FINANCIALconnection
Heir today,
Also:
n SEP IRA
n 401(k) plan
gone tomorrow?
Ask Suze
Orman
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By Suze Orman
KEI TH LATHROP
I am 72, my sister is 69. We received an inheritance. My sister put $200,000 in government
bonds. I put $100,000 in a five-year jumbo CD
[certificate of deposit] at 4.98 percent. Did I
do the best thing? Should I go with government bonds when the CD term is up? We are
both retired. She rolls over her interest. I use
my interest for income.
—Nancy Hudson
Aliso Viejo, California
BOTH APPROACHES are fine. The only problem
with a five-year CD is that you are locked into that
rate for a long time. You might find yourself frustrated a few years down the line if interest rates have
gone up and you are still earning just 5 percent. One
option is known as “laddering”: You could put one-third of your money in bonds that mature in five to
seven years, another third that matures in three to
five years and the rest in just a one- or two-year CD.
That way your total income payment will remain
higher than if you had it all in short-term bonds or
CDs, but you will also have a rolling schedule of
money that is maturing and you will be able to reinvest it at higher rates.
In the meantime I want you to make sure your
jumbo CD is safe. Check that the bank is in fact
Federal Deposit Insurance Corporation [FDIC]
insured. In this rough economy, some banks are
going out of business. IndyMac Bank was deemed
insolvent in early July, so you can’t be too careful. If
your bank isn’t covered by the FDIC—most are—I
would seriously consider paying the early-with-drawal penalty and moving your money to an
FDIC-insured bank so it is safe.
If your current bank is FDIC insured the general rule is that the FDIC guarantees full payment
up to $100,000 for any individual account. (If you
have a joint account with someone else and you are
both entitled to equal shares, a total of $200,000 in
that account will be fully insured. Certain bank
retirement accounts up to $250,000 also get full coverage.) Because your CD is for $100,000 I want you
to move any other money you have at that bank,
such as checking and savings accounts, to a different
bank. The safe move is for individuals to never have
more than $100,000 at a single bank.
I am 27 years old. The company I work for set
me up with a SEP IRA [Simplified Employee
Pension Individual Retirement Account]
account last summer. The beginning balance
that was contributed by my employer was
about $8,500. (I have yet to make my own
contributions to the account.) At this time,
the balance remains nearly the same, but at
one point it was as high as $9,500. It has
steadily dropped since then. I would like to
know exactly what a SEP IRA account is. Is
this a good retirement account to have, or
should I invest in other outlets?
—Norma Nuñez
Concord, California
A SEP IRA is just a generic name for a standard
retirement plan that many small businesses offer.
What makes them good—or bad—is the specific
investments that are made in the SEP IRA. Typically
they would be mutual funds. So you need to find
out what your account is invested in. You want to
hear that it is no-load mutual funds with annual
expense ratios that are less than 1 percent a year. In
fact, you should be able to choose your own investments. Go for stocks funds with low costs; I think
index mutual funds are a great option. Consider
yourself lucky that you work for a company that
offers this great retirement benefit.
I have a 401(k) plan from Nordstrom retail
company, where I worked for nine years.
The plan is worth about $45,000. Because
stocks have been so volatile, my husband
wants to withdraw the money to pay off
debts, and put the leftover money into a
bank CD account.
I’m 57 years old, and if I withdraw money,
I have to pay a penalty and tax. But I’m also
afraid that if the stocks keep going down, I’ll
lose that money too.
—Sea Permelli
San Mateo, California
IF YOU WERE at least 55 years old when you left
your job you can withdraw any amount of money
you want from your 401(k) without a penalty,
though you will, of course, be stuck with the income
tax. Instead of cashing it out I recommend moving
the money into an IRA rollover account where you
can choose whatever investments you want, including CDs or other low-risk investments. You shouldn’t
use retirement money to pay off debts. What will
you live on in retirement? C