Q–I’m 37 years old and make $15,000 a year. Besides $37,000 in my individual retirement account, I also have $3,000 in the T. Rowe Price Tax-Free High-Yield Fund. Is that fund worth keeping or not?
A–If you’re willing to be aggressive and dabble in high-yield bonds, this fund’s a keeper. A terrific research staff, astute in all market fundamentals, accounts for its success.
The $1.15 billion T. Rowe Price Tax-Free High-Yield Fund gained 9.58 percent over the past 12 months to rank in the upper 8 percent of all national long-term municipal junk bond funds. Its three-year annualized return of 9.73 percent placed it in the top quartile of its peers.
“Portfolio manager Stephen Wolfe does a great job of finding undervalued individual credits,” explained Kevin McDevitt, fund analyst with the Morningstar Mutual Funds investment advisory.
The fund works best as an aggressive core holding in a younger investor’s portfolio. It even had a good year in 1990, when the high-yield market had a high level of defaults.
The credit quality of 31 percent of the bonds it holds is BBB, 27 percent AA, 20 percent BB, 15 percent A and the remainder AAA.
This “no-load” (no initial sales charge) fund based in Baltimore has a low annual expense ratio of 0.73 percent and requires a $2,500 minimum initial investment.
Q–What are your thoughts on a relatively new company called Atria Communities Inc.? It’s a health-care facility spinoff of Vencor Inc.
A–Atria Communities Inc. is in the business of assisted- and independent-living communities. These help bridge the gap for elderly individuals who are unable to live unassisted at home yet are not in need of a full-care facility.
Because of our aging population, this has become a hot growth segment, with our nation’s spending in assisted living expected to expand significantly within the next several years.
Positive prospects have led to a consensus “buy” recommendation from Wall Street analysts covering the stock of Atria Communities Inc., according to the Boston-based First Call Corp. research firm. That includes two “strong buys,” three “weak buys” and one “hold.”
Atria currently operates 22 communities in 13 states with 3,000 units and an average occupancy rate of nearly 96 percent.
The 10 percent decline in Atria earnings expected for this fiscal year compares to a 12 percent gain for the real estate industry as a whole, said First Call. However, a 58 percent increase is projected for the coming fiscal year, versus 14 percent industrywide. More importantly, its five-year annualized growth rate is estimated at 35 percent, versus an industrywide 9 percent.
Q–My wife and I are planning to purchase a home early next year. We understand the new laws effective in January allow first-time homebuyers to withdraw money from individual retirement accounts for down payments and other expenses of a home purchase without being penalized. Does it make sense to roll over our existing IRA into the new Roth IRA so that we can spread the tax hit over four years instead of having to pay the tax next year?
A–Not so fast there.
It’s true the new tax law going into effect next year permits you to take up to $10,000 from either a regular or Roth IRA without having to pay the 10 percent early-withdrawal penalty, so long as the money is used to purchase a first home.
Roth IRAs differ from traditional IRAs in that they’re taxed upfront and accumulate tax-free. Next year the owners of existing IRAs will be able to roll them over into a Roth IRA penalty-free. Tax on the amount rolled over can then be spread out over four years, which is why you find the rollover so attractive.
However, your well-thought-out plan may not be possible because Congress is in the process of narrowing the loophole in the law that would have permitted you to do a conversion and immediately withdraw from the new Roth IRA before earnings accrued. This would have, in effect, allowed you to avoid the 10 percent penalty if you’d taken the money straight out a regular IRA.
The House approved a technical correction, which won’t be finalized until Congress returns next year. Whatever’s decided will be retroactive to Jan. 1, 1998. The correction would penalize people who do the rollover and withdraw the money within five years.
“Wait until the correction is finalized, since it’s not yet totally clear whether it would affect your plan,” advised Martin Nissenbaum, national director of personal income tax planning with Ernst & Young.
Using IRA money for a home down payment isn’t recommended by Nissenbaum. If you withdraw from your existing IRA, you must still pay taxes on the withdrawal, leaving you with substantially less than the $10,000. In addition, you’re taking money from your retirement savings, a bad idea.
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Andrew Leckey, an anchor on the CNBC financial cable television network, answers questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” Suite 367, 76 N. Maple Ave., Ridgewood, N.J. 07450 or by e-mail at successinv@aol.com.
