Take care how you dip into an IRA account; The limits on tax-free gifts; Extend the warranty on a high-priced car? Profiting from closed-end funds
Q:I'm in a temporary financial bind, but I don't want to cash in my $50,000 certificate of deposit to get out of it. Can I borrow $10,000 from my IRA and repay the loan in 45 days, when the CD matures?
A: A loan from an IRA is a taxable distribution, so you can't "borrow" the money as you might with a non-IRA account and pay the bank a small interest charge instead of an early-withdrawal penalty. But if you withdraw the money outright and redeposit it in the same IRA within 60 days, the two transactions will be treated as a tax-free rollover.
Q: I'm a widower and am planning to start giving several family members annual gifts. How will this affect my lifetime gift-tax exemption?
A: In 2003, you can give $11,000 apiece to as many individuals as you like without lowering your $1 million lifetime exemption. If you give anyone more than the $11,000 annual exclusion amount, the excess will reduce the lifetime exemption.
Since the annual exclusion is inflation-indexed, it will increase in future years, but the lifetime exemption will not. After that's used up, you'll owe tax on amounts that exceed the annual exclusion in the year you make the gifts. One more point to bear in mind: A gift with strings attached doesn't qualify for the annual exclusion, so its value decreases your lifetime exemption.
Q: I'm buying an expensive new car, and the dealer is pushing me to pay for an extended warranty. I've heard conflicting opinions about such warranties. How can I judge whether the coverage is worth the price?
A: First, make sure it includes costly high-tech components like antilock brakes and covers both mechanical breakdowns and wear and tear. Second, the warranty should allow you to go to any shop certified by the National Institute for Automotive Service Excellence (ASE) for repair work, not just the dealership.
Be aware that the coverage isn't an extension of the factory warranty; it's generally a third-party contract that the dealer buys from an insurance company and sells to you at a generous markup. You don't have to buy it from the dealer if you can obtain adequate and more economical coverage elsewhere. Check for quotes online. Make certain that the contract is backed by a financially sound insurer rated A or better by A.M. Best.
Q: How do closed-end funds differ from ordinary mutual funds?
A: Unlike mutual funds, closed-ends don't redeem their shares on request. They sell a fixed number of shares at one time (in an initial public offering), then those shares trade on an exchange like stocks. Their price is determined by the market and may be greater or less than the net asset value (NAV) of their holdings at any given time.
Investors who buy at a discount from NAV stand to profit not only if the fund's portfolio goes up in value, but also if the discount narrows because the market reacts to the rise. Suppose a fund's NAV is $10 a share and you pay $9 for it, a 10 percent discount. If the NAV rises 10 percent to $11, the discount might narrow to 5 percent, so the share price will be $10.45 (95 percent of $11). Your gain per $9 share would then be $1.45, or 16 percent.
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 Aug. 22, 2003;80:79.