Time limit on completing a Roth conversion; Would a stock slump trigger tax on index fund gains?; A way to hold down employee pension plan costs; Clocking the return on a variable annuity; How state law defines prudent investing; Don't dither when buying travel insurance; Disclosing lead paint hazards in an older home.
Q I've paid relatively little tax on the appreciation of my Vanguard 500 Index Fund shares, because the fund doesn't sell assets often. But I keep reading that a big market slump would force Vanguard to convert holdings into cash to cover redemptions, saddling shareholders with large taxable gains. Should I worry?
A Not according to Vanguard management. If the market were to decline 30 percent, say, redemptions would have to equal two-thirds of the fund's assets before it would realize a net capital gain. Of course, if you were to sell some of your Vanguard shares while they were still worth more than you paid for them, you'd have a taxable gain regardless. But this would be the case with any stock market asset you own.
Q My adjusted gross income for 1999 didn't top $100,000, so I withdrew funds from a traditional IRA in November, intending to roll them over into a Roth account. Is the conversion allowed, even though the transfer wasn't completed until this January and my 2000 AGI will be more than $100,000?
A Yes, provided the money was redeposited within 60 days of the date you received it. The conversion counts for the year in which the withdrawal was made, but if you missed the 60-day deadline, the rollover is invalid.
Q I can't afford to make large pension contributions for myself or my employees, so I'm thinking of setting up a SIMPLE IRA salary reduction plan. Assuming I contribute the maximum for myself, what's the most I'd have to put in for them?
A It depends on how much your eligible employees contribute. At most, you'd have to match the amount they put in themselves, up to a maximum of 3 percent of their compensation. So for a staffer whose salary is $40,000, say, your maximum contribution would be $1,200and he or she would first have to contribute this amount or more. For 2000, each employee can put in up to $6,000 of salary.
You have the option to contribute a smaller percentage of employee salaries, but if you do, you can't put in the maximum for yourself. However, you can restrict participation in the plan to those employees who earned at least $5,000 in each of any two prior years and will earn that amount or more this year.
Q I'd like to diversify my investments by putting $25,000 into a variable annuity. How long would I need to hold it in order to do better than I would by investing in a mutual fund with a comparable return?
A Unfortunately, there's no rule of thumb, but let's assume a 10 percent annual return, a $25 yearly contract charge, and a combined federal and state tax bracket of 40 percent now and 35 percent when distributions start. To make the annuity more advantageous than a mutual fund that also returns 10 percent, you'd have to hold the annuity for roughly 12 years. Remember, part of the mutual fund's return would be taxed at the capital gains rate, but all of the earnings on your annuity investment would be taxed as ordinary income upon withdrawal.
The holding period could be shorter if you plan to take the annuity income over your life expectancy. Assuming distributions begin after age 5912, when the early-withdrawal penalty no longer applies, your wait could be less than five years. Spreading the withdrawals over many years allows a substantial portion of your investment to continue growing tax deferred.
Q I'm responsible for a family trust fund, and my broker says my investment moves have to conform to a state law called the Uniform Prudent Investor Act. What does that involve?
A The UPIA, which more than half the states have adopted since its 1994 inception, calls for trustees to act more boldly than the former "prudent man" rule did. The law favors an investment strategy that maintains a reasonable balance between risk and return, focusing on the trust's portfolio as a whole, not on individual assets in isolation. The UPIA states that the trustee has a duty to diversify the trust's investments, except in special circumstances. A trustee must also consider general economic conditions, tax consequences, total return, and the beneficiaries' needs and resources. For example, a trust for an elderly widow of modest means shouldn't take on as much risk as one for a younger beneficiary who's well-to-do.
If you need help carrying out your obligations as trustee, the UPIA allows you to delegate investment and management functions to agents. But you must set appropriate terms and standards for them and periodically review their overall performance to make sure they comply. Doing so relieves you of liability for their decisions and actions.
Q My travel agent recommends that I buy trip insurance as soon as I put down a deposit on the vacation jaunt I'm planning. What's the hurry?
A Some insurers waive the pre-existing condition clause in their trip cancellation policies, provided you buy the insurance within a week or two of making your travel deposit. Without the waiver, if you cancel the trip because you, a traveling companion, or a close family member has become ill, you might not be able to collect the nonrefundable portion of your trip cost. The pre-existing condition period typically extends for 60 to 180 days prior to purchase.
Before signing up for the policy offered through your travel agent, make sure it doesn't include additional coverages you don't need. Some insurers bundle several benefitsemergency medical evacuation, medical expenses, baggage loss, accidental death, automobile collision damage waiver, and others. In such cases, you may do better to shop around. But don't delay. Some carriers to check: Access America (800-284-8300), CSA (800-348-9505), Travelex (888-457-4602), and Travel Insured (800-243-3174).
Q I'm planning to sell or rent my 30-year-old house shortly. Will the rules on hazards from lead-based paint require me to test for it and remove any that exists?
A No, but if you don't reveal what you know about the presence of such hazards, a buyer or tenant can sue you for triple the amount of any damages, and you could face civil and criminal penalties.
You must give a buyer or tenant any relevant records or reports you have, along with a pamphlet on protection against lead published by the Environmental Protection Agency. The contract of sale or lease must include warning language, and a buyer must be allowed 10 days to have a test or inspection done at his expense. You should obtain a signed acknowledgment from each party concerned, and keep it for three years. These rules apply only to houses built before 1978, the year lead-based paint was banned for use in housing.
You can obtain copies of a sample disclosure form and the EPA pamphlet from the National Lead Information Center by phoning 800-424-5323, or on the Web at www.epa.gov/lead/leadbase.htm.
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.