Shifting retirement funds for a higher yield

Q In my tax-deferred 403(b) retirement account I hold a low-yielding mutual fund that is part of a fund group that has turned in terrible returns the past few years. If I withdraw the funds, I will owe capital gains taxes plus a tax penalty. What can I do to increase my earnings on this account?

R.S., Boston

A You have several choices, fund experts say.

You can shift all or part of your assets to the best-performing fund in your current fund group, provided the new fund is expected to continue to post gains.

Another option is to move your assets into a money-market account within the current fund group.

Finally, if all else fails, have your employer stop posting new monies to the account and then ask another fund group linked to your 403(b) plan to undertake a direct transfer (rollover) of your money into their fund group.

Under this scenario, be sure you do not take direct possession of the money to avoid a tax penalty.

Q A few years ago the school where I taught let me set aside a pretax portion of my paycheck for medical-related expenses. I was planning to purchase hearing aids. Since it doesn't pay for me to itemize deductions, this plan amounted to a substantial tax savings.

I have since switched schools, and my current employer does not offer medical-savings accounts. Can an insurance company or financial institution like a credit union or bank offer me such a plan? Or is this only available through one's employer?

D.O., Sarasota, Fla.

A Only your employer can offer pretax medical-savings plans, says Joe Walshe, a partner with accounting firm Price Waterhouse Coopers, in Tyson's Corner, Va. You may be able to find a similar plan on your own, but you would not qualify for a pretax deduction.

Instead, you could get a private-insurance plan which you could pay for on your own. It would be subject to the medical/dental deduction rule, which is that such expenses must total more than 7.5 of your adjusted gross income before you can take a deduction.

Bottom line: Urge your new employer to set up a pretax medical-deduction plan.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com

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