BOSTON — Sell That Laggard Fund and Move on
For 'gift loans,' the IRS taxes lenders on foregone interest, with exceptions
Q I bought shares in the Lord Abbett Government Securities Fund at $2.99. For the last few years they have been about $2.55, with no signs of improvement. I would like to sell my shares and invest the $11,500 in other funds. I also have $30,000 in short-term CDs and $5,600 in the USAA Money Market Fund. What should I invest in?
- J.C., Comfort, Texas
A"Sell the Lord Abbett Government Securities Fund," says Lewis Altfest, who heads L.J. Altfest & Co., a financial planning firm in New York. Assuming you want a relatively conservative portfolio but also greater returns, he suggests the following:, Buy either the Lord Abbett Affiliated Fund, a large-company stock fund with "below average risk," or the Fidelity Convertible Securities Fund. For your certificates of deposit, he suggests boosting yields by moving toward longer durations - up to 10 years. You could buy (1) longer-term CDs, (2) US Treasury securities through the Treasury Direct program (202-874-4000), or (3) shares in Vanguard's Intermediate Corporate Bond Fund (800-662-7447). The money-market fund is fine, he says.
Q How may parents reduce or eliminate taxes on the imputed interest on a loan to a child for buying a home?
AGenerally, you don't need to, but this gets complicated. (We spent two days on it with the IRS.) Imputed interest occurs when you make an interest-free loan. The IRS wants to tax, as income to you, the interest that would have been charged - with the exception of parents lending to children buying homes. Such interest-free loans, up to $100,000, carry no imputed interest, or tax, if the child earns less than $1,000 (net) from investments.
Both parents can also give a child and the child's spouse $10,000 each annually (thus up to $40,000) tax free. For more information, call a tax adviser or the IRS (800-829-3676). Ask for help and IRS Publication 550.
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