Open a Roth...?

[SlowTwitcher]

I'm selling some individual stocks(and closing the account) in a taxable account worth about $8000, to reallocate. This is about a $1200 loss. This money is sort of rainy day fund/emergency fund. I am considering opening a Roth and making max $4000 contributions for 2006 and 2007. I would likely invest in Vanguard Int. Bond Fund, Questions:

1.) Does this seem reasonable, since I can withdraw my contributions, $8000,
without penalty and tax-free anytime if I ever needed to?

2.) Can I write off the loss on 2007 taxes or can it only offset gains?

3.) Does a bond fund make sense since I won't have to pay tax on interest ever
and I'm growing tired of currently being taxed on extremely small dividends yearly?

4.) It's easy enough to calculate my loss on this sale (purchase price less sale
price) but how do I figure in the reinvested dividends?

Thanks for any help. I've never actually sold any stock before so this is new
teritory for me.

SlowTwitcher

 

[LOL!]

1. Is it reasonable? Who knows? You haven't given enough info to really say. That written, I think Roth IRAs are great -- if you are eligible for one, but only after maxing out your 401(k) contribution, if eligible.

2. The capital loss is applied to realized capital gains first, then to up to $3000 in ordinary income, then any excess is carried over to future tax years.

3. We don't know about your overall asset allocation, so we cannot tell you if a bond fund make sense.

4. Reinvested dividends added to your cost basis. The IRS has nice publications on how to do all this. Be careful about long-term vs short-term. Some of your dividends were probably reinvested in the last year and thus would not fall in the long-term section of Form1040 Schedule D.

 

[Coach]

Slow Twitcher, I like the idea of putting your emergency fund into a Roth. And a bond fund is a reasonable choice. Or a money market fund for that matter.

Coach

 

[JohnEyles]

Since gains in a Roth will never be taxed, doesn't it make sense to
use investments that have the maximum growth-rate over time,
that is, stocks and equity mutual funds (to the extent, of course,
that it makes sense to have those equities in your asset allocation) ?

 

[Red-y]

Since gains in a Roth will never be taxed, doesn't it make sense to
use investments that have the maximum growth-rate over time,
that is, stocks and equity mutual funds ....?

My thinking exactly. That's why I have assets with the highest risk/reward profile (e.g. VEIEX - Vanguard Emerging Mkts) in my Roth, as opposed to my traditional IRA or taxable accounts.

 

[Coach]

Since gains in a Roth will never be taxed, doesn't it make sense to
use investments that have the maximum growth-rate over time,
that is, stocks and equity mutual funds (to the extent, of course,
that it makes sense to have those equities in your asset allocation) ?

I think that's right in general, but in this case, since it's also an emergency fund, you'd want to be able to sell on short notice.

Once the amount gets over emergency fund level, or you've had a chance to build an emergency fund elsewhere, it would make sense to diversify.

Coach

 

[cute fuzzy bunny]

You can also lock up your "emergency" money somewhere not immediately liquid and keep a HELOC for the "holy crap I need $20,000 today!" situations, pay it back in a few days/weeks from the semi-liquid emergency money vehicle.