Bank, S & L ‘Annual Yield’ Advertising Lets Consumers Compare Apples to Apples

Q I was reading recently about interest rates and annual yields advertised by banks and savings and loans, and a question came to mind: When the account term is less than one year, why is an annual yield advertised? It doesn’t seem quite right.

--K.G.

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A Yields of accounts whose maturity is less than 12 months are “annualized” to make it easier for customers to compare rates. Why is this done? Because there are now no other commonly accepted methods of advertising and comparing investment rates.

Further, and perhaps more important, thrifts are required by federal law to post only annualized yields, to help customers compare various investment opportunities, regardless of whether the accounts are for a year, more than a year or less than a year. (The regulation that covers this is 563.27 of Title 12 of the Code of Federal Regulations.)

Is the practice of annualizing yields misleading when it’s applied to accounts of less than a year? That’s a matter of some debate. A $1,000 certificate of deposit advertised as having a compounded daily annualized yield of 4% will in effect earn less than that if the term is just six months. By our accountant’s reckoning, the difference on a $1,000 six-month CD is less than $1 because of daily interest compounding. You’d get six months more of daily compounded interest for a full one-year investment term than you would with a six-month certificate.

By the way, another common way to annualize is to average several years of gains or interest income to arrive at a single figure. The Times does this with two- and five-year mutual fund returns in its mutual fund listings on Sundays.

Tax-Exempt Securities Bad Idea for an IRA Q If I purchase municipal bonds for my individual retirement account, would the interest on these bonds be exempt from taxes when I withdraw the funds? Also, when I am between ages 59 1/2 and 70 1/2, may I withdraw whatever amount I want from my IRA, or must it be the same amount each year? Finally, once I reach age 70 1/2 and must make mandatory withdrawals, is the required amount a minimum or is it the maximum?

--I.B.

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A Despite what you might have read or been told by some hustling investment counselor, municipal bonds or any other tax-exempt investment are poor choices for your individual retirement account. Why?

All withdrawals of previously untaxed money from an IRA are taxable regardless of the type of investment account the funds are in.

So even if the funds are generating what would otherwise be tax-exempt interest, because they are in an IRA, that interest is taxable when the money is withdrawn. You do not want to put your IRA fund into tax-exempt securities--which typically earn lower interest than their taxable counterparts--if those funds will be taxed when you withdraw them.

Taxpayers between ages 59 1/2 and 70 1/2 may withdraw any amounts they want from their IRAs and are taxed on the amount they withdraw. There is neither a minimum nor a maximum amount. At age 70 1/2, you will be required to begin annual withdrawals of a minimum amount. The exact amount of this mandatory withdrawal will depend on the type of distribution you elect to take. In any case, the amount is only a minimum. You may withdraw more if you want, as long as you pay taxes on what you take out.

For more information about IRA withdrawals, you should consult Publication No. 590 from the Internal Revenue Service. To order this pamphlet, call (800) TAX-FORM.

Margin Account Funds Cannot Be Deducted Q May I borrow money from my brokerage margin account to make improvements to my residence or to repay my mortgage and deduct the interest charges as investment interest?

--P.D.

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A You can’t deduct the interest as investment interest because you are using the borrowed money to improve your home, not to make an investment. Furthermore, you can’t deduct the interest as home mortgage interest because the loan is not secured by your home.

Consent Rules Vary for Powers of Attorney Q I read recently about a “durable power of attorney.” Can you tell me more about this and how I can get one?

--K.G.

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A A durable power of attorney is a more permanent variation on the traditional power of attorney, the document typically used when someone wants to hand over responsibility for his or her affairs to another.

Whereas a traditional power of attorney remains in effect only with the continuing consent of the giver, a durable power of attorney is in effect until it expires or is canceled. It is considered especially helpful in cases in which the giver becomes so severely incapacitated that he or she can no longer give the continuing consent that a traditional power of attorney requires.

Armed with a durable power of attorney, family members and friends can gain access to an injured or elderly person’s financial assets and papers to provide, for instance, necessary medical attention.

These documents are available at stationery stores that carry legal forms and can be completed, signed and held for safekeeping.

For more information, consult the “Power of Attorney Book,” a handbook that contains an exhaustive explanation of all types of powers of attorney, how they should be executed and maintained and copies of the necessary documents. You should be able to find the book at your local public library or bookstore. You can also order it from its publisher, Nolo Press in Berkeley. California residents may call (800) 992-6656.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 Or send e-mail to carla.lazzareschi@latimes.com