Money Management Q&As

June 3, 2005

Roth real estate; munis; one mutual fund; home sale

Buying real estate for a Roth IRAQ: I intend to convert a traditional IRA into a Roth account, then use the funds to buy real estate. Can I do this?

A: Yes, but most financial institutions limit IRA investments to securities and similar holdings, so you'll have to find a qualified IRA custodian who'll go along. Title to the property must be in the custodian's name, not yours, and the custodian must manage it or hire a service company to do so. Ask a real estate broker for recommendations or search the Web under "real estate IRA" or "self-directed IRA."

The IRS won't let you use IRA money to buy property owned by you, your spouse, or close relatives, and you can't occupy it for personal or business purposes. If expenses on the property exceed the income from it, the difference must come from the IRA. You can't make up the shortfall from your other assets. If there's not enough left in the IRA to do this, you'll have to exchange the property for cash by selling it to a nonfamily member. Or you could withdraw it from the account and include its value in your taxable income.

A: Only nine states exempt interest income from issues originating outside their borders-Alaska, Florida, Indiana, Nevada, South Dakota, Texas, Utah, Washington, and Wyoming, as well as the District of Columbia. (Note that Florida's annual intangible personal property tax based on current market value does apply to out-of-state municipals.) There are 15 others that don't tax the interest on bonds issued by the US possessions of American Samoa, Guam, Puerto Rico, and the Virgin Islands. To check where your state stands, go to http://www.investinginbonds.com/statetaxes.htm.

Preserving tax breaks for your estateQ: I plan to leave my entire estate in trust for my wife, but I want my mother to receive 20 percent of the annual income during her lifetime. Since my wife will inherit all the trust assets, won't the marital deduction shield the estate from tax?

A: No. For the trust to qualify, your wife must be its only beneficiary. Even though your wife would end up with the bulk of the trust income and all of the principal, your estate couldn't claim any marital deduction under the arrangement you propose. However, the estate tax credit will still apply.

By naming your mother the income beneficiary of a separate trust, you could combine the credit and the marital deduction to achieve your objectives with no tax cost. If you die in 2005, the credit will cover as much as $1.5 million in your mother's trust. And your will can raise that to $2 million should you live until next year. It can also authorize the trustee to use part of the trust income or assets for your wife's benefit, if necessary, while your mother is alive.

Save on car insurance if you rent abroadQ: When I rent a car in the US, I never pay for a collision damage waiver (CDW), since I know my credit card insurance will cover me. But can I count on it for a rental in a foreign country?