Q. What are "bearer bonds?" Are they a good investment for someone who is in his late twenties and making a decent income?
A. "Bearer bonds" are municipal bonds that are not registered and therefore give the possessor anonymity. They have been around since about the turn of the century, and were a big source of tax savings to individuals. However, there are no new bonds being issued in this form. All bonds issued since 1981 have to be registered, either in the name of the individual owner or in "street" name if a broker holds them for his customer. As a result, individuals are more likely to pay the state and local taxes due on these bonds.
Nevertheless, previously issued bearer bonds are still available on the market.
The bonds are delivered to the owner and he is responsible for "clipping the coupon" and bringing it to a bank to collect the interest twice a year. It is also up to his good conscience to report and pay the taxes due.
The big risk with bearer bonds is that if they are lost or stolen, there is no recourse. Since they are not registered, they belong to the "bearer" and are as liquid to the new posessor as cash.
Q. Can you explain the differences in the way mutual funds collect sales charges from an investor? I'm getting confused trying to figure it all out.
A. Don't feel alone. Investment companies continue to be creative in developing sales charges that may not be easily discernible to the investor.
The easiest to understand are the front-end load funds. The "load," or sales charge, is a percentage of your investment (up to 8.5 percent) and is taken directly off the top before
your funds are invested.
An end-load is sometimes charged. This is a percentage (usually 1 to 5 percent) charged at the time you sell your shares.
Investors have been confused by "12b-1 funds" (so named because the fee is permitted by Securities and Exchange Commission Rule 12b-1). This is an annual fee paid to a distributor (between 0.5 and 1.25 percent). This means you would pay a "sales charge" every year instead of up front when you purchase shares.
Some funds with a 12b-1 fee also have a "declining deferred sales charge." This is like an end-loaded fund, only the charge is usually higher in the early years and decreases to zero in five to 10 years.
Also, there are many good-performing mutual funds with no sales changed (front, middle or end). These have to be purchased directly form the investment company.
Q. What is the penalty for failing to take an IRA distribution? My husband was in and out of hospitals last year and I was unaware that he was supposed to start taking money out of his IRA.
A. The tax penalties are severe for failure to take the minimum required distribution unless you can show "reasonable error" and reasonable steps to rectify it. The tax is equal to 50 percent of the amount that the distribution falls short of the required minimum.