Money Management

Differences between two types of index mutual funds

Q I'm thinking of putting some money into index mutual funds in order to diversify, but a friend suggests that I consider exchange-traded index funds instead, because they give an investor a shot at getting a better price when buying or selling. What are the other advantages or drawbacks of ETFs?

A Mutual fund share prices are fixed at the closing values of the stocks held by the fund, while ETF prices normally reflect each day's market fluctuations. In volatile markets, ETF shares may trade at premiums or discounts from net asset value. For long-term investors, the price differences between mutual funds and ETFs aren't apt to be significant. Still, you can use limit orders to set the price you're willing to pay (or take) for ETF shares; with mutual funds, you're stuck with the closing value on any given day. Another minor plus for ETFs, if you're inclined to gamble, is that you can buy them on margin and sell them short.

Some other considerations: ETF sponsors tend to charge lower management fees than mutual fund sponsors, but this advantage may be more than offset by brokers' commissions, particularly when you intend to make periodic investments. ETFs figure to be somewhat more tax efficient than mutual funds, since they don't have to sell stock to raise cash for redemptions. (As the name implies, you must sell ETF shares on the open market, rather than redeem them from the issuer.) However, both types of funds occasionally have to sell some of their holdings in order to mirror the index they're tracking. You might do best to confine yourself to ETFs concentrating on market sectors that aren't covered by suitable mutual funds.

What liability insurance does a landlord need?

Q I'm buying a four-unit apartment building, and the seller suggests that I take over his fire insurance policy, which includes liability coverage if a tenant is injured. Is this sufficient protection?

A That depends. An actual or prospective tenant might sue you for discrimination, unlawful eviction, invasion of privacy, or property loss due to your negligence, among other things. If the seller's policy contains a comprehensive liability clause, it may bind the insurer to defend you against such claims.

Find out from the insurance company exactly where you'd stand. Also look into adding "loss of rents" coverage to compensate you if a casualty makes a unit temporarily uninhabitable.

How to file after a shortfall in pension contributions

Q After filing my tax return for last year, I discovered that my contributions to the practice's pension plan for calendar 2000 totaled less than the law required. Now that I've made up the shortfall, can I file an amended return for 2000 to claim an additional deduction?

A Not unless you contributed the makeup money by the due date of your tax return, including extensions. If you missed the deadline, the extra contribution isn't deductible for 2000. However, it still counts for the 2000 plan year. That's because the deadline for contributions is eight and a half months after the end of the plan year—Sept. 15, 2001, in your case.

Saving estate tax via a Roth conversion

QCould I save estate tax for my heirs by converting a traditional IRA into a Roth account?

A Indirectly. When you die, the fair market value of the assets in either type of IRA will be included in your estate. However, if you convert to a Roth IRA, you'll pay income tax on the amount transferred. That payment will reduce the size of your estate, so the tax will be smaller at your death.

Edited by Lawrence Farber,
Contributing Writer

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 able to answer readers individually.

Lawrence Farber. Money Management.

Medical Economics

2001;16:104.