Money Management

What to look out for when investing in convertibles

Q I'd like to add some convertible bonds to my portfolio, to get downside protection and still have a shot at capital gains. What guidelines can you suggest?

A Be mindful that convertibles aren't as safe as straight bonds, which have first call on the issuer's assets in case of trouble. Stick to bonds rated at least BBB, unless you're so familiar with the company that you have no doubt of its financial stability. Also, make sure the bond isn't callable (redeemable before maturity) for less than your purchase price; otherwise, a call might force you to convert and cost you the premium you paid. And pay close attention to the conversion terms; not all convertibles remain exchangeable for stock at the original issue terms.

If these complexities daunt you, consider a convertible bond mutual fund whose investment policies match yours. Some funds aim for big returns by concentrating on comparatively low-grade issues. Others favor high-quality bonds with limited risks, even though yields may be lower.

Safeguarding pension assets when you quit practice

Q I'm going to retire from my solo incorporated practice next year and won't be able to make further contributions to my profit-sharing plan. However, I'd prefer not to terminate the plan, in order to protect the assets in case I'm ever sued. Can I keep the plan going whether or not I dissolve my professional corporation?

A Perhaps. Even if you're no longer practicing but keep the business in existence, you can probably freeze the plan rather than terminate it, so that earnings on the funds in it will continue to be tax-deferred. A dormant business can maintain a qualified pension plan under federal law, provided the plan is amended as necessary to comply with future changes in the Internal Revenue Code. But make sure the law in your state permits a professional corporation to remain inactive. Also be aware that you must take minimum distributions after you reach 70¹/₂.

Be careful how you tinker with your will

Q My will includes a bequest to my sister-in-law, but a family quarrel has changed my mind. I know I shouldn't just cross out the clause leaving her the money, but I'd like to avoid paying a lawyer. Can I just attach a signed, notarized statement deleting the bequest?

A It's not advisable; you may deprive your lawyer of a small fee but hand your sister-in-law's lawyer a large one. In some states, a person whose legacy is decreased or eliminated by codicil—which is what your statement would be—must be notified when the will is probated and has the right to oppose it in court. If that's the law in your state, it might be prudent to rewrite the will, omitting the bequest; if the former beneficiary isn't named, she'll have no standing to complain. And even if your proposed codicil would do, it won't be effective unless it's executed with the same formality as the will itself. Either way, you need to consult your lawyer.

If you sell stock withdrawn from an IRA

Q I want to close an IRA account that I have with a stockbroker. If I transfer the stocks to my name as an individual and later sell them, will the profits be taxed as capital gains?

A That depends. Assuming you bought the stocks with deductible IRA contributions, you'll owe regular tax on their market value as of the date you transfer the shares, whether their price rose or fell while the securities were in the IRA. If you hold the stocks for more than a year after that, any additional increase in value will be taxable as capital gain when you sell.

Edited by Lawrence Farber,
Senior Editor

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

 

Lawrence Farber. Money Management. Medical Economics 2001;6:149.