More for Your Money

This month, Kim Lankford answers your questions on IRAs, CDs and HSAs.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, October 2008

I have more than $100,000 in a certificate of deposit that's paying 5.25% and is about to mature. I'm 66 years old. I have enough invested in stocks and funds and want this money in a safer place. Most CDs are only paying about 2%, so what is the next-safest way to invest my money? K. Love, Nashville

Take a look at this list of top-yielding CDs and money-market accounts, all of which pay more than the 2% offered by your local bank. If you want more options, visit Bankrate.com, a Web site that lists rates of CDs and bank money-market accounts across the country.

For a bit more flexibility, stash your money in an online savings account. You can find accounts that yield more than 3%. We like HSBC Direct because it offers an above-average yield (3.5% at last word), requires a minimum investment of just $1 and levies no account-maintenance fees.

You could earn more by investing in, say, floating-rate bank-loan funds. But that would involve considerably more risk, which is something you want to avoid. At any rate, in the current environment, it's wise to keep your powder dry and your money secure until interest rates begin to rise (see Is My Money Really Safe?). The Federal Reserve, which influences short-term rates, has lowered rates to stave off recession. We believe the Fed's next move will be to hike short-term rates, possibly late this year, to keep inflation in check. Such a move would lift yields on CDs, bank money-market accounts and money-market mutual funds.

Deduct a loss on my IRA? If the current value of my Roth IRA is less than the amount I invested, can I close my account and claim a loss on my taxes? Bernardo Estevez, North Bergen, N.J.

You may be able to write off the loss, but the rules are tricky and you probably won't be able to deduct as much as you think.

You can deduct Roth IRA losses only if you close out all of your Roth IRA accounts, and if the total amount you receive is less than your basis. In the case of a Roth, your basis is the total amount you've contributed to the account plus any money you've converted to a Roth, minus any withdrawals you might have made earlier.

The procedure is similar to deduct a loss in a traditional IRA. You must close out all the accounts and receive less than your basis. Your basis in a traditional IRA is your total nondeductible contributions minus any earlier withdrawals; the basis for any tax-deductible contributions is $0.

If you have a loss, you don't report it in the same way that you would a capital loss on money-losing investments in a taxable account. Instead, you report it as a miscellaneous itemized deduction on Schedule A. You must itemize to take this write-off, and the total of your miscellaneous deductions -- which also include job-hunting expenses, investment expenses and unreimbursed employee business expenses -- must exceed 2% of your adjusted gross income.

To illustrate how all this works, let's say you contributed $7,000 to your Roth IRAs over the past few years and the accounts are now worth $1,000. If you closed all of your Roths, you'd have a loss of $6,000. If your adjusted gross income (AGI) was $50,000, you could write off $5,000 -- your losses above $1,000, which is 2% of your AGI. Be aware that you can't take this deduction if you're hit by the alternative minimum tax, which does not allow for miscellaneous itemized deductions.

Taking the loss may seem helpful, especially in a year during which your investments have lost money. But there's a big downside: Once you close your IRAs, you lose the opportunity for the money to grow tax-deferred (or tax-free in a Roth) for retirement. So it usually doesn't pay to close all your IRAs, unless you suffer major losses.

Donations from an IRA. Are charitable donations of IRA money permitted after tax years 2006 and 2007? Joe Sims, via e-mail

Not at the moment. In 2006 and 2007, people age 70 and older could transfer $100,000 per year from their IRA directly to a charity and avoid paying taxes on the money. That provision has expired, but we expect Congress to reinstate it retroactive to January 1, 2008.

This strategy can be particularly helpful for retirees who need to take required minimum distributions from traditional IRAs that have increased significantly in value -- and who would face a big income-tax bill on their withdrawals -- but don't need the money to live on. The contribution would count as your required distribution but wouldn't be included in your adjusted gross income.

If you could benefit from such a move, delay taking your required minimum distribution until late in the year, just in case Congress does reinstate the tax break.

Rules for health accounts. I opened a health savings account at my previous job, which offered a high-deductible health-insurance policy, and my pretax deductions were deposited into the HSA from my paycheck. My new employer does not offer a high-deductible policy. Can I still contribute to the HSA? Daniel Nardini, Plantsville, Conn.

You can make HSA contributions only for the months during which you were covered under a qualifying high-deductible health-insurance policy. But if you didn't make the maximum contributions that were allowed when you were eligible, you may still be able to contribute the remainder of the money, says Roy Ramthun, president of HSA Consulting Services, in Silver Spring, Md.

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