Question: Where can my parents park $132,000 for a year or two to get a better return than the 1.1 percent on their current CD?
Answer: Unfortunately in these days of low interest rates, your parents do not have many options without either locking up the funds in a longer-term (investment) or taking additional risk that ultimately could result in some loss of principal.
Due to the short timeframe investing these funds, there is a trade-off: By not taking any real risk with the principal, your parents are giving up potential long-term rewards.
I would advise researching local credit unions. Some have certificates of deposit where funds can be withdrawn as needed. Your parents would have the liquidity they wanted and still could achieve higher interest rates than a normal savings account.
Another option would be online banks, such as (Charles) Schwab Bank or E-Trade. For example, I just looked at the ING online checking account, which is currently paying 1.25 percent APY for a deposit of your size. Not too bad by today’s standards while still preserving your liquidity.
You will want to do a significant amount of research before deciding where to deposit these funds. I would also make sure the funds are covered by FDIC insurance.
—Michael R. Tate, investment adviser Q: My 82-year-old mother has decided to sell her house in Los Gatos, Calif., and move into a senior living community. She bought the house in 1975 for about $42,000 and plans to list it for about $700,000. She is very worried about capital gains on the house, since she needs this money to live on for the rest of her days. She has roughly $10,000 in the bank and about $75,000 in debt from a $150,000 line of credit on her home. Her only income is $700 a month from Social Security. How big a hit will she take from capital gains/taxes when her house sells? Is there any way she can protect or shelter this income?
A: Assuming she has lived in the house for two of the past five years, she will be able to exclude $250,000 of the gain when calculating the taxes due (married couples can exclude up to $500,000).
The cost basis of the home is not only the purchase price, but also the cost of any improvements (new roof, kitchen remodeling, etc.) and her expenses in selling the home. This total cost basis would be deducted from the sales price to determine her capital gain.
The good news is that the current long-term capital gains tax rate is only 15 percent and may even be zero if her taxable income is low enough. Before selling the house, be sure to discuss her situation with a qualified tax professional.
—Susan Soesbe, certified financial planner
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