Playing catch-up with two retirement plans; What mutual fund expense ratios signify; How a reverse mortgage can be modified; When a joint owner pays in kind
Q: You wrote recently that participants in 401(k) and other salary-deferral plans who are at least 50 years old can set aside an additional amount above the regular limit applicable to younger employees. Is there a similar "catch-up" provision for IRA participants?
A: Yes, although it's less generous than the $2,000 catch-up amount for 401(k) plans. The regular 2003 contribution limit for a traditional or Roth IRA is $3,000, but if you meet the age requirement, you can put in an extra $500, for a total of $3,500. If you have both a 401(k) and an IRA, you can make a catch-up contribution to each plan. If you have more than one IRA, you may split the $500 catch-up between them.
Q: Your Nov. 22, 2002 article about exchange-traded funds mentioned that they have much lower expense ratios than other mutual funds, on average. What expenses go into the ratios for mutual funds, and how are the ratios calculated?
A: The expenses consist of the managers' and advisers' compensation; administrative and operating costs; and advertising and marketing outlays (known as 12b-1 fees). To get the expense ratio, funds tally those costs and divide by the total value of the fund's assets.
Note that the ratio doesn't reflect trading costs or the sales commissions and taxes shareholders pay. The ratio tends to rise if a fund performs poorly, because its asset value declines and redemptions increase, so fewer investors remain to bear the expense burden. Current information on funds' expense ratios appears regularly on the Web sites of monitoring services like Morningstar ( www.morningstar.com).
Q: My parents think they can benefit from a reverse home mortgage that pays them a fixed monthly amount, but what if their financial situation changes after they've taken it out?
A: If the mortgage is one of the major typesa Fannie Mae Home Keeper or a HUD-insured Home Equity Conversion Mortgage (HECM)your parents can reduce or terminate the loan any time without penalty, or they can alter the payment arrangements. For example, they can suspend the receipt of payments for a period, vary their size, or opt for a line of credit on which they can draw when desired. Any fees charged for interim changes can be added to the outstanding loan balance, so your parents needn't pay them.
Q: I'm recently widowed, and my daughter has invited me to live with her. I'd rent out my current home, rather than sell it. If I share ownership of my house with my daughter in exchange for her kindness, will that create an estate tax problem when I die?
A: No. Normally your estate would include the full value of jointly owned property, unless the survivor is your spouse or can prove he or she paid part of its cost. But the Tax Court recently ruled that an offer of lifetime residence, such as your daughter has made you, constitutes payment (the legal term is "consideration") for her ownership share. You and your daughter should agree in writing on a reasonable value for her offer. If the figure equals at least half of what your house is worth now, only the value of your share at the time of your death will be part of your estate.
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 firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management Q&As. Medical Economics Sep. 19, 2003;80:86.