Q: Would you please do an article on Ginnie Maes (Government National Mortgage Association paper) versus Treasury notes? You may have heard a radio spot that touts Ginnie Maes yielding 12 percent. It sounds too good to be true. I am 68 years old and have most of my savings in Treasury notes, which are not paying much interest now -- and I depend on them for income. I sleep better knowing the U.S. Treasury is keeping my money safe.
A: If you switched some of your money to Ginnie Maes from Treasury notes, you could continue sleeping well, because the Ginnie Maes -- both interest and principal -- are guaranteed by the government.
There are several ways to invest in Ginnie Maes: by direct participation, through shares in a mutual fund or with a unit trust. But there are a couple of disadvantages.
In the first place, the yield is based on an assumption that the underlying mortgage securities will remain in place until maturity -- perhaps 20, 25 or even 30 years. But the average payoff period for residential mortgages historically has been 12 years, and lately -- with a lot of people refinancing their high-rate mortgages of a few years ago -- the average term has been even less, perhaps as low as seven or eight years.
Secondly, because these are mortgage investments, payment each month contains some principal as well as interest, so that the interest is paid on a regularly decreasing principal amount. Therefore, you must find an alternative investment for the principal as it is returned to you.
In a fund, you can arrange to have the principal amount reinvested, with only the interest coming to you each month; unit trusts offer somewhat the same arrangement, with the principal amount going into a companion mutual fund that, in turn, invests in more Ginnie Mae mortgages.
But this reinvested money won't bring the same yield as was quoted on the original investment. This is not necessarily bad -- the later yield actually may be higher if mortgage rates have gone up since your original purchase. But you can't be sure.
The bottom line is that you can buy Ginnie Mae mortgages in several different ways, each of which is about as safe as Treasury paper, and which will pay about a point and a half or two points more than Treasury notes. I like Ginnie Maes, particularly unit trusts, and particularly for retirees looking for steady income -- as long as you understand how the investment works.
Q: I have 200 shares of stock for which I paid $5.50 a share in January 1975. The company filed for Chapter 11 about four years ago, but it still is listed on the Pacific Exchange at less than 10 cents a share. Can I declare this as worthless for a long-term loss on my 1985 tax return? Or do I have to sell the stock before I declare a loss? (If I sell, I would have to pay at least a $34 commission.)
A: Unless the company goes completely down the tubes, you must sell the shares to a disinterested party in order to declare the loss on your tax return. If you have an account with a broker, he may be willing to buy the shares from you, at 10 cents a share, as an accommodation to permit you to claim the tax loss.
Otherwise, you have to wait until the company goes out of business to take the loss. As long as the stock is listed with some value, you only have a paper loss, which is not recognized for tax purposes, until you make a bona fide sale of the shares.
Q: I would appreciate your views on whether a person born during the first half of the year can contribute to an IRA during the year he or she reaches age 70 1/2.
A: Now here's a precise question with a precise -- and short -- answer. You may not take a deduction on your tax return for any payment to an IRA during or after the tax year in which you reach age 70 1/2.
So if you were born during the period from January to June, and therefore will reach the age ceiling sometime between July and December -- no IRA deduction. Quite clearly, however, if you were born during the second half of the year and will not reach 70 1/2 until sometime in the following year, an IRA deduction is okay for the current year.