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YOUR MONEY | Q&A | MONEY TALK

Credit Unions Can Offer Good Credit Card Deals--for Members

September 15, 1996|KATHY M. KRISTOF

Q I have credit cards that are charging too much interest. I have heard that credit unions offer a better deal. I would like to obtain a credit union credit card for lower interest, but how can I get a list of credit union credit card offers?

--B.B.

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A There isn't such a list, for a very practical reason: Credit unions are membership organizations that serve certain segments of the population.

One credit union might serve only employees of a particular company, for example. Another might restrict membership to the faculty, students and alumni of a particular university. If you don't fit the membership criteria, you can't be a member. And only members can take advantage of member services, such as credit card and auto loans.

However, there are plenty of low-rate bank cards available. A company called CardTrak publishes fairly up-to-date listings of the lowest-rate and lowest-fee cards. To get a list, send $5 to CardTrak, P.O. Box 1700, Frederick, MD 21702.

The Times lists some of the lowest cards on Sundays on D2.

How to Avoid Penalties on 401(k) Withdrawal Q For reasons out of my control, I will be receiving a check for my 401(k) account from my former employer. Can you please tell me where I can invest my money so I will not owe early-withdrawal penalties to the IRS?

--N.R.

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A If you've taken another job and your new employer has a 401(k) plan, you can normally do a "trustee-to-trustee" transfer and simply have the former employer transfer the funds to the new employer's plan. Call your employee benefits department to seeif this is possible.

If not, you could simply roll the 401(k) proceeds into an individual retirement account. These accounts are offered by most major banks, brokerage firms and mutual fund companies. You can invest the money any way you like within the IRA, and there will be no tax penalty unless you take money out before age 59 1/2.

There's one trick, though, says Philip J. Holthouse, partner at the tax accounting firm of Holthouse Carlin & Van Trigt in Los Angeles. You need to set up the account first and then have your 401(k) plan administrator send the money directly to the institution that houses your new IRA. Why? If the money is sent to you, the plan trustee is required to withhold a portion of it for income taxes. That would leave you in the unenviable position of having to tap other savings to make up for the amount that was withheld in order to roll the whole amount into an IRA.

If you roll over only the amount you get into the IRA, the remaining amount will be taxable as ordinary income and you will owe a 10% federal tax penalty too.

Say you have $10,000 in a 401(k) and you want to roll it all into an IRA. But the IRA isn't established and you know you have 60 days to make the deposit. So you have the 401(k) plan send you the check. The plan will withhold 20% of the amount, sending you just $8,000. In most cases, the $2,000 would come back to you as a tax refund if you deposit the full $10,000.

If you put just the $8,000 into the new IRA, the $2,000 that was withheld will be considered a distribution to you. You'll be taxed on that amount at your ordinary income tax rate, plus you will have to pay penalties to the federal and perhaps the state tax authority as well.

Mutual Benefits of Charitable Trust Q Please explain how the following works: A person donates at least $5,000 to a well-known charity. That charity, in turn, pays the donor either a monthly or yearly amount of money for life.

--P.J.

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A What you're describing is called a charitable remainder trust. Generally speaking, this is how it works: You have 1,000 shares of XYZ Corp. that you bought 50 years ago for $1,000. They're now worth $100,000, but the company doesn't pay dividends and you're at a stage in your life when you'd like some income from this investment.

If you sell the stock and reinvest in an income-producing asset, you would pay tax on $99,000, which would amount to more than $27,720. If you reinvest the remaining $72,280 in a bond fund that yields 6.5%, you would get $4,698 in interest income each year.

But if you give the shares to charity, retaining an interest in the investment income, you would get more in interest. The charity can sell the shares without paying tax. So the charity has $100,000 to reinvest at 6.5% interest, generating $6,500 in interest income. The charity pays you all or part of that annual interest amount for a set period--often the rest of your life. When you die, the $100,000 and all the future interest earned on it reverts to the charity.

Better yet, you get a tax deduction equivalent to the present value of the asset that was donated in the year you make the gift. Figuring out that value is a bit complicated, but most big charities can do it for you.

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Money Talk is normally written by Carla Lazzareschi. If you have a question of general interest that you would like to have answered in a column, write to her c/o the Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail her at carla.lazzareschi@latimes.com. Please include your name and phone number in case any details need to be clarified.

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