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Q: I have a Roth IRA fixed annuity with an insurance company. Can I have them do a direct transfer to a bank for a Roth IRA CD? I might want to do this if CD rates improve. I am 57, and beyond the surrender penalty period for the annuity. That annuity guarantees 3 percent.

A: There are three sets of issues to contend with when you make this kind of transfer:

1. Annuity contract issues
2. Tax issues
3. Investment issues

Fortunately, it seems you have a good handle on the details involved, so now it's just a case of following the right procedures.

Regarding the annuity contract, the surrender penalty period that you mention is probably the biggest issue. Annuity contracts typically carry a fairly heavy penalty for early surrender in the first years of the contract, and then this penalty slowly diminishes over time. If you are completely past the penalty phase, you should be able to make a cost-free transfer. Still, you will want to check with the insurance company on their transfer policies; chances are, there is a notice period required before you can make a transfer, so you will want to know what that is and factor it into your plans.

You are allowed to make transfers from one Roth IRA into another without tax penalties, so the key thing is proper documentation. Make sure you keep copies of letters informing both the insurance company and the bank you are going to that this is a Roth-to-Roth transfer, so that it does not erroneously get reported as a distribution out of the IRA. Note that while there is a five-year period between the start of a Roth IRA and when you can start receiving qualified distributions. In the case of a rollover, this five-year period applies from the start of the original Roth IRA. The clock doesn't re-start upon transfer to another Roth IRA.

Finally, as to investment issues, a 3 percent interest rate sounds pretty good these days, but you are right to anticipate a time when CD rates might be higher than that. Not only should you follow interest rate trends in general, but you should periodically shop for the latest CD rates, since the best CD rates may cross the 3 percent threshold well before average rates do. Keep in mind, though, that if interest rates are rising rapidly, you might want to consider savings accounts or money market accounts instead, so you can continue to benefit from that rise.

Good luck with your plans, and here's hoping you see bank rates above 3 percent before too many years go by!

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Q: I just received $300,000 from a life insurance policy. The money is currently in a retained asset account, drawing 1 percent interest. What should I do with this money? I work full-time so I have income.

A: You should probably approach this as a three-step process:

1. Get the proceeds into a bank savings or money market account as soon as possible. Retained asset accounts are vehicles that insurance companies use to house insurance policy proceeds until the beneficiaries decide what they want to do with the money. There has been some controversy over the fact that insurance companies can profit from holding this money in the meantime, but that's not why you should switch to a bank account as soon as possible. Unlike savings accounts or money market accounts, retained asset accounts typically are not FDIC-insured, even if a bank happens to be providing administrative services on the account. If you shop for the highest savings or money market rates, you should be able to find rates competitive with the 1 percent you are now earning, plus you will have the comfort of FDIC insurance. However, in order to maximize this protection, which is capped at $250,000 per depositor per institution, you may want to split the money between two different banks.
2. Check with an accountant to see if there is any tax liability on the money. Life insurance proceeds may well be tax-free, but you will want to make sure before you start making long-term plans for the money.
3. Make long-term plans for this money. Once the money is safely in a bank and you know whether to keep any of it aside for tax purposes, you can start making some long-term plans. Even if you had previously set financial goals, this sudden addition to your wealth might change them. Think through what is important to you, whether it is paying off debt, putting a down payment on a house, funding education, or saving for retirement, and decide how to allocate this money towards those goals. Most likely, you will then want to move at least some of the money out of your savings or money market account, and into longer-term investment vehicles. Knowing specifically what the money is allocated for will help you know what types of investment vehicles to consider, so you can then focus on finding able and reputable providers of those products.

Your payout is enough to really jump-start a retirement savings program, and as described above, you can use it effectively toward other goals as well. Just remember that this type of lump sum does not come along very often, so be sure you use it purposefully and wisely.

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Q: What are some good stocks for income production?

A: With rates on CDs, savings accounts, and money market accounts near zero, it is only natural that people should be looking for alternative sources of income. One possibility for this is investing in stocks with a decent dividend yield. However, before taking that step you need to fully come to grips with the substantial risk differential between stocks and savings accounts.

Savings accounts do not fluctuate in value, and they are guaranteed by FDIC insurance for amounts up to $250,000 per depositor. Stocks, on the other hand, fluctuate in value constantly, and some losses can be steep and permanent. So investing in stocks as an income alternative to savings accounts is fine as long as you aren't expecting a comparable amount of stability from the investment. Also, keep in mind that even if you can live with price fluctuations, stock dividends are not guaranteed. In times of financial distress a company may reduce or completely eliminate its dividend.

One way you can reduce risk is through diversification. That means spreading your money across a number of different stocks. This can make the portfolio less volatile than any one stock might be, and it also cushions you against the risk of any one company cutting its dividend. So, to take a diversified approach, you should be thinking about which sectors as a group tend to produce good dividend yields, rather than thinking in terms of individual stocks.

The S&P 500, which is a broad cross-section of large U.S. stocks, has an overall dividend yield of about 2.22 percent. However, some sectors of the S&P 500 produce much more dividend income than others. For example, the dividend yield on telecommunications stocks is 5.32 percent. Other relatively high-yielding sectors include utilities, at 4.02 percent, and consumer stables, at 3.0 percent. In contrast, information technology is the lowest yielding sector, at 1.20 percent.

Naturally, then, one approach you could take is to focus on the higher-yielding sectors of the stock market. As an alternative, Standard & Poors publishes a list of what it calls "Dividend Aristocrats." These are companies within the S&P 500 that have increased their dividends every year for at least 25 years. This list of Dividend Aristocrats would be a good place for you to look for income-producing stocks. There are 51 stocks on the list, which is a broad enough selection to enable you to assemble a reasonably well-diversified portfolio, if you choose to take this approach.

Historically, dividend yields have not generally been competitive with interest rates, so the current situation is something of an anomaly. However, as long as that anomaly persists, it is worth considering stocks for their income production.

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Q: Should I use cash toward paying off my mortgage? I have $150,000 in a checking account earning 1 percent interest. I have $50,000 in stock, and I'm currently putting $2,500 a year into a retirement account. I owe $282,000 on a mortgage at 4.78 percent, and my house is valued at $500,000. My only other debt is a $25,000 car loan. I am 61 years old and single.

A: It's worth looking at the pros and cons of putting some of your savings into your mortgage, along with another possible alternative.

The argument in favor of putting some of the $150,000 in your checking account toward your mortgage is that this would allow you to instantly make up the gap between the 1 percent you are earning on your checking account and the 4.78 percent being assessed on your mortgage balance. So there is a clear-cut savings to be had by lowering your mortgage principal.

On the other hand, your house is already your largest asset, and not a very liquid one at that. You may not want to concentrate any more of your wealth into that single asset -- especially since you are at an age where you should be starting to line things up for retirement. In fact, a key question is whether you see yourself continuing to live in that house in your retirement years. Especially since you are single, you may want to ask whether you would be willing and able to keep up with the maintenance of a whole house in the long term.

The reason this matters is that if you see yourself downsizing your home in the years ahead, it probably isn't a good idea to sink any more money into the mortgage than you have to at this point.

If you do see yourself staying in the home for the long term, here's another alternative you should consider: refinancing to a shorter-term mortgage. At current mortgage rates, you could switch from your existing 4.78 percent mortgage to a 15-year mortgage at around 3.16 percent. The interest savings should be worth your while, and with a shorter mortgage you would be paying down principal more rapidly. This would effectively achieve your goal of putting more money into the mortgage, but in a less drastic way than by putting a lump sum of savings toward your mortgage balance. This more gradual approach provide benefits without reducing your liquidity, which may be a good fit since you are going to need some liquidity upon retirement.

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Q: If the euro comes to an end, what should the holder of a German bank account do with these funds? Will the euros in the account simply be revalued in a new German currency? Would the exchange rate from euros to this new currency be more favorable given Germany's superior financial condition, compared to other countries in the euro zone?

A: Here are two things you can say about this situation:

1. If the dismantling of the euro happens, it will be chaotic.
2. Germany is better prepared than most to weather the storm.

A year ago, dismantling the euro would have been unthinkable, but now Germany has to be seriously considering an exit strategy. Even though Germany has maintained its strong financial position, it has seen its interest rates rise because it is issuing bonds in a tainted currency (i.e., the euro). That gives Germany a strong incentive to find a solution, which may mean kicking some countries out of the euro zone, or going it alone.

Of course, Germany could continue to try to orchestrate a bail-out of the current euro, but if conditions in Europe continue to deteriorate, Germany could see the euro devalued relative to other major currencies. That represents a significant risk to Germany -- and to your euro-denominated account.

In the event of a transition away from the euro, while you are correct about Germany's superior financial condition, this would not mean a favorable exchange rate from the old euro to a new German currency. In the topsy-turvy world of currency exchange, strength can be a drawback. A weaker currency can "afford" less of a stronger currency, so an exchange from euros into a German currency might yield less than you might think. In theory, this shouldn't matter if the German currency remained strong after the exchange, but it does make you vulnerable to a valuation inefficiency at the time of the exchange.

Speaking of exchange rates, there is another risk factor to consider if you are living in the United States. Your account will not only be affected by the exchange rate from euros into a new German currency, but also by the ongoing exchange rate between the dollar and that new currency. If you think of your German account as a conservative savings account, you might find yourself taking much more risk than one would normally associate with savings accounts due to currency fluctuations.

Those fluctuations might come fast and furious in the uncertainty surrounding the transition, and in the early days of a new currency. If you want to save yourself some volatility, this might be a good time to start checking out U.S. savings accounts.

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