If you got in on the first rush for tax-free All-Savers certificates last year, they're maturing right about now. Your savings institution may or may not notify you in advance of the maturity date.
In any case you should decide what to do with the proceeds. If you have already deposited enough money to reach the lifetime ceiling ($1,000 for an individual, $2,000 for a couple filing a joint return), you must find another haven.
If you haven't yet earned the maximum, you can roll over all or part of the proceeds into a new All-Savers certificate. But should you?
At this writing the yield on All-Savers is down under 9 percent. If you're still looking for a tax-exempt return, good quality municipal bonds are paying 11 percent or better, as are tax-free unit trusts.
Whether you go this route or another, do something. Don't let the money from your maturing certificate -- which has been earning better than 12 percent tax-free -- slip back to a 5 1/4 percent passbook account by default.
Question: I own shares in a tax-exempt mutual fund, with dividends free of federal income tax. However, they are subject to Virginia tax (my home state) -- except for a percentage of the fund invested in Virginia securities. In the latest quarterly statement the fund shows 2.2 percent of assets invested in Virginia, but this may change from quarter to quarter. What's the best way to determine the exclusion to use for the entire year?
Answer: Although the portfolios of bond funds are not particularly volatile, they can change on a daily basis, not just quarterly.
The amounts involved are quite small, and there is no practical way for you to keep track of a changing portfolio. I suggest you use the distribution given with the year-end statement to determine the percent of the entire year's dividends to exclude on your Virginia return.
Q: In January I deposited the maximum allowable amount into a money market fund for my IRA. Now I would like to transfer a part of this amount into another mutual fund where I like the aggressive growth potential. Must I first withdraw the funds from the money market fund? Or can I start a new IRA, then later (perhaps in 60 days) withdraw the corresponding amount from the old account?
A: You can do it either way -- but the second method presents some unnecessarily complicated bookkeeping.
The new deposit would be an excess contribution; you have until the date for filing your 1982 tax return to withdraw any overpayment without penalty.
The catch is that at that time you must also withdraw all interest earned by the overpayment; and that interest must be reported as income on your tax return.
Let's say you open the new IRA account on Nov. 1; then on Dec. 15 you withdraw the equivalent amount from the money market fund. You must also determine how much interest that amount earned from Nov. 1 to Dec. 15, and withdraw that sum also -- and it would be taxable income for 1982.
There really is no advantage to delaying the withdrawal in your case. If you're concerned about losing earnings during the mail transit time, you may be able to authorize a direct transfer of funds from the old fund sponsor to the new one.
You gave no clue to your reason for this "backward" transfer. There may be advantages I don't see, but the only time a delayed transfer might make sense is if your reading of market conditions impels you to get into the growth fund fast, and your old IRA is in a CD that doesn't mature for a little while.
You could then deposit fresh money into the new account now, and avoid the bank penalty on early withdrawal by waiting until the certificate matures to draw those funds. But of course the same bookkeeping problem must be faced in any case.