Money Management Q&As

November 5, 2004

Compare your fund to the right index; If you inherit a Health Savings Account; Could this refund be taxed? Figuring contributions to a SIMPLE plan; You can sell Treasuries without a broker; Taking back a home mortgage; How to discuss a premarital agreement; Passports for kids who travel abroad.

Compare your fund to the right indexQ I think it makes sense to judge a mutual fund's performance by how it compares with the behavior of an index. But how can I tell which index is appropriate?

A The SEC requires a fund's prospectus to specify a so-called benchmark index. This could be the S&P 500 for funds that invest mainly in companies with large capitalizations, the Russell 2000 for small-cap funds, or a more specialized index like MSCI EAFE (Morgan Stanley Capital International's index of European, Australasian, and Far Eastern stocks) for international funds. The SEC won't let a fund design its own benchmark index, but it can use any one that's well-known or even combine two indexes if that better reflects its portfolio mix.

While a benchmark index can help you evaluate a fund, you should also compare its returns with those of its competitors.

A The rules for a SIMPLE (Savings Incentive Match Plan for Employees) give you the option of matching each participant's contributions dollar for dollar up to 3 percent of his or her annual salary, or else putting in 2 percent of salary for all eligible employees, including those who don't choose to contribute for themselves. If you opt for the 3 percent annual match, you can reduce that percentage in two out of five years, but not below 1 percent.

Suppose a participant contributes $5,000 in 2004 (the maximum is $9,000). If her salary is $40,000 and you opt for the 3 percent annual match, you'd be required to make a matching contribution of $1,200 for her. If your compensation is $160,000 and you contribute the maximum of $9,000 for yourself, you could then add $4,800 (3 percent of $160,000) to your own account, for a total of $13,800.

Could this refund be taxed?Q My 73-year-old mother recently moved into a residential unit in a continuing care facility, where she receives meals and routine medical care and will get long-term nursing care, if required, at little added cost. She paid $250,000 for the unit, and if she moves out she'll get $125,000 of that amount back. Now one of her neighbors says the arrangement is taxable. Should my mother worry?

A No. In some cases, the IRS considers the refundable amount as a "below market" loan to the care facility, so some residents owe tax on the interest they should have charged. But those 65 or older don't have to pay it if the potential refund is less than the annual exemption-$154,000 for 2004.

Taking back a home mortgageQ I've verified that the buyer of my home has an excellent credit record, and I'm willing to accept a mortgage from him for 80 percent of the purchase price. What steps should I take to minimize my financial risk?

A The contract should give you the right to immediate payment of the mortgage balance in case of resale, which lets you protect yourself if the substitute buyer has dubious credit. It should also impose a penalty to discourage your present buyer from paying off the debt prematurely. The buyer should be required to maintain property insurance adequate to cover your potential loss, as provided for by a "lender's loss payable endorsement" on the policy. Finally, you should subscribe to a service that will notify you if the buyer fails to pay his property taxes, or you can engage a loan servicing company to handle all the administrative work for you.