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ASK KIM
Is it Time to Buy Fannie?
by Kimberly Lankford
A while back, everyone was in love with Fannie Mae. But with all the controversy, including a criminal investigation, its shares are way down. Is it time to buy?
--C.R., Jackson, Miss. The long term looks good, but the short term may be rocky. Fannie, the nation's largest source of money for home mortgages, has been charged by the Office of Federal Housing Enterprise Oversight with accounting misdeeds. While defending its actions, Fannie has agreed to change its practices.
Even before this development, Fannie was controversial. Many in Congress don't like its government-sponsored duopoly with Freddie Mac, making Fannie and Freddie the nation's low-cost suppliers of mortgage funds (they can borrow cheaply because of Uncle Sam's implicit guarantee of their debt). More accounting questions may surface, and the stock could slide further.
But the outlook remains bright. If Congress doesn't rein it in, Fannie should be able to generate earnings growth of 10% per year. And in the unlikely event that tight new restrictions are imposed, profits should rise 6% annually, says analyst Jonathan Gray of Sanford C. Bernstein & Co., who rates the stock a buy. At $69, off from $79 last February, Fannie sells at nine times estimated 2005 profits of $7.97 per share. That puts the stock in bargain territory.
Help for hurricane victims
Will families be able to deduct hurricane losses that are not covered by any type of insurance on their federal income-tax returns? After living through three hurricanes and one tropical storm this year, a lot of people in Florida are facing problems we never thought of before.
--Margaret Barthe, Haines City, Fla.
Not only can you deduct unreimbursed losses resulting from the storms, you even get a choice of writing them off on your 2004 income-tax return or taking a retroactive deduction on your 2003 return. You get this generous opportunity because your loss occurred in a presidentially declared disaster area. Amending your '03 return would guarantee you a refund check from the IRS.
Losses due to hurricanes are considered casualty losses, and to figure your deduction you must first reduce each loss by $100 and then subtract 10% of your adjusted gross income. (Those residents who suffered from two storms must reduce their loss by $200.) You can deduct the remainder. If your loss is $35,000 from one storm, say, and your AGI for 2003 was $75,000, your loss would be $27,400. Because of the AGI reduction you'll probably want to claim the write-off in the year in which your income is lower. If you decide to amend your 2003 return, be sure to write "Florida Hurricanes" at the top of Form 1040X so that the IRS will expedite your claim.
Too rich for an IRA
My wife and I are both 61, and each year we contribute the maximum to our Roth IRAs. Between January and May, we contributed a total of $4,500. Then I discovered that, thanks to a tremendous increase in commissions this year, our income will exceed $150,000 -- the point at which the opportunity to use the Roth begins to disappear. I understand we have to withdraw our 2004 contributions. Is there a special form to complete? Will we face a penalty?
--G.L., Lake Ridge, Va.
Thanks to your age, there is no penalty and there are no extra forms to fill out. You do need to withdraw the $4,500 and any earnings attributed to it while it was in the tax shelter by April 15. The earnings should be reported as a taxable-IRA distribution on your Form 1040. Attach a note explaining what happened. (If you were under age 59½, the withdrawn earnings would have been hit by the 10% early-withdrawal tax and you'd have to file a special form.)
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