Tax Deferred Investments
November 19th, 2005
Question: Tax Shielding an inheritance?
My father recently passed away and has left me P&G stock valued near $750,000.00.
P&G has an internal corporate policy that will not permit me to roll this money into a tax-deferred IRA of any sort. Basically, it must be cashed and I’m going to lose WAY MORE than I want to lose!
I’ve talked to an investment company who only cares about investing whatever I get out of the liquidation of the stock.
I *WANT* to be able to keep as much of this money as possible and, ideally, draw a monthly interest payment from it so that my wife can retire now. I don’t have any idea WHO to consult…or where to turn!
It seems to me that SOMEBODY should know how to keep as much money as possible away from the big, bad IRS and let it work for me. I want to tax-defer as much as possible.
HELP!!
Mark
Answer: First, as an economist and former financial planner, do not ask anyone here. You must visit a certified public accountant or a tax attorney.
It isn’t P&G’s policy it is IRS policy, only a spouse can roll that money over. There is very little you can do, however, the law requires you receive it by the end of next year (if the rules have not changed.) If P&G will permit it, you can split it into more than one year’s tax. That may or may not help you, depending upon all your other tax issues. Further, since this is in P&G stock and the market as a whole is quite high right now, waiting is a financial risk. Put Options could protect you, but they are also very expensive at around $600 per $7000 protected until January 2009. Further, gains on puts are always short term gains, while losses are only deductable to the extent there are other gains plus $2000. Gains or losses on the P&G stock are ordinary income not investment gains or losses.
I have three strong suggestions as a professional investor.
First, ask around for local CPA’s. Interview them like you were hiring someone for a job.
Second, contact an estate attorney. You do not have estate issues yet, but do you want your children to have the headaches you are about to have.
Third, interview trust companies. Look for ones who use a value based approach and avoid those that “sell” mutual funds. You are probably too small, without life insurance, for them, but they might take you. You are also going to get innundated with offers to help from financial services personnel trolling for money. If you are not on the list yet, I promise you soon will be.
The reason I suggest trust companies is that a broker can only do what you tell them to do, a trust company can take care of you in a car accident, if you become mentally disabled or die. It also prevents probate to a large extent.
You cannot defer these taxes, but because it is October you should be able to split it between years. It is very important that you meet with an accountant to plan this. Rates are down to 4.5% and the stock market is over valued. So, if you get to keep $500,000 then you will get around $22,500 per year before taxes. Cash Investments are usually a very bad thing, however because although your principal is safe, your income is highly variable as rate changes. Dividends, on the other hand, tend to move tightly with inflation, so your principal is at risk but your income tends to be secure.
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Taxed as Earned, Tax Deferred, TAX FREE
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