Personal Finance: Q&A

By , Staff writer of The Christian Science Monitor

Question: I am in my early 70s and draw Social Security benefits. I also work as a real estate broker and pay social security taxes as an independent contractor. My wife, not yet eligible for social security, works part time and is able to shelter $2,000 of her income in an IRA. Can I shelter part of my earnings?

- N.C., Bothell, Wash.

Answer: Yes. You are not eligible for an individual retirement account (IRA) after reaching 70-1/2, but you might be able to shelter earnings through a Keogh (self-contributory) tax-deferred retirement account, says Gary Schatsky, a fee-only financial adviser and attorney in New York. Normally, you can set up a profit-sharing or a money-purchase Keogh account, or a combination of both. After adjustments, you might be able to deduct 20 percent of your net self-employment income, he says. But your wife's IRA may be affected. An IRA contribution is currently not fully deductible if either spouse participates in a qualified retirement plan, and the couple's combined adjusted gross income is over $40,000. Above $50,000, none of it is deductible.

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Question: Plenty of stable corporations out there offer preferred stocks with attractive yields. It seems odd that so little is said about preferreds. I submit that they might be excellent, high-return investments.

- L.T.

Answer: Preferreds are stocks that are like bonds: They offer a fixed, annual payout, generally much higher than dividends on common stock. Also, shareholders have higher legal standing than holders of common stock (but not necessarily higher than bond holders), in case the company goes under. In his book "The Only Investment Guide You'll Ever Need," Andrew Tobias says preferreds are generally not good investments for individuals, since corporate investors bid them up in price. And corporations, unlike individuals, can get a tax break buying preferreds.

But they do offer high yield. Case in point: An investor holding Ford Motor Company preferred B stock would currently earn about 52 cents per share, a little more than 8 percent, compared with about 38 cents on a share of common (5 percent). One share of preferred costs about $27, and has stayed in that range for many months. A share of common currently costs about $33, but it fluctuates.

"You have to shop around," says James Fraser, of Fraser Management in Burlington, Vt. If the issuer has excessive debt, he says, you might want to avoid that company. Some brokerage houses offer lists of first-rate preferreds.

Question: Mutual funds proudly publish their performance each year, but don't mention that their results ignore annual fees. In addition, some funds accumulate capital gains, for which the fund holder must pay taxes. When these two items are considered, the performance loses some shine.

- S.S., Vero Beach, Fla.

Answer: Up-front sales fees tend not to be factored into performance results, but other fees usually are, says Walter Updegrave, author of "The Right Way to Invest In Mutual Funds" (Warner Books, $9.99). And yes, an active fund that buys and sells frequently can rack up a tidy capital-gains tax bill for shareholders. That's one reason index funds, with low securities' turnover, have become so popular. Money Magazine, where Mr. Updegrave works, runs a feature in February and August that rates funds on "tax efficiency" for investors in the 28 percent bracket.

But he notes that while some funds appear tax-efficient, they may store up unrealized gains that eventually land in your lap. His advice: Identify some top-ranked funds that meet your goals. Make sure they show high returns over time. Then use a tax screen as a "tie-breaker" to pick a fund. The tax issue is moot for retirement plans such as IRAs and 401(k). Earnings there are taxed only when withdrawn.

* Please send your questions on personal finance to Guy Halverson at The Christian Science Monitor, 500 Fifth Avenue, Suite 1845, New York, NY 10110. Or send electronic mail to: halversong@csps.com.

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