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On money

Tax code far from the only road for saving

By HELEN HUNTLEY
Published February 27, 2005

Want to know why our federal income tax rules are so complicated? It isn't just because big businesses line up for handouts, although that certainly is a factor. It also is because politicians like Tom Gallagher want to use tax law to promote what they see as the public welfare.

Gallagher, Florida's chief financial officer, wants to help future hurricane victims, a noble cause. His idea is to create "hurricane savings accounts," similar to individual retirement accounts, that could be used to pay hurricane deductibles and damages. We'd be able to deduct our contributions and shelter our earnings from federal income tax. Then if we spent the money on hurricane-related expenses, it would never be taxed.

Gallagher says his concept could be extended to include other types of natural disasters, calling the accounts "catastrophe savings accounts" instead.

I'll be the first to agree that we all should have an emergency fund. And I agree with Gallagher that having such a fund would allow us to increase policy deductibles and save us money. But a fund that only covers natural disasters is about as useful as health insurance that only pays if you get cancer. Yes, it might really help, but it leaves you exposed to all sorts of other perils.

The tax code already offers us health savings accounts and education savings accounts. Why not unemployment savings accounts? Transportation savings accounts? Appliance meltdown savings accounts? Family funeral savings accounts?

President Bush has a better idea - a "Lifetime Savings Account" that could be used any time for any purpose as a companion to a "Retirement Savings Account" that would replace the Roth IRA. Contributions of up to $5,000 a year to each account would not be deductible, but distributions would be tax-free. Bush also wants to replace the mishmash of work-based retirement savings accounts with a single Employer Retirement Savings Account.

Sometimes simpler really is better, although I don't think Congress has gotten that message yet.

In the meantime, don't wait for Congress to create another tax break for you. Start your own emergency savings account today. If you get hit by a hurricane, you'll be glad you did. And if some other type of disaster befalls you, you'll also be glad you can tap your emergency fund.

Q. I have a brokerage account worth about $1-million with a stated goal of income and asset preservation with some risk. What would you consider as an acceptable annual income amount?

What really matters is the bottom line - the total return on the account - and what kind of risk is being taken to achieve it. Judge whether an account did well or poorly by comparing its elements with market benchmarks, such as rating the large stock portion of your portfolio against the Standard & Poor's 500 Index.

Income doesn't have to come from interest and dividends. You can sell shares of mutual funds, for example, to generate the cash you plan to withdraw. Studies typically show that a "safe" rate of withdrawal is to start retirement withdrawing an amount equal to 4 to 5 percent of the value of your account, then to increase the dollar value each year based on the rate of inflation. This assumes that the account is invested about 60 percent in stocks and 40 percent in bonds. The older you are when you start withdrawals, the larger those withdrawals can be.

Q. I refinanced my home mortgage last year and was charged a $3,840 "origination fee." Is this considered points paid to obtain a mortgage and how much of it can I deduct?

An origination fee generally qualifies as "points," deductible as mortgage interest. With a purchase, points are deductible up front. With a refinancing, they are deductible over the term of the new loan. Divide $3,840 by the number of months in your loan. Then multiply by the number of months you held the mortgage last year. That's how much to deduct on your 2004 return. If you refinance again or sell the house, you can deduct all the points you haven't deducted yet.

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 huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 31, 2005, 11:12:29]