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On money

Compare split annuity's package deal to other investments

Personal Finance editor
huntley

HELEN
HUNTLEY

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By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published December 29, 2002


Q. I have been advised to consolidate and sell investments and invest in a "split annuity" to produce income and save on taxes. What is your opinion of this type of investment?

A. A split annuity is nothing more than two annuities sold as a package deal. To evaluate it, you have to look at each piece of the package separately, comparing it to what you could get elsewhere.

One piece is an immediate annuity that pays a set income over a set period, such as five or six years. At the end of the period, it is worth nothing. These payments are only partially taxable because they are a combination of interest and return of principal.

The other piece of the package is a deferred annuity. It accumulates interest for a set period. Once the period is up, this annuity can be tapped for income. Of course it will have a deferred tax liability that will come due as the money is withdrawn.

Whether this is the right investment for you depends on the details and your own situation. Here are some things to check out: What is the interest rate guaranteed on each of the annuities? Is this better or worse than you could get elsewhere? What kind of surrender penalties apply? What are the real tax savings based on your tax circumstances? Is the split annuity really better than the investments you have now? Will cashing in those investments have tax consequences? Are you willing to give up the liquidity you now enjoy to lock up your money for the term of the annuity?

* * *

Q. I am the treasurer of an investment club consisting of five retired women. We bought WorldCom stock very high and now need to make a decision about what to do with it. Should we sell or hold? When a company declares bankruptcy, what happens to the stock? If you keep it, do you ever get anything for it? We know if we sell we can take a loss, but that is all we understand. Today there is plenty of information about why to buy, but it is hard to find the answers to why you should sell.

A. I can think of three good reasons to sell a stock, all of which might be relevant in your case: 1. The original reasons you made an investment no longer apply. 2. You have another, more promising place to put your money to work. 3. You could use the tax loss on your income tax return.

The stock of any company going through bankruptcy reorganization is a speculative investment. Common shareholders sometimes are issued new shares in connection with a bankruptcy reorganization, but often they get nothing. That's because their claim on a company's assets is a lower priority than the claims of creditors and bond holders.

WorldCom stock is still trading, which means you would have to sell it to realize your loss.

* * *

Q. I have never read about any owner of a 401(k) account investing in a money market fund. Don't you think this is a viable alternative to stocks? My daughter-in-law has been investing 16 percent of her pay (she pays 10 percent, her employer 6 percent) in stocks for six years, but her account has gone less than nowhere. I tell my son that if she invested in a money market she would earn a 60 percent annual return on her money without any risk, but they don't get it.

A. As a general rule, a money market fund is a parking place for emergency funds and for money that you might need in the next couple of years. People who are young and saving for retirement should take a long-term approach with their savings, which means investing part of it in stocks.

Having said that, a money market fund is a very viable alternative if you want a parking place because you are afraid of the stock market and not willing to commit to any of your 401(k) plan's other options. It is better to set the money aside in a low-yielding money fund than to simply go out and spend it.

Everyone who works for a company that matches 401(k) contributions should contribute at least enough to the plan to get the full match. That does provide your daughter-in-law with a 60 percent return on her contributions for that year. Of course, it does not apply to the money already in her account.

Online Money Map

The Online Investor (investhelp.com) is a useful resource for investors who want to track stock splits, mergers and buybacks.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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