Should I invest my capital gains in an IRA?

Q: I recently sold some stock from a company I used to work for. I am unsure what to do with it. I would like to invest it but unclear about the benefits/disadvantages of the 60day IRA period from the time I sold it. Also, what makes the most sense as to where to invest it if I intend on using some of it in a year to buy a house? What are the tax advantages of putting it into an IRA now for 2003 tax purposes? I sold it 1/23/04. Thank you very much. —Nancy, Boston

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: Unless the stock was received from the company pension plan, you will not be able to defer the gain through the use of an IRA. The best you might do is contribute to an IRA (limited to $ 3,000 for 2004, unless you are over age 50, in which case the limit is somewhat higher), provided you do not otherwise participate in a pension.

If you received the stock from a pension, you are usually required to rollover the assets received, but I believe that you could rollover the proceeds, if they equal the fair market value of the assets at the time of the distribution. If they are less, you may need to make up the difference.

If the stock is stock in your former employer, you may qualify for capital gains treatment for the amount realized in excess of the cost of the stock to the pension. The cost of the stock to the plan would be treated as pension money and taxed at ordinary rates.

If you are not over age 59 & 1/2 or disabled, you will be subject to a 10% early payout penalty on the pension money.

If you are planning to buy a house, you need to weigh how much you will lose to taxes (10% penalty + income tax on the entire amount [excluding the capital gain element, if you received qualified employer stock, as previously discussed]) vs. your ability to raise the funds you need from assets outside of your pension money and borrowings. Once rolled into the IRA, you would face these same taxes if you took money to pay for the house purchase (only pension money may, on a once-only basis, be withdrawn to the extent of $ 10,000 to buy a house, in which case, you avoid the 10% penalty, but NOT the income tax on the distribution).

You may need to consult someone about your finances and the actual costs of these various choices - and you face a potential deadline of March 23, 2004, if you ARE eligible to rollover the money.