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Using tax loss harvesting to fund Roth IRA?
11-10-2011, 02:32 PM
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#1
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Full time employment: Posting here.
Join Date: May 2005
Location: Atlanta suburbs
Posts: 900
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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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11-10-2011, 05:05 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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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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11-10-2011, 06:57 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,227
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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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11-10-2011, 08:51 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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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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11-11-2011, 05:46 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Jul 2011
Location: The Bay Area
Posts: 2,736
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What's "TLH?"
__________________
You may be whatever you resolve to be.
100% x 10% > 10% x 100%
Small pensions & SS cover essentials
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11-11-2011, 05:49 AM
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#7
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,715
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Tax Loss Harvest
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11-11-2011, 05:52 AM
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#8
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,715
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Quote:
Originally Posted by RunningBum
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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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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11-11-2011, 06:01 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2007
Posts: 14,328
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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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11-23-2011, 12:12 PM
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#10
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Full time employment: Posting here.
Join Date: May 2005
Location: Atlanta suburbs
Posts: 900
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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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11-23-2011, 08:31 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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Quote:
Originally Posted by sailor
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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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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