Gyroscopic Investing

coinstar wrote: On Bogleheads I read about TAX-LOST HARVESTING where you have your investments in a taxable account (say a SP500 mutual fund) and if the fund loses money, you SELL it, and immediately buy a different SP500 fund. The IRS says this is NOT a wash sale and you get an immediate tax write off.

With the PP, there seems to be a mixed bag in opportunities for this because you want to hold the long term bonds in tax sheltered accounts like retirement because of needing to pay regular taxes on the interest rates.

SUPPOSE you did want to tax lost harvest and held some bonds in taxable. Given interest rates are still below 3% (2.6% on TLT right now) it seems like the chance of an opportunity to start holding some bonds in taxable for this opportunity.

This would guarantee that either your stocks in taxable OR your bonds in taxable go down quite a bit in any given year and you sell and lock in loss for the tax benefit.

The cost is your paying income taxes guaranteed on that 2.6%. but compared to being able to write off a possible 30% drop in the bond fund, that seems like a small cost.

Suppose interest rates go up. Well that makes holding bonds in the taxable account more expensive BUT since they are bonds and you bought them at 2.6% rate, when rates rise, the principal goes down and you get a nice loss. Then when you sell, you simply choose not to buy them back in taxable (and switch cash or stocks there instead), and buy them back in your tax deferred retirement vehicle of choice.

So I'm thinking of splitting my taxable money into Stocks and Bonds since I'm in a high tax bracket this year due to a windfall at work and if I can tax-lost harvest the maximum allowed $3,000 loss against my regular income, that saves me around $1,000 in taxes which more than pays for the taxes I'll have to pay on the 2.6% interest rate on $20k worth of bonds (which is around $150 to $200).

I guess the worse-case scenario is if both stocks and bonds stay fairly neutral or both go up and then I paid the taxes and STILL don't get a tax-lost harvest!!

coinstar wrote: The IRS says this is NOT a wash sale and you get an immediate tax write off.

sophie wrote: Also if you have stocks in taxable and you're in the 15% bracket or below, don't forget to "tax-gain harvest", i.e. sell and buy to increase your basis without incurring tax.  Then if a big drop happens you're more likely to reap a nice profit from the tax loss.

MachineGhost wrote:

sophie wrote: Also if you have stocks in taxable and you're in the 15% bracket or below, don't forget to "tax-gain harvest", i.e. sell and buy to increase your basis without incurring tax.  Then if a big drop happens you're more likely to reap a nice profit from the tax loss.

Do the wash sale rules or anything like that apply?  That's a pretty cool strategy.  I'm still carrying over the T-Bond losses from when I sold exactly at the bottom.  Can't get any better than that, huh!

ochotona wrote: Sophie, you kind of lost me on tax-loss harvesting in an IRA... so you'd sell a losing stock in an IRA to lock in the loss, impacting the future value of your IRA really forever after so that when you liquidate the IRA your taxes are less, and buy the same stock in a taxable account at it's lower level? Is that the idea?

sophie wrote: Just a crazy idea I had to get out of having to pay income tax on withdrawals from a tax-deferred account.  The idea is to take advantage of market volatility to "transfer" losses to the tax-deferred account.  If you sell stocks then buy, you have a zero net change in your stock position, BUT - the value went down in the tax-deferred account (before paying taxes) and later it will go back up in your post-tax account (Roth or taxable).  Voila, taxes avoided.  Does this make sense or am I missing something?

re tax gain harvesting: I think there's a bogle wiki on it.  It's not a wash sale because you aren't claiming a loss, just reporting a gain on your income tax return that doesn't get taxed, and increasing your cost basis.

ochotona wrote: The tax wash harvesting rules apply between spouses, to any corporations you control, and you can't sell at a loss in a taxable account and buy within 30 days before or after the sale in a retirement account. IRS Publication 550.

jason wrote: Isn't there a risk with tax loss harvesting in the event the asset you exchanged then quickly shoots up in price and you need to rebalance? This could force you to either pay short term capital gains (at the ordinary income tax rate) or else delay rebalancing, I would think. So, if you sell your VTI and buy FSTVX, and the stock market then skyrockets 6 months later, you will get killed on taxes when you sell FSTVX to rebalance. And you can't even use your long term capital loss from selling VTI to offset the short term capital gain in FSTVX. Murphy's Law dictates this will happen.

bedraggled wrote: Which broker(s) have commission free ETFs?  It seems TD Ameritrade is happy to charge $9.99 on all ETF trades.

MangoMan wrote:

bedraggled wrote: Which broker(s) have commission free ETFs?  It seems TD Ameritrade is happy to charge $9.99 on all ETF trades.

Thanks.

TDAmeritrade offers 100+ commission-free ETFs, including many by Vanguard. Annoyingly, you have to sign up for the program by calling in and requesting, or by logging into your account and making the election online. AFAIK, they are the only broker with that idiotic requirement, but it's easy enough to do, and the election is a one time issue.

dragoncar wrote:

jason wrote: Isn't there a risk with tax loss harvesting in the event the asset you exchanged then quickly shoots up in price and you need to rebalance? This could force you to either pay short term capital gains (at the ordinary income tax rate) or else delay rebalancing, I would think. So, if you sell your VTI and buy FSTVX, and the stock market then skyrockets 6 months later, you will get killed on taxes when you sell FSTVX to rebalance. And you can't even use your long term capital loss from selling VTI to offset the short term capital gain in FSTVX. Murphy's Law dictates this will happen.

I never quite understood the importance of Long term vs short term loss.  Every time I read about it I'm pretty sure any loss will cancel a short term gain.  Is this wrong?  Your temporary replacement shoots up in value so you have a gain but isn't it more than offset by your loss?

If gold did shoot up so high in a month it gave me significant taxable gains I probably wouldn't complain