Q–I have credit cards that are charging too much interest, and I have heard that credit unions offer cards for lower interest. How can I get a list of credit union credit-card offers?
A–There isn’t such a list because credit unions are membership organizations for certain segments of the population. One credit union might serve only employees of a particular company, for example. If you don’t fit the membership criteria, you can’t be a member. And only members can participate in services, such as credit cards and auto loans.
However, plenty of low-rate bank cards are available. CardTrak publishes listings of the lowest-rate and lowest-fee cards. To get a list, send $5 to CardTrak, P.O. Box 1700, Frederick, Md. 21702.
Q–Due to reasons out of my control, I will be receiving a check for my 401(k) account from my former employer. Where I can invest my money so I do not owe early-withdrawal penalties to the IRS?
A–If you take another job and your new employer has a 401(k) plan, you can normally do a “trustee-to-trustee” transfer and have the former employer transfer the funds to the new one’s plan. Call your employee benefits department to see if this is possible.
If not, roll the 401(k) proceeds into an IRA account. These are offered by most major banks, brokerage firms and mutual fund companies. You can invest the money any way you like within the IRA, and there are no tax penalties unless you take all or part of the money out before age 59 1/2.
There’s one trick, though, says Philip J. Holthouse, partner at the tax accounting firm of Holthouse Carlin & Van Trigt in Los Angeles. You need to set up the account first, and then have your 401(k) plan administrator send the money directly to the institution that houses your new IRA account. If the money is sent to you, the plan trustee is required to withhold a portion of it for income taxes. That will leave you in the unenviable position of having to tap other savings to make up for the amount that was withheld in order to roll the whole amount into an IRA.
If you roll only the amount you get into the IRA, the remaining amount becomes taxable as ordinary income and you pay a 10 percent federal tax penalty, too.
Consider: You have $10,000 in a 401(k) and you want to roll it all into an IRA. But the IRA isn’t established, and you have 60 days to make the deposit. If the the 401(k) plan sends you the check, it will withhold 20 percent of the amount, leaving you just $8,000. If you put just the $8,000 into the new IRA, the $2,000 withheld is considered a distribution to you. You’re taxed on that amount at your ordinary income-tax rate, plus you pay penalties to the federal and possibly your state tax authorities as well.
Q–Please explain how the following works: A person donates at least $5,000 to a well-known charity. That charity, in turn, pays the donor either a monthly or yearly amount of money for life.
A–What you’re describing is a charitable remainder trust. This is how it works: You have 1,000 shares of XYZ Corp. that you bought 50 years ago for $1,000. They’re now worth $100,000, but the company doesn’t pay dividends and you’re at a stage in your life when you’d like some income from this investment.
If you sell the stock and reinvest in an income-producing asset, you pay tax on $99,000, which amounts to more than $27,720. If you reinvest the remaining $72,280 in a bond fund that yields 6.5 percent, you get $4,698 in interest income each year.
But if you give the shares to charity, retaining an interest in the investment income, you get more. The charity can sell the shares without paying tax. So, the charity has $100,000 to reinvest at 6.5 percent interest, generating $6,500 in interest income. The charity pays you all or part of that annual interest amount for a set period–often the rest of your life. When you die, the $100,000 and all the future interest earned on it reverts to the charity.
Better yet, you get a tax deduction equivalent to the present value of the asset that was donated in the year you make the gift.
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If you have a question of general interest that you would like to have answered in a future column, write to: Kathy Kristof, c/o Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053, or send the question via e-mail to: Kathy.Kristof@latimes.com. Please include your name and phone number in case any details need to be clarified.
