Thursday, March 18, 2010

You Can Lose Money Selling Your Investments

Why Should I Lose Money? The Plan For Investing After RetirementYesterday, I wrote about how I sold the first mutual fund I ever owned, FGRIX. One of the hardest parts about selling an investment is that when you go to sell your asset - you may be looking at selling at a loss. Granted, with the recent market turbulence, you may think - everyone is facing a loss right now. 

But what if you are choosing to sell - even in the face of a loss. Do not fret too much. If the asset is in your taxable account, you can write off up to $3,000 on your taxes this year. If the loss was more than that, you can actually carry forward the loss and continue to write off an additional $3,000 each year as needed.

Buy why would you ever want to sell an asset at a loss? Lots of reasons. Let's just look at why I did. I wanted to make my annual contribution to my Roth IRA and had decided that the best source of that money, $5,000, should be from my taxable investment account. Last year I made the mistake of just transferring the assets straight across from my taxable account to my Roth account. One call to the broker facilitated this easy move. Why was that a mistake? Because I didn't know then what I know today. I understand the wash rule and expense ratios and ETF's and index funds and asset allocation. Last year I transferred several mutual funds with very high expense ratios into my Roth. Today I am considering selling those mutual funds, just like my mutual fund from yesterday. If I would have sold the mutual funds while they were still in my taxable account I could have written off thousands from several years of tax returns. That is tax loss harvesting. I need to make an adjustment with my assets, so I harvest losses solely for the tax purposes.

This year, I sold my mutual fund and I plan on transferring the cash to my Roth and using that cash to purchase new, cheaper mutual funds or cheaper ETF's and index funds that better match my target asset allocation.

Capital Gains, Minimal Taxes 2009: The Essential Guide For Investors And TradersCaution! The IRS does not allow you to simply sell your asset in your taxable account and then immediately repurchase the same, or even very similar, asset in any of your accounts, retirement included. Sorry, you cannot sell and rebuy just to get a nice tax break. This is known as the wash sale rule. In order to book the loss, it must be at least 30 days before you buy back that asset. 

So, last year, I missed out on a perfect opportunity to catch a tax break because of the wash sale rule. Not this year! Check back tomorrow to see what fund I finally decided to buy in my Roth from the proceeds of my sale of FGRIX.

Have you ever done tax loss harvesting?

You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions

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