Savings Bonds Lose Some Luster
Q. Recent changes in how interest is earned and credited for Series EE U.S. savings bonds make me wonder if they are still suited to my savings goals. I have been buying them every year for my grandsons’ college educations. They are now age 6 and 8. According to what I read, bonds sold in the future will mature in 17 years. But by then, these boys should be college graduates! Is there some other investment I should consider for them? -- C.C .
A. As you know, the government has changed the amount and method of allocating interest on U.S. savings bonds sold after May 1, 1995, to better reflect actual conditions in the interest rate market. The changes do not affect in any way bonds sold before then.
Bonds sold after May 1 no longer carry a guaranteed minimum interest rate. (It remains 4% for bonds sold before that date.) Instead, the rate paid during a bond’s first five years is set at 85% of the rate paid on six-month Treasury notes. Bonds held for more than five years will earn interest in the same way as bonds sold before May 1: 85% of the average rate paid by Treasury notes with five years left to maturity.
Because the interest rate paid on new bonds will fluctuate with the market, the actual time it takes for them to reach maturity will vary. However, the government has said that if market conditions do not produce a mature bond within 17 years, the Treasury will make a one-time adjustment to set the security at its face value at that point. (Bonds sold before May 1 carry a guaranteed minimum 4% interest rate and maturity set at a maximum of 18 years.)
Clearly it would seem that absent a sustained run-up in interest rates, your days of buying savings bonds expressly for your grandsons’ college educations are over.
What else can you do? Several financial advisers recommend the 20th Century Giftrust Investors, a highly rated fund used by many college savers. This fund allows you to open an account with as little as $250 and periodically add to it with as little as $50. The fund must be purchased as a gift trust and must be held for either 10 years or until the child reaches age 18. The fund does not charge an initial commission, but it does levy an annual management fee of 1%. For more information, call (800) 345-2021.
Stock Shares Usually Held in ‘Street Name’
Q. Several years ago I purchased 500 shares of Mrs. Fields Inc. from a discount brokerage.(I liked her cookies, which is no way to pick a stock.) Later, the stock declared a reverse split and is now listed as 62 shares. I have never received a certificate for the shares, although they are listed on the statement I regularly receive from my broker. The Mrs. Fields company says it has never heard of me. Do I have a problem? -- N.K.A .
A. You do not have a problem. You have merely misunderstood how your shares are being held.
Investors have a choice of how to hold their stock. You may get a share certificate directly from the company. Or you may elect to have your brokerage hold the shares in “street name,” that is, in the name of your brokerage, which is then responsible for tracking ownership of those shares.
From the information you have provided, it sounds as though your shares in Mrs. Fields are held in street name, which is how the vast majority of individual investors keep their holdings. Why? Because this allows faster execution of trades and greater convenience to both broker and investor. And you don’t have to worry about losing the certificates. In addition, some brokerages charge investors an extra fee if they want a certificate. (Your broker, Charles Schwab, charges $15 for that service.)
IRAs Can Be Toted Up to Figure Withdrawals
Q. I have several individual retirement accounts. When I begin figuring my minimum required annual distribution, must I make the calculation for each account individually, or may I aggregate the amounts in each of the accounts and then do a single calculation based on that total? The beneficiaries are the same for each account, if that matters. -- B.S .
A. As far as the Internal Revenue Service is concerned--and that is the only agency that really matters in these cases--you have a single IRA. It just happens to be spread among several different accounts. As a result, you may aggregate the amounts in each account and make a single calculation based on the total holdings. You may then withdraw that sum from any one or more of the accounts of your choosing.
The fact that the beneficiary of these accounts is the same is not necessarily a significant issue. It depends on the manner in which you are making your annual distribution calculation. If you are basing withdrawals on your life expectancy alone, the beneficiary doesn’t matter. But if you are basing withdrawals on your life expectancy and that of your beneficiary, it does matter. Experts say the vast majority of Americans base the calculation on their life expectancy alone, since the only reason for including the age of a beneficiary would be to reduce the annual withdrawal requirement.
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, CA 90053.
