Q. My wife and I are in our 60's, collecting Social Security, and with other investment income we are doing fine. We have $72,000 in a tax deferred annuity that is now paying $321.13 a month. We would like to receive more than this but still have a sense of safety. We can withdraw the principal without a penalty. What do you suggest?

---C.I., Easton, PA

A. Your insurance company is providing you with a return of about 5.4 percent which is significantly below the average yield on most tax deferred annuities. According to the Fisher Annuity Index--- a database of some 883 annuities from 144 different companies--- the most recent average yield on new contracts was 6.29 percent.

You basically have two choices. If you have a large accumulation of tax deferred interest in the account you would probably be better off doing a 1035 exchange to another annuity with a higher yield, recognizing that you will end up with a new early withdrawal penalty. Making such a move is problematic since your new contract might lower your return to 5.4 percent after a year, leaving you where you started… but with penalties.

A second option should be considered if you are in a low tax bracket and have limited tax deferred income in the current contract--- check with the company for the information. If the tax cost will be low, redeem the annuity and reinvest the proceeds in either a ladder of U.S. Treasury obligations or a top no load government securities fund such as Vanguard GNMA.

Q. I don't recall any mention in your columns regarding Nuveen closed-end muni funds. Their return seems very good with little expense. I understand the possibility of calls, etc.. I would like to know whether the absence of mention implies a dislike. I think I like the NUV fund.

--- R. O., AOL.com

A. No dislike. Remember, readers determine the subject of most of my columns. However numerous, the Nuveen closed end funds and unit trusts are seldom the subject of reader letters. I interpret that as a positive for them since reader letters are not random. They are "adverse selection"--- ie. people don't write to tell me they love their fund or their broker. They write because they are uncertain. It's an automatic, negative bias that's built into communication from readers.

There are 57 closed end Nuveen funds, mostly for single states. Their average Morningstar rating is 2.8 or slightly below average; 1 has a top rating of 5, 11 are rated 4 or above average, and the remainder are rated average or lower.

Q. We took out a home equity loan for $35,000 ( as a second mortgage) ten years ago to buy a lake cabin in Northern Minnesota. We then sold our home, paid off both mortgages, and bought a townhome.

Will we forfeit the $35,000( plus appreciation) when we claim our one-time exclusion of up to $125,000 on the sale of the townhome? Or is it possible to reclaim the $35,000 at some future date when the cabin is sold? After the sale of the townhome we would have about $70,000 after the mortgage is paid. What does the IRS have to say about this situation?

---C.C., Shoreview, MN

A. Not to worry. Financing a home is not related to the one-time capital gain exclusion which is restricted to primary homes. Your primary home was your original home. It is also the cost basis for tax considerations, plus improvements or increases in purchase price of subsequent homes. The townhouse then became your new primary home and will be your primary home when you sell it. The difference between the after commission net selling price and your carry forward cost basis will be your realized capital gain that is eligible for the $125,000 exclusion. If you don't understand this, save yourself a lot of grief and see an accountant.

Your lake house has always been a vacation home and is not eligible for the $125,000 exclusion. That you purchased it with cash financed out of your primary house is irrelevant and has no effect on either home or its taxation. You appear to have an unrealized capital gain of about $35,000 in the lake house, the difference between the expected $70,000 sale price and the original $35,000 purchase price. If you sell the lake house, that tax will be due, without deferral or exclusion.

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File Name: 961209MODallas Morning News file date: 12/10/96---TUEUniversal Press Syndicate file date: 12/09/96---MON

 © Dallas Morning News, Universal Press Syndicate, 1996