Tax treatment of annuity profits made plain

Q If I cash in $5,000 representing the entire gain in an annuity that I have held since 1993, will it be treated as a capital gain? Or will some of the money be considered part of my original investment? Also, can this gain be offset by capital losses in my regular stock and mutual-fund portfolios?

D.S., New York

A The "gain" you refer to would be ordinary income, not a "capital gain," such as on a stock transaction, says Ed Slott, a tax specialist in Rockville Centre, N.Y.

Ask your annuity provider if the money withdrawn is regarded only as profit. If it is, you will pay the full tax, treating your gain as ordinary income, Mr. Slott says. (If you are under 59-1/2, you will also face a tax penalty for early withdrawal.)

If the withdrawal is considered a partial distribution of profit, see IRS publication 575 (on pension and annuity income). It discusses different tax treatments on pages 8 through 12. You can offset your gain with up to $3,000 worth of losses, Slott says.

Q A growth-and-income mutual fund that I invest in carries almost as many growth stocks, which pay no dividends, as income stocks, which pay dividends. Which type of fund is best to hold - growth, or growth and income?

J.R., Los Angeles

A Growth funds are generally aimed at producing long-term growth, which means stressing capital gains over dividends.

Growth-and-income funds generally seek some growth (capital gains) but a lot of dividends for current income.

Some growth-and-income funds deliberately throw in more growth stocks to rev up returns. Which type of fund is "best" depends on your particular investment goals.

Q Some of the really great electronics firms are located outside the US. How can I buy stock in such non-US firms as Nokia and Sony?

K.A., Lincroft, N.J.

A Both firms are listed on the New York Stock Exchange, so you can buy shares through a broker, or, alternatively, through each company's dividend reinvestment plan. For Nokia, contact Citibank, at 800-483-9010. For Sony, contact Morgan Guaranty Trust, at 800-749-1687.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110


(c) Copyright 1999. The Christian Science Publishing Society

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