Staying Tax Free As a Matter Of Principle
Rollover from annuity into mutual funds is easy; making quick money isn't
Q In 1980, I inherited shares of a coal mine that have increased until, in 1997, they paid over $10,000 in income from them, making me taxable. I am a tax resister, a Quaker pacifist. Should I sell the coal shares and reinvest elsewhere?
- M.G., Deerfield, Mass.
A If you decide to sell the shares, "you will be taxed at a maximum 20 percent capital-gains rate, since you held your investment longer than 18 months," says Tim Shmidl, a financial adviser at Prism Group in Overland Park, Kan. The tax will cover the sale price less the value when inherited.
One option, he says, is to invest the money in a socially responsible mutual fund, where only dividends are taxed if you don't sell. The Domini Social Equity Fund (800-762-6814) buys an index of socially responsible stocks, with five-year annualized returns of 19 percent and dividends less than 1 percent. Others include Pax World Fund (800-767-1729); up 13 percent a year with yields above 2 percent, or Calvert funds (800-368-2750).
Other options: Donate some of the income or shares to your church or another charity. You could also donate current income to a charity, then place some shares - $2,000 worth annually - into a Roth individual retirement account. Once it's in the account, you'll never be taxed on gains, even when you withdraw at retirement.
Or you could put $2,000 a year into a traditional IRA, receive a tax deduction on that amount, and pay no taxes until distribution. It sounds as if you could use some professional advice.
Q Do any Web sites provide information on rolling over a tax-deferred annuity into mutual funds or stocks that can make money in a short amount of time?
A A Web expert at Morningstar, a financial-research firm, suggests the American Association of Individual Investors (www.aaii.com), American Express Financial Advisors (www.americanexpress.com/advisors/), and Charles Schwab (www.schwab.com). Turning quick profits is tricky. When you find those hot stocks, let us know, too.
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