Money Management

Limits on deductible pension plan contributions

Q I want to set up a retirement plan for my solo corporation. Before selecting the type of plan, I'd like to know the limits on tax-deductible contributions to the various types of plans. Can you give me a rundown?

A Yes, but be aware that more than one limit may apply to any given type, as we'll explain:

• SIMPLE plans—Savings Incentive Match Plans for Employees—allow each participant to defer up to $6,500 of salary currently (the limit is inflation-indexed); the employer can add 3 percent of salary to that. So if your salary is $217,000 or more, the most you and your practice can put in for you is $13,000.

• 401(k) plans let participants defer an inflation-indexed portion of salary ($10,500 is the current limit), but the total contribution for a participant, including any employer matching amounts, can't exceed 25 percent of his full salary.

• Profit-sharing plans allow a deductible contribution equal to 15 percent of a participant's salary. For this purpose, only $170,000 of salary counts in 2001, so the maximum contribution is $25,500 (15 percent of $170,000). The same limits apply to Simplified Employee Pension plans.

• Money-purchase pension plans permit annual contributions of up to 25 percent of salary, provided that's not more than an inflation-indexed fixed dollar limit ($35,000 currently). These limits also apply to combined profit-sharing and money-purchase plans.

• Defined-benefit plans, unlike the previous choices (all of which are defined-contribution plans), have no dollar limits on contributions. You can put in as much as is actuarially required to provide an annual payout in retirement equal to the average of your salary over the highest three consecutive years. However, an inflation-indexed limit restricts the size of the payout for which you can fund. Currently it's $140,000.

When bonds shouldn't be left to an heir

Q I own a stack of corporate bonds with a combined face value of $100,000, which is what I paid for them. Because interest rates have risen since I bought them, the bonds are worth only $80,000 now. If I were to die shortly, would the bonds' value be stepped up to their face amount?

A No. For estate tax purposes, your assets will be assessed at their fair market value on the date of death. That means your heir would owe tax only on the bonds' current value of $80,000, not $100,000.

But what the tax law giveth, it also taketh away. If your heir retains the bonds to maturity and collects $100,000, that person will owe tax on a $20,000 "profit," though the bonds originally cost you $100,000. Ironically, this holds true even if the heir—your wife, say—got no estate tax saving from the lower valuation because her legacy was tax-free.

If you want to avoid this outcome, any bonds valued below the face amount when you die should be sold promptly, either by your heir or by your executor.

Where to look before you leap into an IPO

Q I have enough spare cash to do a little speculating, and I'd like to take an occasional flyer on an initial public offering. Where can I get online help with the research?

A If you're interested in a specific company, a reliable place to look is the Securities and Exchange Commission's Web site, www.sec.gov , which allows you to search its Edgar data base of individual corporate filings. A useful commercial Web site is www.alertipo.com , where you can read the initial registration statements of many companies and obtain timely pricing data. Another Web address to check is www.ipocentral.com , which provides IPO statistics and news, information on pricing, filings, and a selection of other data compiled from a variety of sources. Both sites provide some features free but charge for others.

For tips on how to spot promising candidates to bet on, see "Will that IPO soar to the moon—or fizzle back to earth?" in our July 10, 2000, issue. This article also lists a group of top-performing mutual funds that invest at least 20 percent of their assets in IPOs. Whether you let a fund do the work or go it alone, the watchword is proceed with care.

Should you buy a retirement home while still in practice?

QMy wife and I have a favorite vacation spot, where we intend to move when I retire in five years. I'd like to buy a place there now and use it as a vacation home temporarily, but my wife worries that this could be a financial mistake if we change our minds about living there permanently. What do you suggest?

A Since you're not sure of your residency decision, focus on the investment aspects. While you're not vacationing at the place, will you be able to rent it out for enough to pay the cost of upkeep, or will it be a constant drain? Either way, can you reasonably expect to make a profit, or at least get your money back, if you eventually decide to sell the place instead of living there permanently? Remember, up to $500,000 of gain is tax-free if you make the house your main home for at least two years.

You're more apt to sell at a profit if the home is convenient to attractive leisure facilities—preferably year-round—and is in an area with a limited supply of vacation properties. If you're considering a condominium, look for professional management that provides full-time maintenance and security protection and will oversee rentals. Such first-class supervision will ease your problems as an absentee owner and raise the potential value of your investment.

Preventing a stolen passport from disrupting a trip

Q I've heard several stories recently about the difficulties travelers can run into if their passports are stolen while they're abroad. In case that happens to me, how can I make sure I'll get a replacement with the least hassle?

A Take along photocopies of the passport pages showing your photo, name, place of birth, passport number, and date and place of issue. It will help speed things up if you bring along two passport-size photos and an official copy of your birth certificate, which you can obtain from the state or county records bureau. Carry these items separately from your passport—preferably on your person rather than in your luggage or purse.

Report a stolen passport to the local police and the nearest US consulate. Count on at least a couple of days to receive a temporary passport or substitute. Be aware that you may need it, as well as a copy of the police report, to replace stolen traveler's checks or credit cards on the spot. Your insurance company will also ask you for the report if you file a claim.

How to figure the minimum insurance on your home

QA builder friend tells me my house would cost around $275,000 to replace if it were totally destroyed. He admits that's unlikely, but thinks my $180,000 insurance coverage is too low. Do you agree?

A Definitely. You should bring the coverage up to at least 80 percent of replacement cost. If you have less than that, your policy won't pay the full amount of a partial loss—even one under $180,000. If your net replacement cost comes to $275,000, your minimum coverage should be 80 percent of that: $220,000.

Suppose you keep your coverage at its present level and suffer a $100,000 loss. The insurer will reduce your claim, based on the relationship of your actual coverage of $180,000 to the required minimum of $220,000. You could collect only $180,000/220,000 of your $100,000 loss, or $81,818 (minus your deductible).

Edited by Lawrence Farber,
Senior Editor

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

 

Lawrence Farber. Money Management. Medical Economics 2001;8:153.