QUESTION: I have $10,000 in two four-year certificates of deposit paying seven percent interest. Would it be worthwhile to cash these in (losing some interest because of the penalty for early withdrawal) and then obtain a new CD paying 11 or 12 percent?
ANSWER: The answer depends really on when you bought your present CDs. A balance sheet has to be drawn up for each particular situation.
You have to calculate how much interest you would lose by early redemption. Next, figure out how much more than seven percent you would earn on the new investment between now and the maturity date of the old CDs. Then compare the two amounts to see if you come out ahead by converting.
But this is really a simplistic answer. For a sophisticated investor the question is more complex, involving the anticipated movement of interest rates between now and the original maturity date -- which in turn determines whether you want to stay with short-term investments for a while or lock up your funds for the long term now.
As I write this, six-month CDs at savings institutions are yielding more than 12 percent (annual rate). Six-month unit trusts can be bought to pay about 13.7 percent. Long-term corporate bonds of good quality return between 11 and 12 percent, and unit trusts about 11.25 percent.
Incidentally, check with your savings institution on the amount of the penalty before you make your calculations. On four-year CDs issued a while ago, the issuer has the option of using either of two methods for figuring the penalty on early redemption: Loss of three months interest and reversion of the passbook rate for the rest of the expired period; or simply loss of six months interest with no rate change.
Q: When my mother died recently, in her will she left everything to the children, to be divided equally. (My children, to be divided equally. (My father died several years ago.) As a matter of convenience since all of us children lived some distance away, she had named a close neighbor as joint owner of her savings account. Now the bank refuses to pay the money in the account to the estate, saying it belongs to the neighbor. Can they do that?
A: Yes, I'm afraid they can do that. With certain exceptions, property held in joint ownership with right of survivorship (the normal method for savings accounts) goes to the surviving owner(s) after the death of one of them. The property cannot be disposed of by will.
Joint ownership can simplify settlement of an estate and may reduce probate costs. But -- as you are finding out -- there are disadvantages too. The ramifications of joint ownership should be explored with your attorney when you are in the process of preparing your will.
Q: My husband and I are working on an amicable separation and divorce. We're a little confused by the tax implications of child support versus alimony. Can you explain, please?
A: Sure. The basic rules are fairly simple. Qualified alimony payments are reported as income by the spouse who receives them; and are deducted from income (as an adjustment) by the payer.
Child support, on the other hand is neither taxable income to the recipient nor deductible to the spouse making the payments.
But there are other implications that may affect your decision on which way to go. Child support payments generally end when the child reaches a specified age. In addition, the amount of the payments may determine who gets to claim the child as a tax-return dependent.
Alimony must be in the form of long-term periodic payments, not a lump sum, to quality for the tax treatment outlined above. However, payments can be arranged to end if the recipient remarries. And the amount can change in the event of specified contingencies (such as retirement of the payer).
Aside from alimony and child support, divorce or separation also affects other aspects of your tax liability. A good reference is IRS publication 504, "Tax Information for Divorced or Separated Individuals." This helpful booklet is available free at most IRS offices.