401(k) Plans May Not Always Be Insured

QUESTION: Can you please explain what happens to funds invested in a 401(k) program? Are these programs federally insured like a passbook savings account or are our savings at risk? Specifically, I want to know if a 401(k) is a sure thing and whether I can get all of my money back. I want the absolutely safest investment for my retirement savings.--I. B.

ANSWER: The recent spate of failures of savings and loan institutions and the precarious position of some major insurance companies have unnerved many savers. It is not surprising that you should be concerned about your retirement savings.

The 401(k) plans offered by many employers are simply a kind of pension fund supported by employers and their employees. And, as such, they are not covered by the type of federal insurance programs and guarantees available to deposits in banks and S&Ls; or investments in federal debt securities.

However, it is still quite possible that your 401(k) savings are covered by federal insurance. Why? Because your 401(k) program may invest its proceeds in bonds issued by the federal government or in savings accounts or other insured investments. If so, then, to whatever extent that your particular account was invested in these insured instruments, you would be covered.

You should ask your employee-benefits manager how your account is invested. Many employers offer their workers the opportunity of choosing for themselves how their account is handled. Some programs allow workers to invest in the stock market, mutual funds, government securities or even the company’s own stock. By learning how your account is invested, you should be able to determine whether or not your savings are covered by any insurance.

Taking as Little as Possible From an IRA

Q: What is the latest possible date that I will have to start taking minimum distributions from my individual retirement account? I turned 70 on Jan 15. Also, what percentage of my account will I have to withdraw? I want to take out as little as I absolutely have to.--V. S.

A: The law requires that you begin taking minimum annual distributions from your IRA by April 1 of the year following that in which you turned age 70 1/2. For you, this means that you must take a distribution by March 31, 1991.

The minimum withdrawal is based on a variety of factors. These include your age at the time distributions begin, your life expectancy and how you decide to handle the third major criterion in the formula: the beneficiary of your IRA. You can elect to figure the life expectancy of your IRA on just your age or the combined ages of you and your beneficiary.

So, if your IRA beneficiary is substantially younger than you--and you want to withdraw the least amount possible from your account--you would be wise to calculate the distribution based on the combined life expectancies. Officials at whatever institution is handling your IRA can help you make the necessary calculations and provide you with the appropriate actuarial tables and paper work.

Loan to Son May Be a Second Trust Deed

Q: I am planning on lending some money to my son. I would like to make the loan in the form of a second trust deed on his house so he can deduct the interest on his income taxes. Is this feasible? If so, what forms are required? Do I have to record them in the county recorder’s office?--B. G.

A: Your plan is quite sound and you should have no trouble executing it, provided that the amount of your loan is within the limits of interest deductibility. Remember, under recent changes in tax law, your son can deduct interest on an additional home-equity loan of up to $100,000, provided that the total indebtedness on the house does not exceed its fair market value.

Once this is settled, you can buy a standard second-trust-deed form at a stationery store that sells legal forms. Fill it out and have all parties to the loan to sign it. Although it’s not required, you are probably better off recording the deed. The recording fee is minimal. Recording the deed makes it a public document that ensures your interests will be taken into account if additional loans are taken against the property or if the property is sold.

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.