Q. Could you please write about Series EE U.S. Savings Bonds? I'm a 64-year-old widow with some savings in a money market account. My late husband purchased 14 EE bonds a couple of years ago when interest rates were very high. Should I leave them alone, or cash them and put the money in my money market savings account?
A. You're actually getting a better return right now on the EE bonds than on the money market account. All bonds purchased since Nov. 1, 1982, (when EEs replaced the old Series E bonds) earn money market rates if held for at least five years.
The rate is changed every six months, and is based on the yield on five-year Treasury obligations. The current rate -- for the period May 1 to Oct. 31, 1985 -- is 9.49 percent; the accumulated rate for the three years from Nov. 1, 1982, to Oct. 31, 1985, is 9.92 percent. That compares pretty favorably with the 7 to 7 1/2 percent interest now being paid by most money market accounts. In addition, the interest on EE bonds is exempt from state income tax; it is subject to federal tax, but that liability may be deferred if you wish.
The problem is that you can't draw the interest periodically; it must accumulate and is not available to you until you cash the bond. If you don't need the income from that capital for living expenses, then I suggest you leave the bonds alone because they are yielding more than you can get in a money market account.
But if you need the interest income, then you should move the money to your money market account or consider turning the EE bonds in for HH bonds, which yield 7.5 percent per year, payable in cash semi-annually. Q Must the annual increase in value of a zero-coupon tax-exempt bond be included when calculating the liability for federal income tax on Social Security payments? A Yes. When you add up the items that make up modified adjusted gross income to determine if you exceed the threshold amount for tax liability on Social Security benefits, "tax-exempt interest" includes both interest received and the annual accrual on a zero-coupon municipal bond.
Q. My wife is self-employed, but before this year she was a salaried employe. She had been contributing to an IRA, but stopped this year and began a Keogh plan. Is she eligible to have both an IRA and a Keogh? Is it legal to make contributions to both?
A. The answer to both questions is yes. Your wife is eligible to have both a Keogh plan and an IRA, and may make contributions to both in the same year, based on the same earnings. Her contribution to the IRA is limited to $2,000 a year, and her contribution to the Keogh plan is effectively restricted to 20 percent of her net earnings from self-employment. The only other limitation is that the combined total of contributions to both retirement plans may not exceed her total net earnings for the year.
Q. Forgive my ignorance in asking a question about something everybody else seems to know about: How do you find out what tax bracket you're in? Bankers, brokers and investors keep talking about how important this is in investing, but no one explains it.
A. You're not showing any ignorance; instead, you're showing how smart you are by asking about something you don't understand. Let me say first that we really mean "marginal tax bracket" when we use the term "tax bracket."
That is, the number does not refer to the percentage of your income that goes to Uncle Sam for taxes. Instead, it means the rate at which the next dollar of income would be taxed or the rate at which you would save taxes on the first dollar you eliminated from taxable income.
Take out your 1984 tax return and find your "taxable income" -- line 37 on Form 1040, line 19 on 1040A or line 7 of the 1040EZ. Then in the instruction booklet for Form 1040, go to the tax schedule (X, Y or Z) for your filing status. On that schedule, find your taxable income; read across that line to the third column, where you will find a dollar value plus a percent figure. That percentage is your marginal tax bracket.