Saturday, May 27, 2000

Personal finance

Think of shares, not bucks

        Suppose you opened a taxable mutual fund account with $2,000, and that has since doubled to $4,000. Can you instruct the brokerage firm to pay the original $2,000 you invested, thereby not triggering a taxable incident?

        No, not in a taxable account. You may be thinking of something you heard in connection with a Roth IRA. But if that were possible in a taxable account, there hardly would be such a thing as capital gains taxes.

        Don't think of your investment in terms of dollars but in terms of shares, said Rob Bult, a certified financial planner and certified public accountant with Fitzgerald Lame Torbeck Group/J.C. Bradford & Co.

        When you want to cash out of a mutual fund, you sell shares — regardless of how many dollars they are worth.

        “No, you can't divide that up,” Mr. Bult said of the shares' principal and growth.

        And then capital gains taxes are paid generally on the difference between the shares' buying price and selling price. This gets confusing, however, because some mutual fund shares are bought through dividend reinvestment, not through your original investment.

        “Mutual funds are the biggest tax headache most people have,” said Rosemary Haddad, senior financial consultant at Merrill Lynch in Symmes Township.

        The IRS does give one concession: You are allowed to decide which you are selling, the ones with the higher basis or the lower basis, or you can average them out. Choosing to sell the ones with the higher basis avoids more capital gains in a taxable account.

Other accounts
        If the money were in a traditional IRA and this were an early withdrawal, you could be subject to certain taxes and penalties. You might have to pay your normal income tax rate plus a 10 percent early-withdrawal penalty.

        But the rules are different for Roth IRAs, which let you withdraw your principal any time without taxes or penalties.

        It seems illogical, because that's money that the government wants you to be saving for retirement. But it's also money that you've already paid tax on, so the government doesn't tax it again when you take it out. It also doesn't charge that 10 percent tax penalty.

        “But clearly the benefit is leaving it in there, because it grows tax-free,” Mr. Bult said. “It's just the quirkiness of the rules.”

        You'll also pay similar taxes and penalties if you try to withdraw your earnings in a Roth IRA too early — except in certain circumstances. Ms. Haddad said the 10 percent penalty doesn't apply to early withdrawals from Roth or traditional IRAs for some higher education expenses, some deductible medical expenses, or a first-time home purchase.

        It's all very confusing — so be sure you consult a tax adviser.

        “This is why God invented accountants,” Ms. Haddad said.

        Amy Higgins writes about personal finance for the Enquirer. You can reach her at 768-8373;; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202.


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