| Help with realizing a loss in a Roth IRA. |
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Jason122082
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| Help with realizing a loss in a Roth IRA. |
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So by far and large most of my retirement money is in my 401k, which I use a simple asset allocation strategy, and max my contributions every year.
I few years ago I opened up a Roth IRA and made the maximum contribution I could for 06, 07, 08, and I've put in a few bucks in 09. I consider this more my gunslinger account in which I've played with a few very aggressive strategies. This being my said my basis is a little over 13k, and my actual value around 7k. From my understanding I can withdraw all of it in kind (this is my only IRA), and whatever is over 2% of my AGI I can take a loss on as a Misc Expense.
My question is with the small contribution I made this year matter (it's $150), and when I do this could I turn around on Jan 1 and make a prior year contribution for the $4850, and then also a cyc for another 5k? This would essentially allow me to use a big loss, and put it all right back in the IRA. Only downside is I would have to sell the securities in the taxable account to contribute cash (not a big deal), and I would be finished on roth contributions for 2010. I called the IRS hotline and they said there is nothing saying I can't, but he didn't sound confident and don't fully entrust the answers I get from them. Anybody done this before?
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Sat Dec 19, 2009 10:50 pm |
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oldguy
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quote:
From my understanding I can withdraw all of it in kind (this is my only IRA), and whatever is over 2% of my AGI I can take a loss on as a Misc Expense.
No, the 2% works the other way - you can deduct up to 2% of your gross income, not the part over 2%. So the tax break will probably be under $300?
And you are correct - you must sell 100% of your IRAs of like kind. You have a $6000 loss and you can claim up to 2% of your income up to $6000.
But what will you do with the $7000 proceeds of the sale? It is already protected inside a Roth, you can invest it in whatever you want and your earnings will be protected from taxes forever. But if you take the $7000 out and invest it elsewhere, the profit will be taxed. Wouldn't it be smarter to let the $7000 grow to about $70,000 tax free over the next 20 yrs? (That is a typical long term market return).
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Sun Dec 20, 2009 12:51 am |
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Jason122082
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Thanks oldguy, are you certain on the AGI aspect? The schedule A shows you subtract line 26 from 24 and only if it's greater then 0 you use the deduction.
It wouldn't be a sale initially, it would be transferred out of the roth in-kind. I would then sell the positions, and turn around Jan 1 and place ~7 k back into the roth. (combination of prior year and current year contribution). So I would get the loss, put the money right back into an IRA and it's still growing tax free. I think your growth projection is a little optimistic too, isn't that around 12%/year?
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Sun Dec 20, 2009 1:50 am |
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oldguy
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You are subject to the annual limit, you can only put the $5000 limit back into a Roth, you have to wait a year to put the other $2000 back in.
IMO, the market move on $7000 will outstrip the <$300 tax break - ie, you might lose $400 of growth while you harvest a $300 tax loss - not a good way to make money.
When you harvest tax losses, make them big.
Yeah, I used 12% for that projection - you never know, we averaged 18%/yr for 18 yrs once. And we have just finished 10 yrs of near zero. 'Recency' is a big human emotion - so for young people the recent histoy of zero prevails. Still - over several decades, 12% is about the average.
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Sun Dec 20, 2009 2:50 am |
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coaster
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quote:
Originally posted by oldguy
IMO, the market move on $7000 will outstrip the <$300 tax break - ie, you might lose $400 of growth while you harvest a $300 tax loss - not a good way to make money. When you harvest tax losses, make them big.
Excellent point, seldom made.
Though "harvest" is a kind of a rosy-sounding euphamism for something that's thrust upon you unwilliingly. 
Bye Bye Bums
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Sun Dec 20, 2009 3:45 am |
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Jason122082
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I'm allowed 5k for 2009 and 5k for 2010. I've only put in $150 for 2009, so I can make a Prior Year contribution on or after 1/1/2010 for up to $4850 and I still have a current year of up to $5k too.
And I'm still not sure your correct on the AGI deduction. I've just been playing around with Turbo tax prefilling my 2009 return. And when I do it seems to just short of a $1k difference in my return. That makes sense if I have a 5k loss, 2% of my agi is going to be around ~ $1200.00 which would make my misc expense $3800.00. If I'm in the 25% bracket that is roughly $950 difference which works out exactly to what Turbo tax is telling me also.
I'm not sure you follow me completely. I will only be out of the market with the $7k for a few days, If I wanted to use Margin for 3 days I could not be out at all but I don't think 3-4 days will be very significant.
Let me explain it again cause I still believe this may be a good idea.
12/31 - Take a Full distribution from my roth (we'll say it's 7k)
1/1 - Put 7k back in my roth IRA ($4850 as a 2009 contribution and the rest as a 2010 contribution). Buy back the same securities I was holding the first business day of the year in my IRA.
If returns come out to 12% over a long period of time that would be great, but I would be more then happy to see 8-9%.
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Sun Dec 20, 2009 4:17 am |
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oldguy
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quote:
1/1 - Put 7k back in my roth IRA ($4850 as a 2009 contribution and the rest as a 2010 contribution).
You will have just sold 100% of your roth in-kind, including your 2009 contribution. So the first new contribution that you are eligible for is the 2010 - ie, the $5000 annual limit comes into play.
If 2% of your AGI is $1200, that is the max loss that you can claim. If your marginal bracket is 25%, you will get a $300 tax break.
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Sun Dec 20, 2009 4:55 am |
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Jason122082
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quote:
Originally posted by oldguy
quote:
1/1 - Put 7k back in my roth IRA ($4850 as a 2009 contribution and the rest as a 2010 contribution).
You will have just sold 100% of your roth in-kind, including your 2009 contribution. So the first new contribution that you are eligible for is the 2010 - ie, the $5000 annual limit comes into play.
If 2% of your AGI is $1200, that is the max loss that you can claim. If your marginal bracket is 25%, you will get a $300 tax break.
My 2009 contribution was only $150, I'm eligible for $5,000. That leaves me the ability to still contribute $4850 as a 2009 contribution. You have until 4/15 to still make a prior year contribution.
I still believe you use the loss that's greater then 2% of your AGI.
quote:
You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040 or Form 1040NR). You can claim the amount of expenses that is more than 2% of your adjusted gross income. You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Your adjusted gross income is the amount on Form 1040, line 38, or Form 1040NR, line 36.
http://www.irs.gov/publications/p529/ar02.html
quote:
Example: You converted a traditional IRA when it was worth $5,000 and now it's worth $1,500. Your AGI is $90,000. If you liquidate the Roth for a loss of $3,500, you'll have to reduce that amount by $1,800 (2% of your AGI), leaving you with a deduction of only $1,700.
http://www.fairmark.com/rothira/losses.htm
The way this reads, that would mean a 5k loss minus my $1200 agi reduction. $3800 deduction 25% is $950 back.
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Sun Dec 20, 2009 6:46 am |
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oldguy
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quote:
I still believe you use the loss that's greater then 2% of your AGI.
Jason, I think you are right. I pulled up Turbo Tax and I get the same answer that you get. And your site concurs.
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Sun Dec 20, 2009 4:05 pm |
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coaster
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quote:
Originally posted by oldguy
I pulled up Turbo Tax and I get the same answer that you get.
TurboTax is a very helpful program year around, not just at tax-time. Any time there's something I don't understand about the tax code I just run a hypothetical scenario through TurboTax. Seeing as how the IRS accepts 100% whatever answers TurboTax comes up with, I trust TurboTax to come up with the right interpretation. I've been using it yearly since 1994, and it just keeps getting better every year.
Bye Bye Bums
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Sun Dec 20, 2009 4:43 pm |
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Jason122082
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Cash: $ 4.45
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Yeah, turbo tax has been a great tool for me over the years.
It looks like this might be a good option, that's a pretty considerable deduction and I'll be able to get the funds back into my IRA.
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Mon Dec 21, 2009 6:17 am |
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