"Your Balance Sheet" column in yesterday's Business section incorrectly stated the minimum yield of EE U.S. savings bonds. EE bonds purchased between November 1982 and November 1986 carry a guaranteed minimum yield of 7.5 percent. (Published 6/23/87)
Q I don't understand how United States EE Savings Bonds can double in five years when the interest rate is not fixed. I would appreciate an explanation in your column. A Explanation: They don't. EE bonds bought since Nov. 1, 1986, carry a guaranteed minimum rate of 6 percent, which means they will double to face value in 12 years -- or less. The "or less" results from the fact that the rate may be greater than that guaranteed minimum, since the actual interest rate will be a market rate equal to 85 percent of the average yield on five-year Treasury obligations.
If the market rate turns out to be greater than the 6 percent guarantee, your investment will double in less than 12 years; or -- put another way -- if you hold the bond for the full 12-year term, you will get back more than the maturity or face value.
But the rate of return won't be less than the 6 percent guaranteed when you bought the bond, regardless of what happens to market rates (unless you redeem the bond early).
EE bonds purchased between July 1980 (when the variable market rate bond first became available) and November 1986 (when the rate changed) carry a guaranteed minimum yield of 7.5 percent and a nominal maturity period of 10 years.
You may have confused the maturity period with the five-year holding period. Series EE bonds must be held a minimum of five years to qualify for the market rate. In fact, if you redeem a bond before the five-year mark, you will be paid something less than the guaranteed minimum rate, the amount depending on the length of time you have held the bond. Q I remain thoroughly confused on a question that must affect quite a few people in this area. I am a 67-year-old federal retiree with additional earned income as a self-employed consultant. I have a one-participant defined-contribution Keogh plan, and also pay Social Security self-employment tax with virtually no chance of ever drawing Social Security benefits. Under tax reform, will my IRA contribution for 1987 and beyond continue to be deductible or not? A Your federal pension does not disqualify you from making tax-deductible IRA contributions. If you make no contribution to your Keogh for 1987, then you are eligible for a deductible IRA contribution. If you do contribute to the Keogh, then eligibility for deductible IRA contributions depends on your adjusted gross income.
A single person covered by an employer plan may make a fully deductible contribution to an IRA (up to the $2,000 limit) if his or her adjusted gross income is $25,000 or less. The deduction is phased out over a $10,000 span, and reaches zero at the $35,000 mark. The comparable numbers for a married couple filing a joint return are $40,000 and $50,000.
So if you participate in your Keogh plan for 1987 and your AGI exceed the $35,000 or $50,000 ceiling (whichever is applicable), you may not take a tax deduction for contributions to an IRA. You may, however, make a nondeductible IRA contribution -- and tax on later earnings on that contribution will be deferred until the money is withdrawn. Q You have mentioned before that one can roll over a Keogh into an IRA. Are there any special filing requirements or notices? When I become eligible to withdraw funds, are there different rules for Keogh and IRA withdrawals? A If you terminate your Keogh and roll the proceeds over into an IRA, you should: (1) file IRA Form 5500EZ as a final return (by checking the appropriate box at the top of the form) for your Keogh plan; and (2) inform the IRA sponsor when you make the deposit that it is a rollover. The Keogh proceeds must be rolled over into the IRA within 60 days of receipt.
If you later make periodic withdrawals, there is no difference in the tax impact between the two plans -- all money withdrawn is subject to tax as ordinary income. However, five-year forward averaging (or 10-year averaging if you were at least 50 years old on Jan. 1, 1986) with the probability of a lower tax bite is available for a lump sum withdrawal from a Keogh plan.Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, in vestments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business &Finance News, 1150 15th St. NW, Washington, D.C., 20071.