Long-Term Funds, Short-Term Needs
Q. I have invested around $12,500 each in the Franklin Income Fund and an Alliance Group fund. I have a limited income, and it's difficult to meet expenses. I rented my garage to help. A [needed] new roof will cost more than $2,000. This seems like a logical time to sell the funds, but my bank does not offer a short-term investment at a high interest rate. I could get a CD at 5.6 percent. A one-year, tax-free municipal bond yields 7 percent. But my Alliance fund pays 7.9 percent.
A. "Unless you can find funds with higher dividend yields, you may want to stick with both your Franklin and Alliance funds," says Tim Shmidl, a financial planner with Consultants Ltd., in Overland Park, Kan. Neither the CD nor the municipal bond sounds like a solid long-term alternative, he says. "You might also want to consider renting out a room in your home to gain income," Mr. Shmidl says.
Check with government, church, and senior citizen groups about help with maintenance work. Finally, consider a reverse mortgage, which pays you a monthly check based on your home equity. But be careful. Your home is your most important financial asset.
Q. I put all my IRAs into two mutual funds, with my son and daughter-in-law as beneficiaries. Now I learn that when I pass on, everything they receive is taxed to them as income. What can I do?
Toms River, N.J.
A. "Assuming you have no spouse [you didn't mention one] and you established your heirs as beneficiaries before you began taking your required distributions after reaching age 70-1/2, you did not make a mistake," says CPA Ed Slott of Rockville Centre, N.Y., and publisher of "Ed Slott's IRA Advisor" (800-663-1340; $79.95 a year).
"Whoever inherits an IRA pays ordinary income taxes on the amount distributed," he says. Your heirs have the right to spread out distributions over their life expectancy, based on their age in the year you turned 70-1/2, less the number of years in which you took distributions, Slott says.
IRA rules are tricky. A person planning to leave an IRA to heirs should consult a tax expert well before reaching age 70, he says.
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