How Savers Fare if Ailing S&L; Taken Over
QUESTION: About six years ago, I opened a 10-year savings account at an S&L; that allowed additional deposits to the account to earn the initial rate of interest, regardless of the prevailing rate at the time of the deposit. I was able to “lock in” an interest rate that is quite favorable by today’s standards.
However, now this institution is listed among the nation’s “troubled” S&Ls;, and I am worried that it will be bought out and the terms of my savings certificate will be nullified. If a new buyer takes over my institution and breaks the savings account contract, offering a substitute rate that is considerably lower, must I accept whatever interest rate the buyer offers, or may I withdraw my funds without penalty? I am really concerned that the saver is being sacrificed so the buyers of these troubled institutions can get cheap deposits to “save” the S&Ls.--B.; W.
ANSWER: Your situation highlights a frequently overlooked participant in the current S&L; mess: the saver. Although your account is probably covered by federal deposit insurance, you have unfortunately discovered that savers do not necessarily emerge untouched by an institution’s failure. In fact, in order for the Federal Deposit Insurance Corp., which oversees the merger of insolvent institutions into healthy ones, to find a buyer willing to take over a failed institutions, something has to give. Often it is the interest rate on deposits, usually higher than the industry average, that the failed institution had been paying to attract savers.
The FDIC takes the position that the failed institution’s savings account contracts are unbreakable only as long as that institution is in business. According to this reasoning, once the association is sold to or merged with another association, those savings contracts are not necessarily in force.
So if your institution is taken over by another association that later decides to break your savings account contract, you have a choice: Accept the new rate of interest offered by the buyer, or take your money elsewhere. If you elect the latter, you will not be penalized for withdrawing your funds before the account matures.
Calculating Minimum IRA Withdrawal
Q: My individual retirement account is in certificates of deposit distributed among three different banks. When I finally begin taking mandatory distributions, does the Internal Revenue Service require that I withdraw the minimum from each bank account, or may I withdraw the combined minimum total from the one account where I am earning the least interest? I have received conflicting answers to this.--B. H. C.
A: There has been a great deal of confusion about this issue because the IRS has never definitively laid down the law. But our experts say you may elect to take the withdrawal from whatever account or combination of accounts you want, provided that you do indeed take the minimum required distribution.
The minimum withdrawal should be calculated based on the total in all IRAs. Take the distribution from the account of your choice and then notify the trustees of your other accounts of what you are doing. This final step is important because these account trustees could review your account activity and determine that you had not made the proper withdrawals and force you into a lengthly discussion. Worse yet, they could just calculate the minimum required withdrawal and send you a check for it. Untangling all this would be a pain in the neck.
Changes in Law for Deals Between Spouses
Several weeks ago, a reader asked what the tax consequences would be if she sold some shares of stock to her husband. We said that if she realized a gain from the deal, her profits would be taxable.
However, according to recent changes in the tax laws--specifically, Section 1041 of the Internal Revenue Code--transactions between spouses are not taxable. Instead, the seller reports no gain or loss, and the buyer takes the seller’s taxable basis in the asset. This means that when the buyer later sells those shares, his taxable gain is the difference between the sales price and the price his spouse originally paid for those shares.
Although the title of Section 1041 would lead one to believe that it applies only to transactions between spouses conducted in connection with a divorce, Los Angeles attorney Paul Gordon Hoffman assures us that “it is clear from the language of the law, congressional reports and Treasury regulations that the section applies to all transactions between spouses, whether or not they are connected to a divorce.”
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
