Nothing to Do but Wait for ‘College’ Bond Sale
Q: Can you please tell me more about the new “college saver” bonds that were initially sold by the state in October and proved so popular? How often are the bonds to be issued, and which banks and financial institutions are selling them? --T. R.
A: The entire $76-million college saver bond issue sold out in a matter of days in late October, leaving many Californians wishing that they had moved more quickly to take advantage of the state’s first bond sale aimed at the small investor.
Will there be another sale? State Treasurer Thomas W. Hayes had tentatively scheduled one for January, but he was defeated in the November general election and will be leaving office Dec. 31. His successor, Kathleen Brown, isn’t committing herself to anything--yet. Nevertheless, she knows how popular the first sale was, and she says she supports both satisfying small investors and encouraging savings for college educations. Brown said last week that she is still evaluating the first sale and may stage another, but probably with some still unspecified changes.
The first bond sale was handled by 20 financial institutions, including Bank of America, Merrill Lynch, Paine Webber, Security Pacific Bank and Prudential-Bache Capital Funding. Obviously, it is too early to say if these institutions will participate again if there is another bond sale.
What should you do? Nothing now. But after the first of the year, watch your newspaper for news of Brown’s decision about the college saver program. You can also check with your broker, one of the institutions that participated in the first sale, or call the state Treasurer’s Office at (916) 445-6562 or (213) 620-4467.
As I explained in this column on Oct. 28, college saver bonds are, for all practical purposes, no different from traditional zero-coupon municipal bonds. Like zero-coupon “munis,” these bonds are exempt from state and federal taxes and pay interest only upon maturity. In fact, the only difference between the latest bonds and traditional zero-coupon munis is that the former were sold in unusually small denominations: $1,000 face value, rather than the customary $5,000 minimum. This meant that the minimum investment in the college saver bonds ranged from $276.61 for a $1,000 bond maturing in 18 years to $598.29 for a $1,000 bond maturing in just eight years.
By the way, the same advice our experts routinely offer about zero-coupon munis applies to the college saver bonds as well: They are best purchased only by those in the highest tax bracket since one of their major advantages is their tax-exempt status.
Finally, despite their name, the bonds did not have to be used for college education, and, in fact, had no restrictions on their use. This feature made them far more attractive to savers than the U.S. government’s new Series EE college savings bonds, which can only be used for certain college expenses. In addition, unlike Series EE bonds, whose tax exemption is gradually phased out for families with an annual adjusted gross income of $60,000 and up, the California bond program imposed no income restrictions on buyers.
Daughter’s Name on Deed Complicates Issue
Q: My wife and I, both 72, plan to sell our house. We have owned it for three years and are hoping to benefit from the one-time, $125,000 exclusion of profits. The problem is that our daughter’s name is also on the deed. She is 44. Can we take her name off the deed--she is willing to go along with this--to become eligible for the exclusion? --L. N. G.
A: Your situation is far more complex than you might have imagined. According to our experts, you cannot simply remove your daughter as an owner of the house (even if you just put her name on the deed in an ill-advised attempt to avoid the hassles of dealing with your estate after your death) and expect to take credit for owning her portion. She has owned at least one-third of the home--possibly half, depending on your arrangement--for the last three years. Remember, the IRS requires ownership of a home for at least three of the last five years to take advantage of the $125,000 exemption. If you do remove her name from the deed, you and your wife must wait three more years to be considered the owners of her portion of the home.
However, you do not have to wait to use your exemption. Our experts say that if you want to sell the house now and use your $125,000 exemption, you may apply the exemption to the portion of the profits from your share of the house. So, if you and your wife are two-thirds owners of the house, you can deduct the $125,000 from two-thirds of the profits. If your share of the profits is less than $125,000, you must forfeit the unused portion and may not carry it over to another home.
Undrawn IRA Funds Won’t be Taxed
Q: The S&L; where I have my $32,600 individual retirement account is having problems, and I am concerned about my certificate of deposit, which does not mature for another year. What happens if regulators seize the institution before I have all my money out? Since I am already making mandatory withdrawals, the Internal Revenue Service will obviously expect me to be paying income tax on these disbursements. But how am I to pay the tax if I am unable to make the withdrawal? --G. T.
A: You shouldn’t be losing any sleep over this, because you do not have a problem. For starters, your IRA is insured up to $100,000 by the Federal Deposit Insurance Corp., and because this is an IRA, the insurance is separate from any coverage you have on non-IRA accounts at this S&L.; And even if your account were not insured, even the IRS does not expect you to pay income tax on income you never received. So, if you don’t take the money out--even if you were supposed to because you are of the age to make mandatory withdrawals--you are not required to pay taxes on it.
