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Don't like CDs? Try bonds,
new savings plans
Dear Dollar Diva,
I have $20,000 in CDs maturing in two weeks.
This money is for a 12 year old and will not be needed for at least
five or six years. Given the low CD rates right now, how would you
advise I reinvest?
Judy
Dear Judy,
The Diva isn't sure who owns the CDs, what the relationship between
you and the 12 year old is and what the money is going to be needed
for in five to six years; these factors could influence where the
money should go when the CDs mature. Here are some ideas.
U.S. Series I savings bonds
Series I Savings bonds were introduced by the U.S. Treasury in 1998
to encourage Americans to save. They pay a very attractive interest
rate, are indexed for inflation and are backed by the full faith
and credit of the U.S. government.
Series I Bonds pay an annual rate 5.92 percent (until
Nov. 1, 2001, when the rate is reset). That's a lot better than
the current rate for CDs, money market accounts and money market
mutual funds, and a good choice for stashing cash you're going to
need in five to six years. A nice feature of savings bonds is interest
compounds tax-deferred until you cash them in. Go to the U.S. Treasury's
Series
I savings bonds Web page for the current interest rate. Bankrate.com
will give you up-to-the-minute
rates on CD products.
If the money is not going to be used for college,
stop here; if it is, read on.
Tax-deferred, good; tax-free,
better!
Tax-deferred interest on U.S. savings bonds is sweet. Tax-free is
even sweeter, and could be yours if the bonds are used for higher
education expenses. All of the following conditions need to be met
to be eligible for the tax break:
- The owner of the bond must be at least
24 years old before the bonds' issue dates. (It won't work if
the bonds are in the 12-year-old's name, but he can be the beneficiary).
- You pay qualified higher education expenses
for yourself, your spouse or a dependent for whom you claim an
exemption on your tax return.
- Your modified adjusted gross income is
less than $70,750 if you're unmarried; $113,650 if you're filing
a joint return.
- Your filing status is not married filing
separate returns.
For more information, read the IRS
Publication 970, Tax Benefits for Higher Education.
Other college options
Two other college savings options worth investigating are state
tuition programs and Education IRAs. Both have been enhanced (and
complicated) by the 2001 Tax Relief Act:
- State tuition programs:
also called 529 plans, these are state-sponsored programs designed
to help families save for college. There are no age or income
restrictions, and the 2001 Tax Relief Act has made qualified withdrawals
tax-exempt. Tax-exempt, compound earnings is as good as it gets.
- Education IRAs:
The 2001 Tax Relief Act has increased the allowed annual contribution
from $500 to $2,000, starting in 2002, and now lets you make contributions
to an Education IRA and a 529 plan in the same year, for the same
person, without slapping you with a penalty.
Joseph Hurley's "Saving
for college" Web site is the place to go for the nitty-gritty
on 529 plans. Hurley is the author of The
Best Way to Save for College: a Complete Guide to 529 Plans.
-- Posted: Oct. 11, 2001
 DOROTHY
ROSEN has a master's degree in finance, with a specialization in
accounting, from the Kellogg Graduate School at Northwestern University
in Evanston, Ill. Rosen has more than 15 years of experience in
the financial arena, serving in Illinois and Florida as a certified
public accountant, financial consultant, expert witness and educator.
She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.
-- Posted: Oct. 11, 2001 |
