The PMD Answerman

Physician's Money Digest, February28 2003, Volume 10, Issue 4

Q: Help, I am not able to decide between termlife insurance and cash-value insurance. Can youprovide some insight into the 2 options to helpmake this decision easier?

A:

Term life insurance is pure insurance withoutany savings feature. You can get the most insuranceprotection for your money with term insurance.However, once the term has expired, you will havenothing. In addition, if you wish to renew your terminsurance after it has expired, you will have to pay ahigher premium. This premium will be based on yourcurrent age, and not the age when you first startedpaying premiums.

Cash value insurance, on the other hand, is lifeinsurance that both insures and saves. So, your premiumpayment will pay for insurance coverage andinvestment savings (eg, stocks, bonds, mutual funds,etc). In addition, you won't have to renew your policyperiodically because coverage lasts a lifetime.However, the premiums for cash-value insurance aremore expensive than term life insurance and your contributionsmay be limited. And since cash-value insuranceprovides the opportunity for gain, there's alsothe realistic chance for losses.

I don't know your particular circumstances, so Iwould suggest speaking with your financial advisorregarding life insurance. By letting them know yoursituation, they can help you figure out the best choicefor you. Since life insurance is so important, it shouldreceive the attention it deserves. And by figuring outyour best option now, you'll be able to sleep a littlebetter at night knowing you're prepared.

Q:

My adjusted gross income (AGI) is below$100,000. This being the case, can I convert myregular IRA to a Roth IRA?

A:

You may convert a traditional or regular IRA toa Roth IRA if your AGI (either joint or single before theRoth IRA conversion) is less than $100,000. In this case,since your AGI is less than $100,000, you can convert.

Q:

I would like to convert my traditional IRA,which includes $135,000, to a Roth IRA; however,I cannot afford to pay the extra income taxes.May I convert only $50,000 from my IRA savingsinstead of the entire amount?

A:

Yes, you are permitted to make a partial conversionif your AGI is less than $100,000. So, if your AGI isless than $100,000 (either joint or single before converting),you can convert only $50,000 if you want tofor income tax purposes. However, if you have to usethe money from your traditional IRA to pay the additionalincome taxes generated from the Roth IRA conversion,you are probably better off not converting.Please consult a tax or financial advisor before youconvert. They'll be able to help you decide the bestchoice for your particular situation.

Q:

If my regular IRA is a mixture of nondeductibleand deductible contributions (rolloverfrom a terminated pension plan and an old Keogh),how is the nontaxable portion identified to avoiddouble taxation when I take distributions?

A:

The nontaxable portion of your IRA is prorated fortax purposes. For example, let's say your traditional IRAconsisted of $75,000 deductible (pretax) and $25,000nondeductible (after-tax) contributions, making youraccount worth $100,000. Now, let's say you withdrew$20,000. In this case, the amount subject to ordinaryincome tax would be prorated and calculated as follows:Your deductible contributions divided by total contributionsequals the prorated portion. So, $75,000 divided by$100,000 equals .75. Then, $20,000 times .75 equals$15,000. Therefore, a $20,000-IRA withdrawal wouldincrease ordinary income by $15,000.

Q:

I have a teenage daughter who is thinkingabout becoming a doctor. Although I have a fewyears to prepare for her schooling, I was wonderingif a 529 plan can be used to fund medical or lawschool in addition to undergraduate programs?

A:

Yes, a 529 plan can be used to fund medical school.And in case your daughter changes her mind and decidesto become a lawyer, you can also use your plan to fundlaw school. In addition, a 529 plan can be used to fundprivate school before or after college, and the money isnot taxable to the student or to the parent.

Q:

How will the stock market and the economyfare in 2003?

A:

No one can answer your question with total confidence,because no one really knows. But since youasked, I believe 2003 could be a strong year for themarket because we will be in the third year of a presidentialcycle and, historically, the market has performedbest during a president's third year. We alsohave trillions of dollars loitering in money marketsearning less than 1%, not keeping up with inflationand taxes. In addition, inventories are getting verylow, which should help business, and interest rates arevery low, encouraging both consumers and businessesto borrow and refinance.

Weighing on our minds, however, is the uncertaintycaused by external events: possible war with Iraq,North Korea's questionable production of nuclearweapons, escalating oil prices because of strikes inVenezuela, possible terror events, and major statebudget deficits forcing states to raise taxes and/orreduce services. The key here is not to try to guesswhat will happen in the short run, but to think longterm. Invest in a well-diversified portfolio suited toyour risk tolerance and risk capacity with a minimumof a 5-year time horizon.

So, despite all these uncertainties and conditions, Ipersonally believe that 2003 might be a good year forthe markets and the economybecause many of the excesses have been removed.On another note, I also believe that the real estatemarket might weaken. The sale of luxury homes isslowing down. Normally this is an indicator of a lessbuoyant housing market for less expensive homes.

Q:

I'll be starting my own business when Iretire after 25 years. At this point, I think I'd liketo hire 3 employees, including my wife, andoffer each employee a retirement plan (hopefullyputting away $20,000 to $40,000). However, Ican't afford more because I have 2 college-agekids. In this case, what type of retirement plando you recommend I start?

A:

Without knowing more about your personalfinancial situation, I'd suggest a profit sharing plan.This will permit you to contribute annually up to$40,000 or 25% of your income (whichever is the lesseramount). Before you begin setting up any retirementplan, however, consult a qualified financial professional.They'll be able to ensure proper legal compliance.And you don't want to start your business offon the wrong foot.

Q:

At age 68, I consider myself to be a healthyand vibrant soon-to-be retiree. However, with therecent market and the questionable future market,there's a chance I may need to continue workingfor a few more years. If, indeed, I do postponeretirement and continue to work past age 70 1/2,will I have to make required minimum distributionwithdrawals? What about my Roth IRA? Do minimumdistribution withdrawals apply to it?

A:

The answer to your first question depends onwhat type of retirement savings plan you have. Forexample, you are not required to take the required minimumdistributions from employer plans like 401(k)s. Ifyou have a traditional IRA, however, you will have totake the required minimum distributions once you turnage 70 1/2. Unfortunately, you don't have a choice in thematter when it comes to traditional IRAs.

The reason why:

Roth IRAs are not affected by these same rules,although they do have rules (it's a good idea to consulta financial advisor to learn more about them). Inthe case of a Roth IRA, you are not required to takeany minimum distributions when you become age70 1/2. You contributed after-taxmoney to a Roth IRA and have already paid the tax. Soif you think you're going to be working past age 70 1/2and you've got a Roth IRA, required minimum distributionswon't be a burden.

Steven C. Camp, a financial planner in Fort

Lauderdale, Fla, is a Wharton graduate and

author of 3 personal finance books, including

MONEY Rx for Physicians (Trunkey Publishing;

$14.95). He welcomes questions or comments

at 954-565-8608 or pmdanswerman@aol.com.