Money Management

September 20, 1999

Money Management

Money Management

Jump to:Choose article section...Stocks you can buy without a brokerManaging assets after a custodial account endsMunicipal bonds that are extra safeAnother way to get cash on a trip abroadHow to play the Roth conversion gameZeroing in on Treasury issuesIf your IRA beneficiary dies before you doDo some index funds place too many bets?Screening out deadbeat tenantsEstimating your chances of a tax audit

Edited by Lawrence Farber, Senior Editor

Stocks you can buy without a broker

Q:I'm familiar with no-load mutual funds, but the other dayI overheard someone mention no-load stocks. What are they?

A: They're stocks you can buy directly from the issuing company,usually without paying a broker's commission. Some companies limit directpurchases to existing shareholders who use their dividends to buy additionalstock. These dividend-reinvestment plans are called DRIPs. Other issuershave direct-purchase plans open to any individual investor. These can producesignificant savings.

Let's say you decide to purchase 200 shares of stock selling at 25. Afull-service broker might charge you $125 to execute that order. A discountbroker would charge less, but direct purchase would cost either nothingor a small fee, generally $15 or less, depending on the plan. To put thisin perspective, if the stock's price rises 10 percent, you'll be only 7.5percent ahead if you've paid the full-service brokerage fee.

Be mindful, though, that buying shares directly from the issuer may involvedelay, and selling them that way can sometimes be a chore unless you gothrough a broker. So direct-purchase plans are most suitable for long-terminvestors.

Several hundred companies--including many of the Dow industrials--nowoperate direct-purchase programs. To find out which ones do and how to contactthem, visit the Securities Transfer Association's Web site at www.stai.org,or write to STA, PO Box 5067, Hazlet, NJ 07730. For more information onthese plans, see "Who needs a broker? Buy stock directly and save,"in our Nov. 23, 1998, issue (available at www.memag.com).

Managing assets after a custodial account ends

Q:I have a custodial account with a broker for my daughter.She'd like me to continue managing it for her after she comes of age laterthis year. Could that cause tax problems?

A: Not if you observe the legal formalities. Remove your namefrom the brokerage account, and make sure your daughter receives sole titleto all the assets, as required by state law. She can then execute a powerof attorney authorizing you to handle the account. If any securities arein your name as custodian at the time of the changeover, your broker canhave them reissued in street name--i.e., held in the firm's name for yourdaughter--to minimize future paper shuffling.

Income from the account assets will still be taxable to your daughter,even though you continue to manage them. But if you're the donor as wellas the custodian, the assets will be part of your estate if you die beforecustody is terminated.

To answer questions the IRS or anyone else might raise about the transferof the assets, you should prepare a final accounting statement, and haveyour daughter sign a release when she takes over.

Municipal bonds that are extra safe

Q:I read somewhere that "prerefunded" municipalbonds are safer than others. How do they differ from other tax-exempts?

A: The main distinction is that prerefund- ed bonds are backedby Treasuries. Here's why: Muni bond issuers generally pledge not to "call"(redeem) their bonds prior to a specified date some years off. But if interestrates drop substantially before then, a municipality may want to ensurethat it will be able to redeem the high-coupon bonds as soon as permitted.It can do so by floating a new bond issue at the lower current rate andinvesting the proceeds in US Treasury notes that will mature on that calldate. The muni issuer holds the notes in escrow until then. This effectivelyreduces the issuer's cost to carry its long-term debt.

Since the prerefunded bonds are as safe as the Treasury notes backingthem, you'll pay more for them than for comparable munis without that guarantee.You need to take this into consideration, along with the likelihood of earlyredemption. So ascertain their "yield to call"--their calculatedreturn if redeemed on the call date instead of at maturity--before you invest.

Another way to get cash on a trip abroad

Q:A travel magazine suggests buying a prepaid bank card inthe United States for use at foreign ATMs, but my local bank knows nothingabout this. Where can I get one?

A: Visa sponsors a prepaid card, called TravelMoney, that letsyou obtain foreign currency at ATMs abroad. If you can't find a bank inyour area that offers the card, you can order it by mail from an issuerlike Columbus Bank & Trust (800-334-9007). The issuing bank sets theterms, including the cost, which can be relatively hefty. CB&T allowsa prepayment of up to $10,000 for a 2 percent fee and charges $1.25 perATM withdrawal after the first three.

A PIN code of your choice protects you against loss or theft of the card.(Prompt notice to Visa limits your exposure to $50.) For a small additionalcharge, persons traveling together can have duplicate cards with the samePIN to use independently. The account isn't connected with any other Visaaccount you may have. However, the central Visa system keeps track of thecard's current value. At the end of your trip, any remaining value is refundable.For more on TravelMoney, visit Visa's Web site, www.visa.com/pd/trav/main.html

How to play the Roth conversion game

Q:I turned 70 1/2 this year and must soon start making withdrawalsfrom my IRA. Will that prevent me from converting it to a Roth account?My annual adjusted gross income isn't more than $100,000.

A: No, but be careful how you do it. Ordinarily, you could delaytaking your first minimum distribution until April 1, 2000, but you musttake it before converting. That means you'll have to do so this year ifyou want to convert to a Roth in 1999.

If you don't convert until 2000, you'll have to take two minimum distributionsbeforehand. It may still be advisable to take the first one in 1999. Why?Because the withdrawals count as part of your AGI for the purpose of determiningwhether you're eligible for a Roth conversion.

Let's say you expect that next year's AGI from non-IRA sources will beabout $90,000, and your first two required withdrawals will be around $6,000each. If you take both of them in 2000, the $12,000 total will boost yourAGI above $100,000, so you won't be allowed to convert. To avoid that, considerwithdrawing $6,000 in 1999, lowering your projected AGI in 2000 to $96,000.(You can't get around the problem by postponing the second withdrawal to2001; that's not permitted.)

Zeroing in on Treasury issues

Q:You mentioned recently that investors can buy new issuesof Treasury securities directly from the government. Does that include zero-couponTreasuries?

A: No. Treasury zeros--regular notes or bonds from which theinterest coupons have been removed--are created by financial institutionswith the Treasury's permission. Individual investors can buy or sell thezeros, known as STRIPS, only through banks, brokers, or dealers.

Because there's no return on the investment until maturity, zeros sellat sizable discounts from face value, but prices fluctuate more widely thanthose of comparable coupon issues. (The Wall Street Journal lists dailyprice changes of Treasury STRIPS.) The gain due to the discount is exemptfrom state and local tax, but a portion of the discount must be reportedas interest income on your federal return each year.

If your IRA beneficiary dies before you do

Q:I've named my sister, who's five years younger than me,the beneficiary of an IRA. My required withdrawals will be based on ourjoint life expectancy. To minimize the distributions, I intend to recalculatemy life expectancy annually, though I can't do that for hers, since she'snot my wife. What will happen if one of us dies after I begin receivingdistributions?

A: If you survive your sister, you can contin- ue to base yourwithdrawals on your joint life expectancy, as though she were still alive.If you die first, she must use only her remaining life expectancy to calculatefuture minimum withdrawals.

If you think your sister is likely to outlive you, you might want toforgo annual recalculation. Then, when she inherits the IRA, she can usethe joint-life basis.

Do some index funds place too many bets?

Q:In a recent column, you mentioned three index funds thattrack the total market rather than just the stocks in Standard & Poor's500 Stock Index. Have any of those funds beaten the S&P in the pastyear or over a longer term?

A: No. In the 12 months ended May 31, 1999, the S&P Index(with dividends) rose about 20 percent, while Fidelity Spartan's Total MarketIndex Fund climbed only 19 percent. The other two funds--T. Rowe Price TotalEquity Market Index and Vanguard Total Stock Market Index--each increased18.4 percent.

Of the three, Vanguard alone has been around long enough to have a three-yearrecord. Its annualized return for that period, 26.7 percent, fell threepercentage points short of the S&P's 29.7 percent.

Screening out deadbeat tenants

Q:I order credit reports on all prospective tenants for rentalproperties I own, and I try to contact their previous landlords before acceptingthem. But too often, I end up having to evict them for nonpayment of rent.How can I get information that will help me sort out the bad apples?

A: Contact one of the companies that specialize in investigatingtenant histories by using databases compiled from court records on evictions,lease violations, bad-check cases, and the like. The cost is about $10 to$20 per query, but there may be a small initial membership fee as well.

The National Association of Screening Agencies recommends charging prospectiverenters a modest "application fee"--say $25--and telling themit's to cover the cost of this service. That may chase away those who havesomething to hide.

You can obtain a list of companies that investigate tenants and get otherdetails by writing to the association at 2020 Pennsylvania Ave. NW, Washington,DC 20006; calling 877-900-6272; or visiting its Web site, www.n-a-s-a.com.

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 ableto answer readers individually.

Estimating your chances of a tax audit

Q: I opened my unincorporated practice at the start of 1998and filed a Schedule C with my annual return. Am I more likely to be auditedthan in previous years, when I was a salaried physician with a medical corporation?

A: Perhaps. Assuming your gross practice receipts for 1998 cameto $100,000 or more, the likelihood of an audit is around 4 percent, basedon IRS figures for the year ended Sept. 26, 1997, covering returns filedin calendar 1996. That's more than three times the percentage of all individualreturns audited for the same year. But geographic location is also a factor.In 1997, for example, over three times as many individual returns were examinedin Los Angeles as in Manhattan.

Nationwide, the number of individual returns audited declined more than20 percent, even though some 2 million more returns were filed.

Lawrence Farber. Money Management. Medical Economics 1999;18:203.

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