How to safeguard heirs against a plunging stock market, Ways to deal with the cost of a Roth IRA conversion, What ARM interest caps can--and can't--do for you, Buying a stock when it's on the way up
|Jump to:||Choose article section...How to safeguard heirs against a plunging stock market Ways to deal with the cost of a Roth IRA conversion What ARM interest caps canand can'tdo for you Buying a stock when it's on the way up|
Q Watching the stock market bounce steeply up and down, I worry that my heirs could be taxed on a portfolio value that evaporates shortly after they inherit. How can I protect them?
A Actually, the estate tax law provides some built-in protection against a sudden market slump. Currently, tax is based on the fair market value of the estate's assets on the date of death. But your executor can opt to value the entire estate as of six months after you die, provided this will lower its size and reduce the tax due. However, any assets sold or otherwise disposed of before the alternative date must be valued as of the date of disposition.
Estate tax returns must be filed within nine months of death, but a six-month extension is available. So the executor has 15 months to decide which option to choose.
QI have $80,000 in a traditional IRA that I'd like to convert to a Roth account. I'll owe around $25,000 in tax on the withdrawal. I don't want to reduce the tax-sheltered balance to $55,000 by paying this from the IRA fund, but I haven't enough outside savings to cover it. Can I borrow the tax money?
A No law prevents it, but keep in mind that the interest on most loans is treated as personal and therefore nondeductible. If you can borrow against your home equity, you can deduct the interest on that loan regardless of what you use the money for. But if you're reluctant or unable to raise your mortgage debt, consider converting only part of your IRA stake this year and the rest in 2002. That might reduce the tax you'd owe for 2001 to a more manageable figure.
Q I know adjustable rate mortgages come with caps that limit future payment increases. Can you describe how they work?
A Almost all ARMs have an overall cap limiting the total interest rate increase for the life of the loan. Many also cap the size of the increase from one adjustment period to the next, but the lender remains entitled to any interest the cap prevents him from charging currently. He may later recoup the excess by keeping your payments high despite a decline in the interest rate index the ARM is tied to. Or the uncollected interest may be added to your loan balancea procedure called "negative amortization." You'll then owe interest on the interest.
In a nutshell, an ARM cap allows you to defer interest or spread the burden over the term of the loan. This may ease your immediate cash flow problems, but eventually you must repay your debt in full.
Q The article on online stock trading in your Dec. 18, 2000, issue recommended the use of limit orders to fix the amount at which you're willing to buy or sell. How do they differ from stop-limit orders?
A Assume a stock you find attractive has shot up to 40. You think the stock is due for a temporary dip to around 30. A simple limit order at 30 guarantees you'll pay that or less. But suppose you don't want the stock if it keeps on dropping. To protect against that, you can place a stop-limit order instructing the broker to buy the stock at 30, but only after it first falls to 27, say. If it sinks to that price, the broker will then put in a limit order to buy at no more than 30. Sure, you might have gotten the stock for 27, but the stop-limit maneuver gives you some assurance that you'll be buying on the upswing or not at all. In a volatile market, that may well be worth three points.
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 email@example.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management. Medical Economics 2001;18:102.