Rising home prices could lower loan rates; High turnover and fund returns; If a corporation borrows from its pension plan; Delayed 401(k) deposits can cause trouble; Where to look for small-cap investments; Required withdrawals from an IRA account; Guarding against a will contest; The hidden cost of a no-interest loan; Tax rebates on Canadian goods
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Q: I seem to recall reading in your column last year that a homebuyer could get a lower interest rate on a mortgage loan that doesn't exceed a certain amount. Is my memory correct?
A: Yes. Lenders tend to charge 0.25 to 0.75 of a percentage point less on loans eligible for resale to Fannie Mae or Freddie Mac. Such loans can't exceed the ceiling set annually by those agencies. For 2003, the loan limit was $322,700, but that was raised to $333,700 as of this January. And it may go higher still in some states: Pending congressional legislation would boost the current limit 50 percent, to $500,550, in any state that has at least one metropolitan statistical area in which the average price of houses topped $333,700 in any quarter through Sept. 30. (The higher limit already applies to Alaska and Hawaii.)
Q: I prefer to invest in mutual funds with low expense ratios. But is it true that those ratios may not reflect excessive trading costs that could reduce returns?
A: Yes. Funds don't include transaction fees in operating expenses. Instead, a fund subtracts those costs from its capital gains or adds them to its losses on sales of its holdings. To get a fix on trading costs, look at a fund's annual portfolio turnover percentage. The more transactions a fund has, the more it must spend on them. Excluding index funds, the average stock fund's turnover is 102 percent. Rates for conservatively managed funds can be much lower.
Q: Our corporation needs $150,000 to buy out one of our doctor shareholders. Instead of getting a bank loan to finance the purchase, can we borrow the money from the corporation's pension plan?
A: Not unless the Department of Labor is willing to grant the corporation an exemption to the prohibited transaction rule. This rule bars a loan or extension of credit between a plan and a "party in interest," which includes the corporate employer, its officers, and shareholders who own 10 percent or more of the corporation. The DOL did give such an exemption to a law corporation, and it might do so in your case, assuming that the prospective loan is adequately secured and carries a reasonable rate of interest.
Q: An employee complains about delays in depositing the 401(k) amounts regularly withheld from his salary into his investment account. Don't we have until the 15th of the following month to do this?
A: Not really. Department of Labor rules require that contributions be forwarded to investment accounts as soon as possible, but not later than the 15th business day of the following month. If the DOL audits you and you can't demonstrate that you're forwarding them promptly, you may have to compensate plan participants for investment earnings lost due to the delay. You might also face other penalties for the violation.
Q: I'm ready to put some money into stocks of small companies with high profit potential, even if that means taking increased risks. But how can I locate ones that are good investment prospects?
A: A number of information sources specialize in this field. RedChip Research, for example, offers subscribers descriptive information, financial projections, and investment recommendations on small-caps, and also sells research reports on individual companies. (For a list of current reports and a sample copy, go to www.redchip.com.) And as its name implies, Stocklemon.com issues reports warning against OTC companies with poor outlooks. For links to other relevant sources of data on specific stocks, go to www.dmoz.org and use the search engine to search for "small cap stock research." For reviews and ratings of small-cap mutual funds, visit www.morningstar.com.
Q: Soon I'll have to begin taking minimum distributions from my IRA. Can I reduce the required withdrawals by naming my 30-year-old daughter as beneficiary?
A: No. You must use the IRS Uniform Lifetime Table to figure your annual required minimum distribution (RMD) regardless of your beneficiary's age, unless the beneficiary is a spouse who's more than 10 years younger than you. In that case, the regulations will allow you to take a smaller RMD, based on the Joint Life and Last Survivor Expectancy Table, provided your spouse is the sole beneficiary of your IRA.
The year you turn 75, for example, your RMD from a $100,000 account would be $4,367 under the Uniform Table. With a spouse age 55, the Joint Table would require you to withdraw just $3,289. (You'll find the tables in IRS Publication 590.)
Q: I intend to leave my children substantial legacies, except for one son who has been a great disappointment to me. If I exclude him from my will, would that give him grounds to contest it?
A: It might. For instance, he could claim you weren't mentally competent or that your other children unduly influenced you against him. Instead of disinheriting him completely, consider making a bequest to him that would be forfeited if he puts up a fight. It should, of course, be large enough to give him an incentive not to cause trouble. Such a conditional bequest is legal in most states, but could be held invalid if your will fails to specify who gets your son's legacy if he forfeits it.
Q: I'm short of cash for a down payment on a home I'm planning to buy. If my employer lends me the money at no interest, will this transaction be taxable?
A: Not if the loan amount doesn't top $10,000 and the transaction isn't done mainly to avoid tax. For larger loans, if you're charged less interest than the minimum set by the IRS, the difference is additional compensation taxable to you.
Q: We're taking an extended trip to Canada later this year. Can tourists obtain refunds on Canadian goods and services taxes similar to European value-added taxes?
A: Yes. Several private companies, such as Official Tax Refund (www.officialtaxrefund.com) and National Tax Refund Service (www.nationaltaxrefund.com), will file refund claims for such taxes on your behalf for a fee. And some duty-free shops at border crossings will process applications for refunds up to $500 in Canadian currency without a fee. Or you can submit your claim to the government rebate agency yourself, using a form included in "Tax Refund for Visitors to Canada," an official brochure available at www.ccra-adrc.gc.ca.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to email@example.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management Q&As. Medical Economics Aug. 6, 2004;81:69.