Accidental IRA wash sale

[RunningBum]

And previously I thought we were just airing differing viewpoints

Good! I just wanted to try to make sure I wasn't coming across as confrontational on every point.

 

[Graybeard]

From Schwab https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales
Q: What would happen if I sold a security at a loss in a taxable account and then immediately repurchased it in a retirement account, such as an IRA?
The IRS has ruled (Rev. Rul. 2008-5) that when an individual sells a security at a loss and then repurchases that security in their (or their spouses’) IRA within 30 days before or after the sale, that loss will be subject to the wash-sale rules.

You can click on the link for the full ruling at the IRS site.

Thanks. I was thinking about this earlier today. It occurred to me "how would the CPA's tax software know whether I was or was not reinvesting dividends and cap gains in my rollover IRA and/or Roth for the same mutual fund I was trying to TLH?". There's no way and I suspect it is Vanguard that marks the sale as ineligible for TLH, maybe on a 1099-D (?) as it is a wash sale violation.

So if I understand this, and I will read the link to Schwab, if you sell any mutual fund or ETF at a loss you can't do TLH if you reinvest dividends and cap gains in that same MF or ETF in any other account such as the rollover
IRA or Roth IRA. So then if I don't want to put those dividends and cap gains into a different MF or ETF and I sure don't need them for expenses, just what the heck do you do with them? Leaving them in the settlement fund earns basically 0 point nothing. As someone who always reinvested these things and never did any TLH, I am somewhat mystified as how to proceed.

I think the answer is buy a different fund and put the money there or take it as cash even though I have no need for it. Seems investing was easier when I was working and not having to take RMDs. The RMD issue has doubled my income this year and I thought TLH could help even though it is limited to only $3k per year.

 

[pb4uski]

... 1. On 3/11/22 I sold all of my VBTLX (Vanguard Total Bond) fund at a loss of $6800.

2. I purchased a substantially different bond fund that same day in the amount of my sale.

3. Unfortunately, I forgot that I also had dividend re-investment ON for VBTLX in my IRA. So, on 2/28/22 (less than 30 days prior to my taxable account transaction), $1250 of VBTLX was purchased by the auto-reinvestment. I have since turned off that re-investment until I decide to stop tax loss harvesting.

Do I have it correct that my $6800 loss will be reduced by $1250 to $5550? Since the purchase that triggered the wash sale was in the IRA, I'm pretty sure that $1250 loss is lost forever.

I'll be doing more TLH and then will eventually sell an unwanted mutual fund for a profit. So I want to make sure I know the exact amounts of my deductible losses so that I can know how much of my gain transaction will be offset.

Am I understanding it correctly?

I think your tax loss will not be reduced by $1,250, but rather by $1,250 divided by the proceeds from the sale of VBLTX times $6,800.

So if the proceeds from the VBLTX sale was $100k then your wash sale impact would only be $85.

 

[Graybeard]

From Schwab https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales
Q: What would happen if I sold a security at a loss in a taxable account and then immediately repurchased it in a retirement account, such as an IRA?
The IRS has ruled (Rev. Rul. 2008-5) that when an individual sells a security at a loss and then repurchases that security in their (or their spouses’) IRA within 30 days before or after the sale, that loss will be subject to the wash-sale rules.

You can click on the link for the full ruling at the IRS site.

Thanks for the Schwab link RunningBum. That clearly explains the wash sale, I bookmarked that.

 

[PaunchyPirate]

I think your tax loss will not be reduced by $1,250, but rather by $1,250 divided by the proceeds from the sale of VBLTX times $6,800.

So if the proceeds from the VBLTX sale was $100k then your wash sale impact would only be $85.

Thanks! I’ll read up on the calculation at tax time. The proceeds were well over $300k. So, assuming you are correct, it’s significant.