Q: I retired Jan. 1 and received a six-figure severance settlement from my employer from a plan approved by the Internal Revenue Service and funded and paid for by my former employer. I have been told that if I roll this payment over into an individual retirement account or similar investment vehicle, I will have to pay income tax only on the amount I withdraw each ear. Is this advice accurate? If so, what type of investment will satisfy the tax requirements and also generate the cash return I need for retirement?

A: The advice is accurate, but you must use an IRA as the investment device. You can, however, use a wide variety of investment vehicles for your rollover IRA, and for a "six- figure" sum I suggest you use several because you are not limited to a single account. The choices include a passbook account, money market account or certificate of deposit at a bank, savings and loan or credit union; a single-premium immediate insurance annuity; and a variety of mutual funds.

The first of these is very safe but offers relatively low yield. If you go that route, don't put more than $100,000 in one institution, which is the federal insurance limit.

An insurance annuity also is relatively safe, but it doesn't carry the federal insurance protection. The yields are conservative and you can't outlive the payments, which are guaranteed for life. However, at the time of your death, no further balance is left for your heirs.

With mutual funds, you can invest conservatively or speculatively, though I don't recommend the latter in your case. A money market fund is relatively safe, but the yield is low. A fund that invests in government securities might be a good choice, or perhaps one that invests only in utilities. A conservative income fund usually carries a mix of bonds and high-dividend stocks and could be a source of steady income at relatively low risk for part of your money.

Your decision should be based on how much income you need and your tolerance for risk. I would diversify among the choices, but stay away from growth funds. I also would avoid investing in real estate, either individually or through a partnership, because it usually promises little or no current income. The primary appeal of real estate is in eventual gain on sale of the property.

Q: In your Dec. 28 column, I think you may have made an error. Based on Form 2119, I think a person who sold a home for $500,000 that cost $110,000 would have to buy a home costing at least $375,000, not $265,000, to escape all current tax liability, even though $125,000 can be excluded because the person is 55 years old.

A: This question is a composite of several letters pointing out the error. I've included all the applicable numbers in the question and need only acknowledge that those who wrote are all correct. The information in the rest of the column was correct. Undoubtedly there will be people who saw the first column who will miss this correction. Mistakes are inevitable, however, and I can only apologize and thank all those who took the trouble to call this one to my attention.

Q: I invested my IRA in a growth and income mutual fund that suffered a 25 percent drop in share price since the October market collapse. If I sell my shares and invest in another fund, can I take a capital loss for this year?

A: No. You don't have to report and pay tax on gains or other income earned in an IRA until you withdraw funds. By the same token, you can't claim any tax credit for losses in the account.

Q: In 1987 I refinanced my first mortgage on rental property for an amount up to the original cost plus improvements. The proceeds went to pay off a second mortgage, establish a fund for future repairs, pay off a personal debt and to pay the legal expenses of refinancing. How will this affect my cost basis for depreciation purposes?

A: The financing arrangements on rental property don't affect your depreciation. The basis for depreciation remains the original cost plus capital improvements.

Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business & Finance News, 1150 15th St. NW, Washington, D.C. 20071.