As a recent widow, I sold my husband's business on a contract ending when I am 62, including a clause allowing me to participate in profits -- now at $8,000 for a year. Can I subscribe to a Keogh Plan? Also, am I supposed to pay into social security? I sold our house and land for $90,000, and I hold the mortgage at 10 percent for 10 years with a balloon payment at the end. Should I pay off the small mortgage, $16,000 at 8 1/2 percent interest or keep it for tax deductions? Should I continue to stumble on, or should I approach an expert? What kind -- accountant, trust officer, bank official, broker or lawyer? Should I have a will or leave everything in trust? B.K.
Taking B.K.'s questions in turn: Money received on contract for your husband's business represents investment income and not personal services income. Thus, you may not deduct up to 15 percent for a Keogh plan and you need not pay social security taxes on that income any more than you would pay social security taxes on interest received from corporate bonds.
To decide whether to pay off the $16,000 mortgage at 8 1/2 percent, consider your alternatives for investing this money. Currently deep-discount bonds and income stocks yield 11-13 percent with an opportunity for appreciation from both to increase total yield further. By prepaying the mortgage loan, you will not have to pay 8 1/2 percent interest. But if you invest the cash, you can earn the difference between 8 1/2 percent and 11-13 percent available from alternatives.
You appear to be doing fine on your present course, so why go to a so-called expert for financial advice? But, contact a lawyer for an answer to your question about having a will or holding everything in trust. If you do consult a bank officer, broker, or other advisor, be aware of their biases. Each may counsel you to invest in his business or product.