Boost Yield on Savings

I am a community-college student and work part-time. I've managed to put away about $5,000 so far, but with interest rates so low, I'm hardly earning anything on my savings. How can I boost my earnings? Should I invest in mutual funds if I'll need to tap the account in a few years? -- M.Y., Chatsworth, Cal.

You're smart to start thinking about saving so early. Because you may need the money in a few years, you don't want to risk it all in the stock market. But, as you've noticed, interest rates are extremely low.

Among options insured by the Federal Deposit Insurance Corp., one good bet is a CD maturing in two or three years. Bank of Internet and USAA both recently offered three-year CDs yielding 2% with a minimum deposit of $1,000. You can also find a community bank or credit union with a checking-account yield as high as 3.51% at www.checkingfinder.com.

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A somewhat more aggressive way to balance risk and return for short-term savings is with Vanguard Wellesley Income fund (symbol VWINX). The fund typically holds 65% of its assets in high-quality bonds and the rest in stocks. Over the past year through December 3, Wellesley delivered a total return (yield plus change in share price) of 9.0%. The yield, based on the fund's distributions over the past four quarters, is 3.8%. The fund has lost money in only one year (2008) in the past 12. Minimum investment: $3,000.

Doughnut-hole relief. How does Medicare Part D's new 50% discount on brand-name prescription drugs work for seniors affected by the so-called doughnut hole? -- Dale Lehman, Woodstock, Ga.

The prescription-drug coverage gap, known as the doughnut hole, has been the big downside of the Medicare Part D program since it was launched in 2006. But beginning in 2011, the gap will start to shrink. Once your total drug costs reach $2,840 for the year (including your share and the insurer's share of the costs), you now get a 50% discount on brand-name drugs. Your pharmacy will apply the discount automatically. After your out-of-pocket costs reach $4,550 for the year, you qualify for catastrophic coverage and your Part D plan picks up most of the tab.

The entire cost of the drug -- before the 50% discount is applied -- counts toward the amount needed to fill the coverage gap. If the drug costs $100, for example, and you pay $50, the entire $100 will count toward your out-of-pocket costs that trigger catastrophic coverage.

By 2020, you will have to pay only 25% of your drug costs in the gap.

Retirement plans for the self-employed. I am self-employed and want to know how much I can contribute to my retirement account for 2011. Is there still time to make contributions for 2010? -- Ovais Sheikh, Nesconset, N.Y.

You have two main choices: a SEP IRA or a solo 401(k). Either one will lower your taxable income now and build a nest egg that grows tax-deferred until you withdraw the money in retirement. A SEP is easiest to set up -- you can open an account with most brokerage firms, mutual fund companies and banks, and you can invest in funds, stocks, bonds or CDs. You can contribute up to 20% of your net self-employment income (defined as total business income minus half of your self-employment tax), up to $49,000 for both 2010 and 2011. You have until the April 18, 2011, tax-filing deadline -- or October 17, 2011, if you file an extension -- to set up and contribute to a SEP for 2010.

Although it's too late to set up a solo 401(k) for 2010 -- you had to establish one by December 31, 2010 -- you can get a jump on 2011 taxes by setting up a solo account by the end of the year. You can contribute up to $49,000 -- $54,500 if you're 50 or older -- and you'll have until October 15, 2012, to fund it.