Not All IRAs Are Federally Protected

QUESTION: There are lots of articles there days about federal insurance for deposits in banks and savings and loans. But I can find no specific information on insurance for individual retirement accounts held by these institutions.

I have a $265,000 self-directed IRA invested through a federally insured bank. The amount is split as follows: $111,000 in a compounding five-year certificate of deposit, $100,000 in a one-year certificate of deposit at a federally insured savings and loan that is held in the name of the bank, $20,000 in a real estate investment trust placed by the bank and $45,000 in a government securities mutual fund placed by the bank.

Is all my money covered by federal insurance? What are the rules for Federal Deposit Insurance Corp. and Federal Savings and Loan Insurance Corp. insurance for IRA accounts? There are thousands of retirees with IRAs exceeding $100,000 who may be at risk without knowing it.--W. V. L.

ANSWER: You’re right: There may be thousands of retirees at risk. And you’re one of them.

Generally speaking, IRA accounts at any single savings and loan institution are insured up to a total of $100,000 per participant, explains Kathy Nagle, director of the insurance division of the Federal Home Loan Bank Board, which administers the fund. The bottom line is that you shouldn’t keep more than $100,000 in any IRA account or combination of IRA accounts at any single federally insured institution if you want to be fully covered by FSLIC insurance. (The same general rules apply to accounts at banks covered by the Federal Deposit Insurance Corp.)

These rules are somewhat more strict than those covering normal savings deposits. The reason is that an IRA account by its very nature can only be held by a single person, while savings accounts and other investments can have multiple owners, each of whom is entitled to insurance coverage.

Now back to your portfolio: Just $100,000 of your $111,000 five-year certificate of deposit is covered by the bank’s insurance. The one-year certificate at the S&L; is fully covered by FSLIC insurance; but be careful, you’ve reached your limit. Deposits in real estate investment trusts and mutual funds are not covered by either FSLIC or FDIC insurance, regardless of whether these investments were placed by the bank at your request or not. These investments simply don’t qualify for federal insurance.

For more information, write for the brochure titled “Insurance of Accounts” from the Insurance Division of the Federal Savings and Loan Insurance Corp., 1700 G St. N.W., Washington, D.C. 20552.

Q: I bought a bond between interest payments in early 1987 and paid some accrued interest to the seller. I sold the bond in mid-1988. I have heard that I can deduct the interest payment to the seller from my proceeds on the bond. But there is no place on the tax form to do this. I do not itemize my deductions. Please help.--L. C. M.

A: We can give you some advice, but it’s not going to do you much good at this point. The interest payment to the bond seller was a plain interest expense for 1987. And you should have deducted it on your tax filing for 1987, the year in which you bought the bond, not 1988, the year you sold it.

However, if the interest payment was a substantial amount, you can file an amended 1987 tax return. Only you can judge if the interest deduction is large enough to be worth the expense and bother of filing the amended return.

Q: My husband died and I received about $20,000 in insurance payments from the policies we carried on him. Can you tell me if I am required to pay federal income tax on this money?--L. A. M.

A: The short and simple answer is no. There are no income taxes owed on straight life insurance policies.

Q: In 1982, I inherited several Series E savings bonds from my father. I rolled them over into Series HH bonds. However, now I am told that the taxes on the interest accumulated by the Series E bonds were paid entirely by my father’s estate. This means that I do not owe any taxes on these bonds when they mature. So what do I do? Some of these HH bonds are maturing soon. How can I get the government to believe that the taxes were paid when my father died? Do I have any chance at all of not paying the tax a second time?--G. L.

A: Yes, there is more hope than you might think, say our contacts at the Federal Reserve. First of all, you should check your bonds to see if they include a “tax deferral legend” across the bottom. If the bonds contain this notation indicating that the taxes were deferred when the bonds were converted from Series E to Series HH, you have work to do. However, if the bonds are blank along the bottom, the Federal Reserve Bank has been notified that the taxes have been paid on the accumulated interest, and the principal is all yours, tax free, when the bonds mature.

Now, if your bonds erroneously contain this tax deferral notation, you must prove to the officers of your local Federal Reserve Bank that the taxes have been paid. Contact the savings bond manager at the nearest branch of the bank--in Los Angeles the bank is located at 950 S. Grand Ave. in the downtown area--and explain your situation. You will need to present conclusive evidence, such as canceled checks and other official documents, proving that the taxes were paid by the estate. The savings bond manager should be able to help you resolve this matter.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.