Reinvestment Fee Is Less Than It Seems

QUESTION: I have $25,000 invested in a money market fund that is paying 10% interest. I have designated that this interest be reinvested in the fund. However, I just discovered that the fund is charging a 4% fee for reinvestment services. Does this mean that the fund is paying me just 6%? Should I take the interest and put it into another account that pays 8% or just leave it as it is? I want to be sure to get the best advantage.--B. S.

ANSWER: Stay where you are, unless you can find a fund paying as high an interest rate with no interest reinvestment fee. You are not in as bad a spot as you think. The 4% fee levied by your money market fund is assessed against the interest earned; it is not subtracted from the 10% interest rate. The net effect is that your money is actually earning 9.6%. So, you are better off where you are than in another account paying 8%.

Here’s how it works: Let’s say you have a $1,000 account and it generates $100 in interest. The 4% reinvestment charge is assessed against the $100. The fee is $4, leaving you with interest of $96 and a net effective interest rate of 9.6%.

No Deduction if Money Not Received

Q: I am a bondholder of American Continental Corp. I used to receive interest payments from the corporation, but they were discontinued when the company ran into financial problems. May I deduct these lost interest payments on my 1989 taxes?--D. S.

A: No. You may not deduct what you never received, even though you were entitled to receive it. The theory behind this, say our tax experts, is quite simple: You can’t lose something you don’t have. Your interest payments were not given to you and then taken away; you just stopped receiving them.

However, be advised: The fact that you cannot deduct lost interest is entirely separate from your ability to write off your investment losses on the bonds. When you sell the bonds--or if they should become worthless--you may write off your capital losses on your taxes.

The Internal Revenue Service allows you to offset all of your capital gains in a given year with your capital losses for the same year. If your losses exceed your gains, you may write off up to $3,000 of the excess losses against ordinary income each year until the capital loss is fully deducted.

Selling Shares That Have Depreciated

Q: I purchased 20 shares of Pan American World Airways for $9.50 each on Feb. 2, 1973. Since then, the value of the stock has declined and now hovers in the $3 range. What should I do with the certificate I’m holding?--L. I. H.

A: Well, unless you’re convinced that a miraculous turnaround is on the horizon, our experts suggest that you run--don’t walk--to a broker and sell those shares. Unless you have a relationship with a particular broker who will offer you an attractive fee to sell just 20 shares, our experts advise you to use a discount broker in order to minimize sales commission expenses. Simply bring the certificate to the broker and ask that the shares be sold. You will receive a check for the proceeds, minus, of course, the selling charges.

Your capital loss on the investment is tax deductible.

Seminar on Tax Forms Scheduled

A Note: Taxpayers using Forms 1040A and 1040EZ may get assistance in preparing their filings during a free two-hour seminar set for 1 p.m. on Feb. 17 at the California Museum of Science and Industry. The session will be held in the Seminar Room of the museum’s Mark Taper Hall of Economics and Finance. Business and accounting students from local universities participating in a volunteer tax assistance program will provide help in tax preparation to those who bring their W-2s, interest income and other relevant tax forms.

The museum is located near the Coliseum in Exposition Park, just off the Harbor Freeway. For additional information, call (213) 744-2327.