Bank owes no interest on long-forgotten IRA

Lesson to be learned: Keep track of your financial records

Dollars & Sense

March 25, 2001|By Liz Pulliam Weston | Liz Pulliam Weston,LOS ANGELES TIMES

I came across my old tax returns in my storage unit and found a receipt for an Individual Retirement Account I opened at a bank in 1987. I had completely forgotten about this account, but when I went to the bank's nearest office, I was told they couldn't help me because it had been too long and I had no account numbers to trace the account. What is my recourse? Certainly, the bank owes me not only my initial payment but also any interest accrued over the last 14 years.

Nice try, but the bank probably turned your account over to the state's unclaimed property office years ago. It doesn't owe you any interest for the time since then.

In California, as in many other states, banks and other companies are required to send unclaimed property to the state controller's office when there has been no account activity or contact with the owner for three years.

The companies are required to try to contact you before turning the property over, but how hard they try depends on the company. Those that have been through a merger - and what bank hasn't? - seem to be particularly lax in this department. Of course, if you moved and failed to give your bank your forwarding address, you probably contributed to your status as a "lost" owner.

Your recourse now is to check with the state controller's office. If it was turned over, the money will still be there, because the state is required to hang on to it until an owner or heir is found.

You've learned a somewhat expensive lesson. You've lost the compounded interest for those years, but you now realize how important it is to keep track of your financial accounts. Tax time is a good time to review what you've got where and to consider consolidating your accounts to make them easier to monitor. It's also a good idea to make at least an annual pilgrimage to your safe-deposit box to make sure that you're up to date on your payments and that the bank has your current address.

I recently made my first stock investment by purchasing 3,500 shares of a company for 52 cents each. I started with a penny stock because I don't make a lot of money, but I hoped to make enough on this stock to purchase a better one. Now I'm concerned that when I sell it, it will cost me as much in taxes as it did to purchase it. I don't have a real handle on these tax laws and could use all the help I can get.

It's not just the tax laws that are eluding you. Some of the basics of investing seemed to have slipped by you as well.

The less money you have, the more you should avoid penny stocks. Their risk is extremely high, and fraud is common enough to scare away most legitimate investors. Trading costs tend to be enormous, too - you may find your stock has to appreciate by 50 percent or more just so you can break even after commissions and the brokerage's markup.

What's a penny stock? Most stock experts define it as a stock that trades for less than $5. Some limit their definition to stocks that trade in an unregulated market, such as over-the-counter or on the pink sheets.

For the same $1,820, you could have bought a few shares of a decent stock or mutual fund and had a chance to make money in the long run. Doing what you did is a bit like buying four junker cars for $455 each, rather than spending $1,820 on one that works.

Now, to answer your question: There's probably no need to fear the tax man. If you've held the stock at least a year, the IRS will take at most 20 percent of your profit when you sell. If you've held the stock for less than a year, you pay your regular income tax rate. Notice that you pay taxes only on your profit, not on the total value of the stock. If you wind up paying as much in taxes as it cost you to buy the stock, that means you've made a substantial profit - and that's a good thing.

You may have reason to fear the brokerage that sold you this stock, however. Penny-stock brokers often try to talk you into buying another loser rather than letting go of your money. If this happens, threaten to call state and federal regulators - and follow through if the brokerage won't budge.

Recently, you said investors have to accept that risk is part of investing. I must assume that you have never heard of certificates of deposit, Treasury notes or money market funds. Investors in these vehicles do not incur any risks (unless the United States goes bankrupt) and should make a steady rate of return no matter what the stock market may do.

Investors in CDs, Treasuries and money market funds do indeed incur risk, including the possible loss of buying power. Their investments are eroded by inflation and taxes. Investors also may be exposed to interest rate risk - the chance that higher rates may erode the value of their holdings or that lower rates may force them to accept less return when their current investments mature.

Money market mutual funds, by the way, are not insured by any U.S. government agency, so investors are exposed to a slim risk of loss. Only money market deposit accounts, which tend to pay lower rates than their mutual fund cousins, are FDIC-insured.

Just because a risk isn't obvious doesn't mean it isn't real. Overly conservative investors may be in as much danger as too-aggressive ones of not achieving their goals.

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