Question: I've recently read some articles about zero-interest coupon bonds. Many of the articles claim they do not make good investments of any kind. I would like to invest in one as an Individual Retirement Account--I like the idea of knowing exactly what I will have in 10 or 20 years. Would you recommend zeros as IRA investments? Additionally, I don't understand why a company would offer such bonds. What is the advantage?
Answer: Yes, I think zero-coupon bonds make a good vehicle for an IRA, particularly if you think interest rates will remain fairly stable (or go down) during the coming years.
As you wrote, with a zero-coupon bond you know just how much money will be in your IRA account at maturity. It locks in the rate of return for the life of the bond, and eliminates the need to worry about where to invest the interest proceeds, since in effect the interest is simply retained and compounded.
You should avoid a municipal zero, however, and go for a corporate zero instead, since you don't incur any current tax liability on an IRA anyway. And check out any call provisions before buying; if interest rates drop, you may suddenly find yourself having to look for a new investment.
What's in it for the issuing corporation? Mainly an improvement in cash flow: The company gets to deduct an annual interest expense on its tax return without actually paying out any cash to the bondholders until the bonds mature at the end of the term.
Q: Referring to your column of Aug. 8, I believe you are saying that IRAs are open to both employers and employes, but Keoghs are open only to self-employed persons. Thus, as an independent contractor who already has invested $2,000 in a Keogh, I can also invest $2,000 in an IRA. The question of eligibility in both plans has been the subject of much discussion among my friends so your assistance would be very helpful.
A: There isn't much I need to add to what you've already said. Let me just confirm that you are eligible for both Keogh and IRA investments this year, as long as the total of both does not exceed your net earnings for the year.
Q: The total amount in my Keogh plan at a local bank will soon be over $100,000. I understand that MSSIC (Maryland State Savings Insurance Corp.) insures only $100,000. Is it all right to freeze that Keogh plan and start a new Keogh account with another bank in order to safeguard my savings?
A: Not only is it all right, I strongly recommend it. The limit on government insurance of personal accounts at banks and S&Ls by federal agencies as well as the Maryland agency is that same $100,000. So you should certainly open a new Keogh account at another savings institution. (There is no limit on the number of different accounts you may have.)
In fact, you really should transfer a part of the money now in the Maryland S&L to your new account to provide room within the $100,000 ceiling for future interest growth. You can "freeze" your present account by not making additional deposits, but that won't stop the addition and compounding of interest on the money already there.
Q: When we were younger, our parents availed themselves of the $3,000 gift allowance to give us tax-free money (on which they had already paid income tax.) Times and situations have changed. Are we children now permitted to give our parents tax-free money out of our taxable income, thus providing them a more comfortable living without increasing their tax burden?
A: Yes. The same opportunity is still provided to make annual gifts of after-tax dollars without imposing any tax burden on the recipients--your parents in this case.
Only difference: With a nod in the direction of the great devil inflation, the annual limit before running into gift tax implications has been raised from $3,000 to $10,000. And if both husband and wife concur in a joint gift, the ceiling per year per donee is a solid $20,000.