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Author: Lankford, Kimberly

ASK KIM

We're off to travel the world for a year. We have about $80,000 sitting in our savings account, which we want to use to purchase a bigger house when we return. Where can we stash the money for a year to earn some interest?

Your best bet is a certificate of deposit. Yields on short-term CDs are the most attractive they've been in a few years. Several banks pay about 4% for one-year CDs (see page 98 for the list of highest yielders). If you're in a high enough tax bracket, you might be slightly better off with a municipal bond. Some high-quality munis recently yielded 2.5% to maturity in a year. If you are in the 35% federal tax bracket, that's the equivalent of a 3.8% yield from a taxable bond. But if you're in the 28% bracket (taxable income between about $120,000 and $180,000 for married joint filers), that's the equivalent of less than 3.5% from a taxable security.

My brother passed away recently, and my sister and I are beneficiaries of his life insurance. How will we be taxed on that money?

The proceeds of life-insurance policies are tax-free. You don't even have to report the money to the IRS.

I'm 44 years old, and the only debt I have is a mortgage with a balance of $100,000 at 6.5% interest, I have enough cash to pay it off. Would that be a smart move?

The key, of course, is how you would invest the money otherwise. First, see if you can lower your mortgage rate. Switching to a 15-year mortgage could get you a 5.17% rate. Then your investments would only have to make more than 5.17% to beat paying off the mortgage. We're not dismissing the peace of mind living mortgage-free can bring, particularly in retirement. But at your age, you're probably better off investing your money elsewhere.

I'm looking for a gold fund to use as a hedge against inflation. What is your advice?

The problem with gold and gold-mining stocks is that they react to more than just inflation. Government central banks, for instance, are big holders of bullion and can influence gold's price through their buying and selling. The price of gold may also reflect global political tensions--or their absence.

If you still want to invest in a gold-oriented fund, a good choice is Vanguard Precious Metals and Mining. It gained an annualized 27% over the past five years (after losing 8% per year the previous six years). It may invest as much as half of its assets in shares of other kinds of companies, such as coal and platinum producers. An even more diversified option is T. Rowe Price New Era, which has about half its assets in energy stocks and the remainder in producers of other commodities and basic materials. It returned an annualized 14% over the past five years (and earned an annualized 12% the previous six years).

I want to contribute to Roth IRAs for my nieces and nephews. Can I transfer appreciated stock to them and avoid the tax on capital gains, the same way I could if I gave it to charity?

Nice idea, but it won't work. Only cash can be contributed to an IRA.

My daughter has finally been hired on with a company that has a 401(k) plan, but her company does not match or contribute to the plan. She is 27 years old, married, makes roughly $30,000 a year and does not have any other savings. Would a Roth IRA be better for her than an unmatched 401(k)?

It's generally best to invest in a 401(k) up to the employer match; otherwise, you'd be passing up free money. But when there is no match, we'd go with the Roth first, particularly because of your daughter's low tax bracket.

Investing $4,000 in the 401(k) would save her just $600 in the 15% bracket. But she'd pay an awful price later. Assuming that $4,000 earns 8% a year, it will grow to about $65,000 over 35 years. Taking that much out of a 401(k) would cost almost $ 10,000 in tax, assuming she's still in the 15% bracket--and even more if she's in a higher bracket. If she uses a Roth instead, her tax bill on $65,000 will be $0--no matter what bracket she's in.

If I already have a loan against my 401(k), should I reduce my current contributions so I can pay back the loan earlier or keep contributing at the maximum rate?

Contribute at least enough to get any match, then try to pay off the loan as quickly as possible. If you leave your job (voluntarily or not), you'll probably have to repay your loan in full within 30 or 60 days. If you can't, you'll be hit with a 10% early-withdrawal penalty plus a tax bill.

My thanks to Steve Goldberg, Jeff Kosnett and Manny Schiffres for their help this month.

Got a question? Ask Kim at kiplinger.com/askkim, or write Ask Kim, 1729 H Street, N. W., Washington, DC 20006.

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By Kimberly Lankford, kiplinger.com/askkim