Money Management

If pension plan assets remain after termination

Q I want to stop contributing to my retirement plan and terminate it this year, but some plan funds are invested in certificates of deposit that won't mature until next year. Cashing them in ahead of time would result in a bank penalty. Will the regulations allow me to hold those CDs until maturity?

A Possibly. The IRS has ruled that after a plan's termination, its assets must be distributed as soon as "administratively feasible." A plan generally will meet that standard if it completes distribution within a year of the termination date. Otherwise, the plan will be considered ongoing.

If some assets remain outstanding at the end of 2002, you'll have to file a return for both this year and 2003.

What to do with gift checks for a toddler

QA relative sent my 1-year-old a check made out to her. My daughter can't say her name, much less sign it, so how can I deposit this check?

A As the child's guardian, you can endorse the check and deposit it in your own account or in a savings account in her name. Another option is to set up a custodial account under your state's Uniform Transfers to Minors Act. That way, you can use or invest the funds for your child's benefit until she comes of age—usually at 18 or 21—and the earnings on them will be taxed at her rate rather than yours. (Until your daughter turns 14, however, if her annual investment earnings exceed the "kiddie tax" floor—currently $1,500—the excess may be taxed at your rate.)

Don't put taxes first in buying long-term care insurance

QI've read that long-term care insurance may be either tax-qualified or nonqualified. Why should I consider a nonqualified policy?

A A nonqualified policy's benefits aren't taxable, nor are they subject to IRS-imposed caps or limitations. In contrast, a portion of a tax-qualified policy's benefits may be taxable if they don't comply with certain restrictions. You can't deduct part of a nonqualified policy's premium on your tax return, but that may not be much of a drawback: Unless your total unreimbursed medical expenses exceed 7.5 percent of your gross income, you can't claim part of a qualified policy's premium, either.

In choosing a long-term care policy, however, you should weigh other key features aside from taxes. For guidance, see "When and how to purchase long-term care insurance," Money Management, March 5, 2001.

Funding two savings plans for a college student

QNow that the annual gift tax exclusion has been raised to $11,000 per recipient, my wife and I each intend to contribute that amount to a state-sponsored college savings plan for our son. Can we also contribute $2,000 apiece to a Coverdell education savings account for him?

A No. You can now contribute to both types of plan for a student in the same year, thanks to the tax law passed in 2001, but total contributions to a Coverdell account (formerly called an education IRA) are limited to $2,000 annually per student. That's true even if more than one person sets up a Coverdell for the child.

Also keep in mind that any Coverdell contribution you make will put you over the annual gift tax exclusion limit. You won't owe tax, but your lifetime gift tax exemption ($1 million per donor, under the new law) will decrease accordingly.

Watch out for escapees from a stock lock-up

QA news release mentioned a "lock-up agreement" in connection with a new company's stock offering. What's the significance of that?

A Sometimes an investment firm or its employees acquire discounted shares in a start-up company before its initial public offering. Generally, a "lock-up" agreement bars such insiders from selling their shares for a set period—often 180 days after trading begins. It's important for a potential IPO investor to know whether a lock-up agreement is in effect and, if so, when it expires. That's because a stock's price may be affected by the prospect of the shares being sold into the market when the lock-up ends.

To find out about a possible lock-up agreement, check the "Underwriting" or "Plan of Distri- bution" sections of the IPO prospectus, or contact the SEC (202-942-8090, or send an e-mail message to publicinfo@sec.gov). You can also check lock-up expiration dates for free at commercial Web sites like www.ipomarketwatch.com .

Beware hidden costs of "no-cost" loans

QI like the idea of refinancing my home mortgage without paying appraisal fees, title insurance premiums, and other settlement charges. But I read somewhere that borrowers often lose money on such "no-cost" loans. How so?

A The lender pays the settlement costs in return for a higher interest rate. Within a few years, the extra interest can wipe out the borrower's initial savings.

Moreover, lenders typically calculate the higher rate based on the assumption that they'll rebate a certain number of points (called "negative" points) to cover the buyer's costs. For example, a lender who normally charges one point to make a loan at 7 percent may be willing to rebate two points to the borrower in return for a 7.5 percent loan. But the borrower loses money if the lender fails to rebate the entire amount.

Suppose you want to borrow $200,000, and your settlement costs would be $3,000. Two points on $200,000 comes to $4,000, or $1,000 more than your costs. But the mortgage broker or lender may never mention negative points or rebates; he may simply make the no-cost loan at 7.5 percent and keep the extra $1,000.

You can find current information on negative-point loan offerings on the Web at sites like www.iown.com.

Why some municipal bonds may lose their tax exemption

QI want to invest some money in municipal bonds. Since the new tax law raises the alternative minimum tax exemption, my broker suggests that I go for some munis that are subject to the AMT, because of their higher yield. What do you think?

A That could prove a costly mistake. The AMT exemption increase is relatively small (from $45,000 to $49,000 on a joint return) and will expire after 2004. Meanwhile, other provisions of the new law will likely double your chances of exposure to AMT in coming years. The odds are already more than one in six, if your adjusted gross income tops $200,000.

Once you're hit by the AMT, you may owe as much as 28 percent tax on interest from so-called private-activity bonds, such as those financing many housing and industrial projects. That's often more than enough to offset the extra yield such bonds offer, which is generally 0.2 percent at most. Before you give in to temptation, talk to your accountant.

Pricing your home if you sell to a relative

QWe're moving to a new home, and a close relative wants to buy our present one, provided we take back a first mortgage. How can we figure a fair price without involving a real estate broker?

A You can get a line on recent sales prices of comparable properties in your area by checking the records at the county recorder's office or the local agency for tax assessment. Another possibility is to ask the customer service department of a local title insurance company to research those sales prices for you; the company may do so with the expectation that you'll buy a title policy. But you'll get the most definitive price estimate by paying a few hundred dollars for an independent appraisal.

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

2002;15:109.