Approving a hardship withdrawal from a 401 (k), Should you rely on a fund when you want to buy bonds? When and how to purchase long-term care insurance, why your paretns may need help with their estate plan, Guarding a pension plan against an invalid rollover
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QI want to put some money into bonds but can't decide whether to buy them directly or invest in a mutual fund. What are some of the pros and cons of each option?
A Because funds buy bonds in large lots, they pay lower commissions than you would as an individual. They also offer more diversification than you could afford on your own. In addition, you get instant liquidity, as well as the convenience of reinvesting income whenever you choose. As an individual bondholder, you'd have to accumulate the interest or combine it with new money in order to buy more bonds.
On the other hand, if you want or need to redeem fund shares in a down market, you may have to take losses. With bonds you owned yourself, you could select the more profitable ones for sale and hold the others to maturity.
If you'd rather invest in a fund than on your own, be aware that some funds stress safety by concentrating on good-quality issues, while others take risks to achieve higher returns. So check fund prospectuses to find one that matches your investment objective.
QOne of our employees has applied for a hardship distribution from his 401(k) account, which the regulations permit for reasons of "immediate and heavy financial need." Is it the plan administrator's responsibility to determine whether the employee meets this qualification?
A The administrator can generally approve the request if the employee states in writing that he can't obtain the needed cash from insurance reimbursements, selling family owned assets, ceasing plan contributions, or borrowing from the plan or commercial sources on reasonable terms. This statement isn't required for distributions to be used for any of the following purposes, which are automatically classified as hardship withdrawals:
The 10 percent tax penalty on withdrawals made before age 591/2 is waived for hardship distributions.
QMy wife and I are 55 and in reasonably good health. Would it make sense for us to buy a long-term-care policy now, and if so, what should we look for?
A According to a recent study by the American Council of Life Insurers, you figure to save roughly half the premium by buying at 55 instead of waiting until, say, 65. For less than $1,000 a year each, you can get long-term-care insurance that will pay $100 a day for the equivalent of three years (with 5 percent annual inflation protection) for stays in a nursing home or an assisted-living facility, or for day care services in your own home. That's about the minimum benefit to aim for, since annual nursing home charges could easily run $50,000 and home care $36,000.
The average nursing home stay is anywhere from nine to 30 months, depending on what source you consult, so three years of benefits should provide a cushion of sorts. And that three-year term isn't a usage deadline; if you don't receive the maximum policy benefit within three years, the benefits continue until you do so. To figure the total you can collect, multiply the maximum daily amount specified in the policy by 365 days, then multiply that result by 3 years.
Shop for reliability, not price alone. A stable, well-known company with long experience in this type of insurance may charge a higher premium than a relative newcomer eager for business, but if you opt for the established firm, you're apt to have a better chance of collecting promised benefits if you become eligible for them. One prudent way to hold premiums down is to select as long an elimination period (the period before benefits start) as you feel you can afford.
Above all, be sure to scrutinize the fine print and get the agent to clarify any ambiguities before you sign up. For example, some companies' brochures assert in boldface type that premium "rates will never change," but hedge in standard type, "unless they are changed for all policies in your state." You'll find additional suggestions in "A Shopper's Guide to Long-Term-Care Insurance," available from your state insurance department or the National Association of Insurance Commissioners (816-783-8300; www.naic.org).
QI'm concerned that my elderly parents haven't paid enough attention to estate planning. I'd like to offer them some guidance, but I'm reluctant to pry into their affairs. What do you suggest?
A Point out to them that tax law changes in recent years may have outmoded any arrangements they made earlier. For instance, their wills may need revision to take full advantage of the unlimited marital deduction and the estate tax credit, which is slated to rise from the present $675,000 to $1 million by 2006. Removing some assets from joint ownership now could spare the survivor capital gains tax. Choosing beneficiaries and withdrawal methods wisely could cut taxes on their pensions and IRAs.
Your parents' plan may also require updating to reflect improvement in your own financial situation. If you no longer need the legacy intended for you, the money might better be left to your children in a generation-skipping trust. Or your parents might want to consider a charitable trust that would give them income and tax benefits during their lifetimes and possibly save estate tax later as well.
If your parents react positively to these ideas, as is likely, offer to put them in touch with a suitable financial adviser, perhaps someone you've worked with yourself. And if they invite you to help review their plan, don't hesitate to accept. You'll be doing them and your family a favor.
QA doctor who just joined our group wants our pension plan to accept a rollover of funds distributed to him by his former employer's plan. Is our plan required to accept a rollover, and will we get into trouble if it later turns out that the rollover is invalid?
A Your plan can refuse to accept any rollovers at all or specify conditions under which it will accept them. For example, you can insist on seeing evidence that the distributing plan is qualified, such as written assurance from the plan's administrator to that effect or, better yet, a favorable determination letter from the IRS. And you can ask the doctor to certify that he received the distribution not more than 60 days before making the rollover; that he was entitled to the money as an employee, not a beneficiary; that it's not part of a series of periodic payments; and that all of it would be taxable if it were not rolled over.
With these precautions, your plan won't be penalized even if the IRS later declares the rollover invalid. In that event, you'll have to give the doctor back the original rollover amount plus subsequent earnings attributable to it.
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 firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management. Medical Economics 2001;5:124.