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Using tax loss harvesting to fund Roth IRA?
Old 11-10-2011, 03:32 PM   #1
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Using tax loss harvesting to fund Roth IRA?

We bought a house earlier this year and don't have enough extra cash flow to fund two Roth IRAs.
What I'm considering is tax loss harvesting:
In our taxable account sell 10k worth of VTI with some short term loss (~9% so around $900)
Send two 5k checks to both Roths and buy something else there (let's say VEU) to avoid wash sale rules.

Do you think it's worth it? Any pitfalls you can see?
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Old 11-10-2011, 06:05 PM   #2
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One should TLH regardless.

One should fund Roth IRAs regardless if one has enough earnings to qualify. It doesn't matter if the money comes from a paycheck or from savings. In your case, you are transferring from a taxable account to a tax-free account. You should do this even if you do not have a loss.

In your case, the gotcha is that you should not invest for 30 days in substantially identical investments in the Roth IRAs. That means do not buy VTI nor VTSMX in the Roth IRAs after you sell for a loss in the taxable account. This would be a wash sale and the loss was not be deductible ever.
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Old 11-10-2011, 07:57 PM   #3
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Is it really a wash sale if you buy it back in a Roth? How would that work? A wash sale means you keep the basis higher rather than take a loss, and use that higher basis when you later sell it again. In a Roth, the sale isn't a taxable event, so I don't see how a wash sale would apply. (edit: ) I see that you are saying that you could never take the loss, so it's even worse than a wash sale. If that's true, you should definitely avoid this. I just had never heard of this.
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Old 11-10-2011, 08:02 PM   #4
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Yes, the loss is disallowed. http://www.irs.gov/pub/irs-drop/rr-08-05.pdf

You can search on Revenue ruling 2008-5. For example, you will also find this:
IRS shuts down wash sale evasion technique! - kitces.com | Nerd's Eye View

In any event, it is trivial to avoid the wash sale, so the OP should TLH and contribute to the Roth IRAs.
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Old 11-10-2011, 09:51 PM   #5
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Absolutely move taxable money into the Roth. Tax free after that. Even if you have to sell with a small gain. With a loss, yes buy something slightly different to avoid the wash sale.
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Old 11-11-2011, 06:46 AM   #6
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What's "TLH?"
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Old 11-11-2011, 06:49 AM   #7
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Tax Loss Harvest
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Old 11-11-2011, 06:52 AM   #8
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Quote:
Originally Posted by RunningBum View Post
Is it really a wash sale if you buy it back in a Roth? How would that work? A wash sale means you keep the basis higher rather than take a loss, and use that higher basis when you later sell it again. In a Roth, the sale isn't a taxable event, so I don't see how a wash sale would apply. (edit: ) I see that you are saying that you could never take the loss, so it's even worse than a wash sale. If that's true, you should definitely avoid this. I just had never heard of this.
Yes it really is a wash violation if you sell in a taxable account and buy back in an IRA 30 days before or after.
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Old 11-11-2011, 07:01 AM   #9
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I should think that it would be pretty easy to find a fund or funds close enough to the holdings of Total Stock Market to hold your position, while being different enough to avoid scrutiny for a wash sale.
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File Type: pdf Approximating Total Stock M...pdf (64.9 KB, 8 views)
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Old 11-23-2011, 01:12 PM   #10
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Thanks to all who replied.
I decided that I can re-balance at the same time, so I sold VTI today and bought VEU, VOO and IJS.
New to me were warnings about using unsettled funds to buy securities, Regulation T and free ride.
I think I'm fine as long as I don't sell the new securities before the settlement.
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Old 11-23-2011, 09:31 PM   #11
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Originally Posted by sailor View Post
Thanks to all who replied.
I decided that I can re-balance at the same time, so I sold VTI today and bought VEU, VOO and IJS.
New to me were warnings about using unsettled funds to buy securities, Regulation T and free ride.
I think I'm fine as long as I don't sell the new securities before the settlement.

Yeah, you didn't have enough cash to buy the new stuff without the proceeds from your same-day sales. They will both settle in three business days after your transactions and you will again be in the clear.
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