On money

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published April 1, 2001

There are ways to reduce capital gains on mutual funds

Q. Last year the value of my balanced mutual fund decreased considerably. However, the account was credited with a substantial amount of capital gains on which I am obligated to pay taxes. Don't mutual fund companies have capital losses that can be used as an offset to the capital gains for the purposes of the individual shareholder's tax benefit? It would seem to me that if the fund decreased in value there must have been losses somewhere.

A. Mutual funds do offset gains and losses before distributing the excess to shareholders. Unfortunately, the shareholders who own the fund at the time of the distribution are the ones who pay the taxes, even if they did not get the benefit of the gains.

To avoid a repeat experience, consider investing in an index fund or a "tax managed" fund that pays attention to these issues. Also, avoid making a major fund investment in December, which is when most gains are distributed. To avoid paying taxes twice, be sure to keep records on your reinvested dividends. They increase your cost basis, which means a smaller taxable gain or larger taxable loss when you sell your shares.

Q. My grandmother had an individual retirement account through her bank with my sister and I listed as beneficiaries. I was told at tax time that I had to claim this money as income, which I did, and it resulted in me having to pay almost $5,000 to the IRS. My sister, on the other hand, was told that she did not have to claim this money as income. My question is: Did I have to claim this?

A. When you withdraw any money from an IRA, you almost always have to pay income taxes on the amount of the withdrawal. If non-deductible contributions had been made to the IRA, withdrawals would be partly taxable and partly tax-free. The bottom line is that if your share of the inheritance is still in the IRA, you should not have paid taxes. If your sister's share has been withdrawn from the IRA, she should have paid taxes. If either of you has filed an incorrect return, the mistake can be corrected by filing an amended return.

Many people confuse income taxes and estate taxes. Someone may have told your sister that she did not owe estate taxes, which probably is true. Income taxes are a different matter.

Q. How will my profit sharing plan be treated for taxes by the IRS upon my death? My wife is listed as the beneficiary with my three children as secondary beneficiaries.

A. Withdrawals from retirement plans are fully taxable unless some portion can be attributed to after-tax contributions. Income tax will be due whether it is you, your wife or your children taking out the money. Minimum withdrawals are required from inherited retirement plans, including IRAs.

Q. I have numerous EE savings bonds in my name and my mother's. Unfortunately, she has passed on. I would like to make sure when I'm gone a close relative will be able to cash these bonds. How do I get someone else's name on them?

A. Ask for the bonds to be reissued, removing your mother's name and adding the name of your preferred beneficiary. To do this, fill out Reissue Form PD F 4000. For more information, visit the savings bond Web site (http://www.savingsbonds.gov), check with a bank that sells savings bonds or contact the Federal Reserve Bank of Richmond by phone at (804) 697-8370 or by mail at P.O. Box 27622, Richmond, VA 23261.

Before filling out the form, check to see if any of your bonds are 30 years old or older. If so, they no longer earn interest and need to be redeemed as soon as possible.

Online money map

The stock market downturn has given many investors new appreciation for the value of dividends. Now there's a Web site (http://www.dividenddiscountmodel.com) that attempts to project future returns based on the value of a stream of growing dividends. A stock's actual dividends and its historical dividend growth rate are used in the calculations. The stocks that fare the best under this model are mostly real estate investment trusts, one of which (Duke-Weeks Realty Corp.) is a sponsor of the site. But a variety of blue chips, including pharmaceuticals and consumer products companies, also score high under this model.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.

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