 10 percent when you make the deposit with the IRA trustee, in your case the credit union. Unless you make up the 10 percent, you must pay full taxes and a penalty on the money.
If you add the 10 percent, you can claim a refund for the withholding when you complete your 1994 federal income tax return next spring. So, in the end, you will be made whole again.
by CNB