
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, March 26, 1990                   TAG: 9003261994
SECTION: BUSINESS                    PAGE: MONDAY   EDITION: METRO 
SOURCE: 
DATELINE:                                 LENGTH: Medium

HOW TO FIGURE ZERO-COUPON TAX

Q: I bought a zero-coupon Treasury bond for my grandson a few years ago to mature when he is age 17. The bond was purchased through Sovran Bank. The difference between the cost and the mature value figures to be 10.8 percent compounded semiannually.

The Sovran people in Norfolk notify me each year how much money is to be counted toward taxable income from this bond. This amount varies up and down, and the Sovran people in Norfolk ignore my letters asking how it is figured. The local people apparently are unable to tell me. Can you tell me how the amount in question in figured?

A: Sovran forwards to you the information about the so-called "phantom income" on zero bonds that is subject to tax, but the bank doesn't do the calculations.

David J. Capps, vice president at Sovran Investment Co. in Roanoke, said the figures are produced by the U.S. Treasury based on the difference between accrued interest and principal appreciation. The government puts out Publication 1212 which lists the dollars of income for each thousand of face value for every Treasury issue.

Sovran and other investment institutions then assign these income figures to customer accounts.

The government revises the tables every year according to the new allocations of principal and interest.

The formula is based on original issue discount yield, multiplied by par value and divided by the number of years to maturity. IRA's all yours

Q: Before my husband died in 1986, he placed his retirement funds in an IRA with a five-year term.

I am 68 years old and retired. My only income is my Social Security of $10,060. I have found it necessary to transfer much money for my sons and repairs to the house.

The fine is so much, this IRA will be withdrawn when I am age 70 1/2. Am I eligible for anything?

A: When your husband died, you became the owner of his IRA. You can treat it as your own account.

Because you are over the age of 59 1/2, you can withdraw from the IRA without any federal penalty except for the tax on the amount taken.

Betty Stanley, who supervises IRAs for Dominion Bank, said it is up to each bank whether it waives the separate penalty for early withdrawal from the certificate in which the money is invested.

Dominion Bank's policy is to waive the penalty for early withdrawal if the account owner is older than 59 1/2. Stanley said that is also the policy of most banks, although many thrifts impose the penalty.

You should consult your bank or thrift to determine its policy on waiver of early withdrawal.

You should conserve this nest egg for your retirement emergencies, withdrawing only an amount that you really need. more to come

by CNB