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Broker probably not to blame for investor's loss

Q. My broker had a standing order to sell shares in a bond mutual fund when the price went to $9.50. The price went to $9.75, but the shares were not sold. Now the shares are $7, and I have incurred a severe loss. Do I have any recourse with the firm for failure to carry out my sell order?

A. You raise an interesting question, but I don't think you have much of a case. Here's why:

An order to sell shares at a specific price or higher is known as a "limit order." Brokerage firms will accept a limit order for shares of stock, including the shares of closed-end mutual funds, which are traded on an exchange or in the Nasdaq market.

However, most mutual funds are not closed-end funds. Your fund probably is an open-end fund, which means its shares are purchased or redeemed from the fund itself at the closing price at the end of each trading day. When you tell your broker to buy or sell, you agree to accept whatever the price turns out to be at the end of the day. No broker can promise you a specific price in advance.

When you told your broker you wanted to sell your shares if the price went to $9.50, the broker probably took that as an expression of your intentions. It was your responsibility to call the broker with a sell order when you were actually ready to sell.

If your fund was a closed-end fund and you placed a limit order to sell at $9.50, then your brokerage firm owes you an explanation for its failure to execute your order. However, even if those conditions were met, execution would not have been guaranteed just because the shares traded at that price.

"There could be a number of reasons if it doesn't get executed," said Mary Farley, vice president of listed trading at Raymond James & Associates Inc. "Maybe it traded at that price only out on the Pacific Coast. Maybe there were already thousands of shares in line ahead of you. You can call and question the broker at any time."

If a failure to properly execute a limit order is the fault of the brokerage firm or the stock exchange, the customer should be compensated for a resulting loss, she said. However, she said the customer would be expected to bring the matter to the broker's attention right away.

Presumably, your shares did not fall from $9.75 to $7 overnight. You could have reduced your losses any time along the way by calling your broker with a sell order.

Q. About five years ago, I bought a $30,000 annuity that promised to be tax-free until withdrawal. I plan to cash it in next year, but now I understand that the IRS will take about 39 percent of the accrued interest. Is this correct? I will be 70 years old next year and do not file a 1040 form, as my income is too low. My wife has never worked.

A. When you cash in your annuity, you will owe income taxes. If you have not been taking distributions from the annuity, you will owe tax on the difference between what you paid for the annuity and what you get back when you cash it in. If you have been taking distributions, the calculations will be a bit more complicated.

The percentage you owe the IRS will depend on your tax rate, which is based on your total income for the year. Since you say your income is low, your tax rate probably will be 15 percent, not 39 percent.

I recommend that you get some help with the tax return that includes your annuity payment. If you do not wish to go to a professional preparer, you can get free help from a volunteer. For details on that, check the newspaper or call the IRS during tax season.

Q. One thing has me baffled: I have read that one may give up to $10,000 to any one person each year without paying a tax. Does this mean that if my taxable income is $20,000 and I give $10,000 to someone else, I can deduct the $10,000 from my taxable income and only pay taxes on $10,000?

A. Unfortunately not. Only gifts to recognized charities are deductible for income-tax purposes, and then only within certain limits. What you have read is that you can give any individual up to $10,000 a year without paying a gift tax. If your income is $20,000 a year, you probably cannot afford to be making any $10,000 gifts.

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. Questions should be sent to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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