Question:
My wife and I are retired, debt free and receive a modest pension. We have a healthy portfolio in equity funds. We also have $400,000 in cash, which represents our 10-year liquidity requirements. We also have $50,000 in I-Bonds, yielding 2.6%, and $350,000 in FDIC money markets at 1.06%. I agree with Dr. Gene when he said, “I can’t think of a worse time to buy bonds than right now.” So, is there any better use for our stash of cash?
Answer:
When we look for bonds, we want to achieve about 5% after tax effective yield. Fortunately, we are finding a few in the municipal bond market in triple-A rated states. Sometimes we are able to go a little longer, and find general obligation bonds at 7% in maturities beyond 10 years. We would not go much further than 10 years, as interest rates will rise. While you could hold 20-year bonds to maturity, the bond will decrease in value as interest rates rise. Therefore, if you had to sell it before maturity, you will likely lose some principle.
If you are unable to find municipal bonds, we suggest considering six-month, nine-month and up to two-year CDs rather than a money market. Once those CDs mature, interest rates will likely be higher, and you’ll be able to buy higher yielding bonds.
Question:
Can I deduct interest paid on a margin account that was not deducted during previous tax years?
Our Answer:
You can deduct margin interest against investment income in the same year. You cannot move it forward or backward. We suggest you file an amended return; however, it only makes sense to amend if the benefits outweighs the cost of amending the return. Margin interest expense is not automatically deducted as investment interest expense. It depends on what you did with the money.
- If you borrowed funds to make additional stock purchases or to make other investments that qualify as investment expenses, then the interest is an investment interest expense.
- If you borrowed money to buy or build a house, then it is mortgage interest and subject to the mortgage interest rules.
- If you borrowed money to buy a car for personal use, it is not deductible.
Question
I am 60 and have done fairly well in rebuilding my 401K funds after the crash. My company does not do any matching in my 401K, and I am tied to a specific list of funds. A friend is suggesting I roll my funds out of my company 401K and into a personal tax-deferred stock account. Then take half and put it into a TransAmerica Variable Annuity with an earnings floor of 5%. He says I can also use the earnings from this fund to purchase long-term care insurance. The big selling point is the guaranteed income part. However, I remember hearing from multiple sources how variable annuities are not a good idea, even if inside an IRA. Has anything changed?
Answer:
No, nothing has changed. An annuity is tax-deferred as is an IRA. You do not get any double tax deferral. We find that most people, including many insurance brokers, do not understand the complexity of annuities. The guaranteed income of 5% is not interest. The company is paying you back your principal investment. The insurance company is betting that you do not outlive your life expectancy. If you try to move your money from the annuity, your cash value depletes faster than your think. Annuities, generally, come with a fair amount of fees.
If you wanted to, you could take in-service withdrawals from your 401(k) to build a stock or bond portfolio of your own design.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
