Remember that investing (rather than spending) your tax refund just might be a wise move; consider the pros and cons of CD investments in this month's Featured Question. Also, be sure to check out the Tax Corner for advice on avoiding this year's number one filing error, and read about the benefits of E-filing (and much more) in this month's Article Briefings.

Featured Question of the Month
Investing in Certificates of Deposit

IRA.com News
Recommended Reading List
Prepare and File Your Taxes On-Line via IRA.Com

Tax Corner
Avoid the Number One Error of This Year's Filing Season

Article Briefings
E-filing Takes Hassles Out of Taxes
Broad Help Arrives for Pension Savings
A Simplified Approach to Retirement Benefits for Small Business
Improving Your Home Can Bring You Some Tax-Free Funds Eventually

Resource Link
Savings Guidance from the Choose To Save Education Program

Q. What is a CD? What issues should I consider before investing in one?

A. A CD is a Certificate of Deposit that is issued by banks, savings and loans institutions, and some credit unions. Sometimes, you can open a CD with a small minimum investment, such as $100. Your money remains in the CD for a set period of time--anywhere from 6 months to 10 years, depending on the CD. CDs pay a fixed interest rate, and interest is usually compounded daily. The interest earned within a CD is taxable each year, even if the money is not withdrawn from the CD. (However, for CDs purchased within IRA accounts, any applicable taxes come into play upon withdrawal of the funds, rather than as they accumulate.) Normally, penalties equal to six months of interest apply if you want to withdraw your money early. However, some banks offer CDs that allow one withdrawal over the term of the CD without a penalty. The allowed withdrawal may be a portion of the total balance, or it can be the entire balance. A CD will usually offer a better interest rate than a standard savings account, and it is insured by the federal government. For example, if the CD is with a bank, the FDIC insures up to $100,000 per account.

The main reason people purchase CDs is safety. Unless they are market-adjusted CDs, the federal government insures them, they provide a guaranteed rate of return, and they guarantee the return of the principal. Of course, the tradeoff for this security is a relatively low rate of return.* Since rates are low and are likely to stay low for the short term, it would be prudent not to tie your money up in a CD for more than 18 months at a time, unless it's a penalty-free CD. A longer term CD could be beneficial depending on the rate of return and your particular financial situation. A qualified advisor can determine if any CD is an appropriate investment for you.

You may choose to purchase a CD with IRA funds. If you do, the IRA rules apply. For instance, if you purchase a CD with funds inside of a traditional IRA, the money cannot be withdrawn from the IRA until age 59-1/2 without penalties, or under special circumstances. So, once the CD matures, the money must be reinvested in another CD or other investment vehicle (stocks, mutual funds, annuities, etc.), as long as it stays in the IRA. Later, when you withdraw money from the IRA, taxes will be due on both the money earned and the money invested. In the case of a Roth IRA, you pay taxes on your money before investing it, so taxes will be due only on the interest earned. The Roth IRA rules also provide for earlier withdrawal, so the money could be withdrawn after five years. Of course, if the CD matures before then, the money would need to be reinvested within the IRA in order to avoid penalties.

Three factors might lead you to consider investing in a CD:

1. You have a low risk tolerance (unless you are considering a market-adjusted CD).
2. You have extra cash (such as a tax refund) that you don't need to access right away.
3. You'd like an insured savings vehicle that may yield a better return than a traditional savings account or a money market fund.

Read All About It!

Our recommended reading list on retirement planning and personal finance is now available on IRA.com. Each title has a direct link to amazon.com for easy purchase and access to further comments and reviews. The experts at the Internet Retirement Alliance have collaborated on this list, making it invaluable to people who want to make informed decisions about their financial future. Check it out at www.ira.com/books.htm.

On-Line Tax Prep via IRA.COM

IRA.com now points the way to fast, convenient, on-line tax preparation. Many free resources are available, such as an easy-to- understand Tax Guide (including a summary of the 2001 Tax Relief Act) and glossary on nearly everything related to tax reporting and future tax planning. You'll find all the forms, tables, and worksheets you need, as well as personal finance calculators on IRAs, home buying, college savings, car loans, and more. This service offers efficient, thorough, on-line tax preparation and e-filing at a reasonable price with no download necessary. Explore for yourself: visit IRA.com today.

Avoid the Number One Error of This Year's Filing Season

The IRS has provided a useful web site to help people avoid tax return problems with last year's rate reduction refund. It's the number one problem people are having with this year's filing season, so it's worth your while to take a look. The site spells out the facts you need to know, explains how to handle the problem, and provides numerous Q&A's. Visit:

www.irs.gov/irs/news/0,,i1%3D42%26articleId%3D78976,00.html.

E-filing Takes Hassles Out of Taxes
USA Today Online [www.usatoday.com], 02/15/02; Block, Sandra.

E-filing takes the sting and the hassle out of filing income taxes. Taxpayers who e-file receive their refunds within three weeks or less if the check is directly deposited into a bank account, compared to paper filing, which can take up to six weeks. Another benefit to e- filing is that people tend to make fewer mistakes. Electronically filed returns have a 99% accuracy rate over paper returns, and, in the event of a problem, the mistake is corrected quickly. E-filed returns can also be tracked electronically, so there is little chance of a filing getting lost.

Broad Help Arrives for Pension Savings
New York Times [www.nytimes.com], 02/17/02; Delafuente, Charles.

New tax incentives are in effect and have raised contribution limits for 401(k), 403 (b), and 457 retirement savings plans, which allow workers to reduce taxable income while building larger retirement nest eggs. Some employees may be hindered by percent-of-salary limits placed on plans, but government officials contend that employers will be more generous with their contributions. Many are concerned employees will not take advantage of the new tax incentives because they are worried about job security--placing money in their employer- sponsored retirement account would render it inaccessible until retirement, unless the participant was willing to pay a 10% early withdrawal penalty.

A Simplified Approach to Retirement Benefits for Small Business
Agency Sales Magazine [www.manaonline.org], Vol. 32, No. 2, Pg. 22, 02/02; O'Malley, Scott E.

Providing retirement benefits has traditionally been viewed as complicated by small employers, not only because of the intricate reporting required by the Internal Revenue Service (IRS) and the Department of Labor, but also because of the labor and time costs associated with administering and maintaining the plan. In response to the needs of small-business owners, Congress developed the Simplified Employee Pension (SEP) plan in 1978. The SEP is an IRA that requires no IRS or Labor Department filings from the employer and puts the maintenance and fiduciary responsibilities of the accounts on the employees, rather than the business owner. As of 2000, the SEP plan allows a business owner to make a discretionary tax-deductible contribution of a maximum of 15% of compensation or $25,000 (which ever is less) for himself and each eligible employee. This contribution can be adjusted annually or skipped altogether. However, two basic rules apply: (1) employers must contribute the same percentage to workers' plans as they do to their own, and (2) contributions must be made on behalf of all eligible employees who are 21 years or older and have worked three of five years as covered under the terms of the plan. Investment flexibility extends to bonds, stocks, mutual funds, etc. In addition, the SEP plan allows employees aged 59-1/2 and older to make penalty-free withdrawals, and required distributions for those 70-1/2 and older are made according to the same rules as a regular IRA. Employers of 25 workers or less can choose an option for cash-deferred plans called CODA-SEPs, which use salary reduction schedules that shift part of the costs of rising retirement needs to the employee.

Improving Your Home Can Bring You Some Tax-Free Funds Eventually
Philadelphia Inquirer Online [inq.philly.com], 02/22/02;Brown, Jeff.

Prior to 1997, homeowners could receive tax-free sale profits only when buying a new house within two years of a sale and for more than the previous property's sale price. However, 1997 federal tax reform allows married and single homeowners to avoid taxes on profits up to $500,000 and $250,000, respectively, if they have resided in the primary residence for any two of the last five years. The law also permits homeowners to count time in a nursing home or other facility, provided they lived in their house for at least one year. Furthermore, widowed homeowners may still claim the $500,000 tax break if they sell the same year that his or her spouse died. Home improvements that boosted property value previously prompted owners to purchase more expensive houses in order to qualify for the exemption, often forcing them to put their sale profits toward the new home instead of other investments. To benefit from the current law, homeowners should choose more profitable upgrades, such as those in the kitchen or bathroom, that will help the property appreciate in value over time; swimming pools and professional paint jobs usually cost more than the value they add. Though major remodeling jobs--such as an addition--could drive up property taxes and minimize the tax- free gains on a future sale, the weakening stock market continues to make real estate a better investment.

Savings Guidance from the Choose to Save Education Program
www.choosetosave.org/tools/index.htm

The Choose to Save(R) Education Program offers a wealth of resources on savings and retirement planning, all organized according to various age groups. The section for each age group addresses that group's most common needs and concerns through a variety of hot topics, glossary of terms, and financial planning calculators. For example, tools are available for questions about budgets, savings, credit cards, auto, home mortgage, home equity loans, retirement, stocks, mutual funds, Roth IRAs, bonds, and insurance.

DISCLAIMERS

(c) 2001 Copyright Claimed, Internet Retirement Alliance.

Abstracts (c) Information, Inc., Bethesda, Maryland 301-215-4688. Redistribution is prohibited.

The material and information herein is obtained by from a wide variety of sources. The Internet Retirement Alliance (IRA.com) believes this information is accurate, current, and authoritative, but it may not be. The Internet Retirement Alliance (IRA.com) provides the information "as is" without any express or implied warranties.

The Internet Retirement Alliance (IRA.com) does not provide legal, accounting, investment, or other professional services. If the reader requires legal, accounting, investment, or other expert assistance, the services of a competent professional person should be sought.