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LOL! 09-29-2013 11:33 AM

Investing to lose money and tax-loss harvest
 
The setup:

My mom passed away earlier this summer and I received a small windfall. Not enough to buy a car, but something nevertheless.

So I have this cash in taxable that is burning a hole in my pocket. And I own shares of the emerging markets index (VWO) in both taxable and tax-advantaged accounts. VWO turns out to be rather tax-efficient and presents tax-loss harvesting opportunities from time to time.

So on Monday, ....

I intend to sell VWO in tax-deferred IRA and buy the same number of shares of VWO in taxable. That way, if VWO drops because of Federal budget stuff, I can just tax-loss harvest it eventually. The proceeds from selling in tax-deferred will just stay in cash until I see what happens this week in Washington, DC.

The change to the current portfolio because of this "double" exchange is no change at all, but now cash is in tax-deferred instead of in taxable. However, it preserves tax-deferred space and allows for some tax-timing due to TLH. OTOH, if stocks go up, VWO is tax-efficient, so is not a bad thing to have in taxable. Also VWO just paid its quarterly dividend, so I will not be buying the dividend. It seems like a win-win to me.

The questions:

Does this make sense and do you think it is worth it?

Bonus: What do you think will happen this week in the stock market and why?

Thanks for any insights! :)

samclem 09-29-2013 01:06 PM

Quote:

Originally Posted by LOL! (Post 1361727)
Does this make sense and do you think it is worth it?

It makes sense. Whether it's worth the trouble probably depends on your marginal tax rate. I don't know if VWO would necessarily be the best (i.e. most dsensitive to Washington craziness) vehicle for this, but it's good you aren't modifying your AA just for this occasion.

Quote:

Originally Posted by LOL! (Post 1361727)
Bonus: What do you think will happen this week in the stock market and why?

I expect brinksmanship, a lot of crazy projections, and that the broad market will take a hit, and that everything will be back to normal in a few months.

As mentioned in another thread, the ACA subsidy "cliff" will make it very important for some people to actively manage their OMAGI. I think for these people (and folks who think they might fall into that situation in coming years), it may make more sense not to buy MFs that hold a broad index, but instead to break their holdings up into smaller, more volatile components that can be selectively tax-loss-harvested to reduce taxable income when needed. It's a shame that this level of management and complexity will be added to the already confusing nest of tactics/countertactics investors employ, but that's the result of having additional "targets" and hard-cutoffs from above.

Animorph 09-29-2013 03:10 PM

Sounds like something I might do, given a push. Like if I needed a little extra cash in the tax deferred account. I'm certainly trying to select funds that are at relative lows as I Roth convert, so that taxes are hopefully minimized and Roth growth might see a little boost later on.

FIRE'd@51 09-29-2013 03:24 PM

Makes sense to me. The only possible snafu that I see is triggering a wash sale if you sell for a loss in the taxable and have dividends (or CG distributions) reinvested within 30 days in the IRA. Of course, that can be solved by taking the IRA distributions in cash.

ERhoosier 09-29-2013 03:42 PM

While I'm generally not in favor of attempts at timing individual markets or stocks, agree 100% with samclem that VERY careful control of MAGI will be critical for those near subsidy "cliff". According to Berkley calc, a couple aged 60 with MAGI of 62k would lose >$12,000 (~20% of MAGI) in ACA subsidy if their MAGI rose just $100!!!
National Health Care Calculator
It's silly that folks will be forced to jump through such hoops under ACA, and one hopes (perhaps foolishly) that Congress will agree on a legislative fix for these kinds of issues.

I will not hazard a guess on the market's behavior next week. My brain would explode trying to predict the simultaneous actions of multiple irrational forces :crazy:

LOL! 09-29-2013 07:01 PM

Thanks All. I've got a plan, but it seems things will probably open on Monday quite a bit lower than they closed on Friday, so probably not as much a TLH opportunity as expected.

haha 09-29-2013 07:14 PM

To the extent that you take a taxable loss, and buy the same security in a tax sheltered account, this may be against against the law regarding wash sales. I suppose you might get away with it, but it is not something that I would do.

Your brokerage may or may not mark your loss sale as a wash sale. If you are not concerned about the tax law and it's varying interpretations, you may still want to check with your broker about how they will handle it.

Ha

LOL! 09-29-2013 07:40 PM

I will not be buying the same security in a tax-sheltered account. I am selling at a profit in tax-sheltered (but that doesn't matter*) and buying the same security in a taxable account.

There will be no wash sale(s).

As for the TLH opportunity, I am planning in case the value of the shares purchased in taxable tomorrow drop even more over the next few months. If they don't drop, then I have made a profit and I will be happy with that, too.

*I could sell at a loss, but so what since a loss in a tax-sheltered account is not tax-deductible in the year of the loss. A loss in a Roth IRA is bad because one gets nothing out of it, but a loss in a tax-deferred account like a traditional IRA means one will not be taxed on that loss when the IRA is withrawn (that is, one will withdraw a lower amount because of the loss and thus pay a lower amount of taxes).

haha 09-29-2013 07:46 PM

I see. So what is the payoff of doing this?

Ha

LOL! 09-29-2013 07:50 PM

The payoff for doing this is

(a) to keep the value of tax-deferred accounts higher than they would otherwise be.
(b) realize a short-term capital loss if the market goes down that I would not get if I didn't do this. Such a realized loss allows me to offset future realized cap gains as I see fit, so it will provide some felixibility.
(c) make my overall portfolio more tax efficient than it was before this, so that means annual taxes will be lower going forward,
(d) invest a small windfall in the teeth of uncertainty in Washington DC without any fear.

gcgang 09-29-2013 07:52 PM

Payoff seems to be maintaining current investments but shifting cash to the tax sheltered account. Seems like a good idea.
Market is likely to fluctuate.

Animorph 09-30-2013 11:21 AM

Quote:

Originally Posted by gcgang (Post 1361872)
Payoff seems to be maintaining current investments but shifting cash to the tax sheltered account. Seems like a good idea.
Market is likely to fluctuate.

And he gets get a tax loss. If everything works, the AA stays the same, but the VWO loss now occurs in the taxable account instead of the IRA/401k. He can take the tax loss and buy something VWO-similar in the IRA/401k to again restore the AA and avoid a wash sale. He gets money back from the IRS that wouldn't have happened otherwise.

LOL! 09-30-2013 12:27 PM

The trades are done. I think I made $10 today by selling higher in two accounts than I bought at in the one account.

Some folks say that trading ETFs has hidden fees like bid/ask spread and premium/discount to NAV. But if one uses limit orders, I don't see a problem.

Also all three accounts have no commissions for ETF trades, so maybe I should just buy/sell to myself and make $10 a day going forward. Do you think I could get rich doing this? :coolsmiley:

Animorph 09-30-2013 01:06 PM

Quote:

Originally Posted by LOL! (Post 1362037)
The trades are done. I think I made $10 today by selling higher in two accounts than I bought at in the one account.

Some folks say that trading ETFs has hidden fees like bid/ask spread and premium/discount to NAV. But if one uses limit orders, I don't see a problem.

Also all three accounts have no commissions for ETF trades, so maybe I should just buy/sell to myself and make $10 a day going forward. Do you think I could get rich doing this? :coolsmiley:

Yep, I always try to make enough to cover the commissions when "transferring" shares of non-commission-free ETF's. Though I'm still waiting for one to drop so I can make the buy, weeks after I sold...

Lsbcal 09-30-2013 03:09 PM

Quote:

Originally Posted by LOL! (Post 1362037)
The trades are done. I think I made $10 today by selling higher in two accounts than I bought at in the one account.

Some folks say that trading ETFs has hidden fees like bid/ask spread and premium/discount to NAV. But if one uses limit orders, I don't see a problem.

Also all three accounts have no commissions for ETF trades, so maybe I should just buy/sell to myself and make $10 a day going forward. Do you think I could get rich doing this? :coolsmiley:

I think even with limit orders (which I use) one winds up paying the bid/ask spread. I always place the limit 1 cent to my disadvantage. It has always resulted in an execution that is fast and to my advantage.

Example, bid is 46.01 and I place it at 46.00 but the fill comes in at 46.0110 and execution is generally immediate. I want it that way because I'm turning around and buying something (at ask + 1cent) with the money. That ask then gets filled at ask - a small fraction of a cent.

FWIW, today I moved my "international" money back from a US position to international. That was a purely mechanical trade based on a strategy that considers momentum. Some of that position is in EM through a broader international etf ... VEU.


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