Rolling over annuities, prioritizing student loans, and cashing in US savings bonds
Q: I have a variable annuity with one company but want to change it to another. I'm retired and I know my current annuity company is leaking money. Is it possible to roll over a variable annuity?
H.Y., via e-mail
A: Yes, it is possible, says Rodney Loesch, a certified financial planner in Columbia, Mo. The IRS allows you to roll over the annuity under its code section 1035, and Mr. Loesch says there should be no taxable consequences.
But he says you'll want to consider a few points before moving ahead.
First, make sure there's no surrender charge left on your annuity contract. Loesch has seen charges run as high as 19 percent of the contract amount.
Second, review all the features and benefits of the new contract. Loesch says that you might be giving up a death benefit in the old contract, for instance, that would protect your beneficiaries should you die before it returned to the amount of your original investment.
Q: I have $20,000 in student loans. I am 50 and have just started working for a nonprofit at a not-so-high salary. I have nothing in savings. Is it best to put extra money into a savings account for an emergency fund or toward paying off more of my student loan?
Y.R., via e-mail
A: For someone your age and in your no-savings situation, certified financial planner Bonnie Hughes of Rome, Ga., recommends taking a couple of steps before you start accelerating your student debt payback.
First, Ms. Hughes says that you need an emergency fund - one that would cover at least three months' and perhaps six months' worth of expenses. Once you tackle that, work on maximizing the amount of retirement savings contributions that are available at your workplace. Then start worrying about that student loan.
The benefit of building an emergency fund prior to paying down student loans is that should something happen that threatens your ability to earn money, such as a period of unemployment, you'll have some funds around to continue paying your education bill until your situation stabilizes.
Q: In July, our Series EE savings bonds will mature. We would like to reinvest this money, but we are concerned about the taxes we may owe upon their maturity. Do we have to pay any taxes on these bonds, and if so, how much?
- E.R., New Holland, Pa.
A: You can breathe a little more easily, because your savings bonds will still earn interest even after reaching their initial maturity.
Series EE savings bonds generate interest for 30 years from the month and year they were issued. While they may have a face value of, say, $100, they can accumulate a much greater value over those three decades. So if you want, hold onto them until they hit their final maturity.
According to the US Bureau of the Public Debt, the first EE bonds debuted in 1980, so the earliest that any of them will stop earning interest is in 2010.
While savings bonds grow in value every year, you defer paying taxes on any interest until you cash them in. The interest is taxed as ordinary income, and how much you owe depends on how much other taxable income you have.
Check with your tax adviser. You could lessen the tax bite if you cash in some of them this year, some next year, etc. That way, you won't jump into a higher tax bracket by taking all your income at once.
Bear in mind that savings bonds are exempt from state and local income taxes; it's only the people who sold them to you who will want back a piece of the action.
If you have access to a computer, you can go to www.publicdebt.treas.gov and look up the present value of those bonds.