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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: Re: Reinvesting Roth liquidated for a tax loss Date: 12/7/2008 10:23 PM
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I searched the forums and found many answers regarding this issue, but not the specific question I am posing.

Is there any regulation preventing me from reinvesting funds from liquidating Roth accounts in 2008 into NEW Roth accounts (albeit different funds to avoid "wash sale" rules) also in 2008? The liquidation was performed in order to claim a Schedule A tax loss for year 2008.

Background: I have two Vanguard Roth accounts (one under my name, one under my wife's name) that have lost a total of $3540 and now total $5146. This amount is less than my principal contribution and can be withdrawn with no penalty. I plan to liquidate these Roth accounts in a few days in order to claim the $3540 loss (minus 2% of my 2008 AGI) as a miscellaneous exemption on Schedule A. I would like to immediately reinvest the $5146 this year back into new Vanguard Roth accounts, but different funds in order to avoid "wash sale" rules which would require a wait of 30 days.

My question is this: Are there any additional regulations (beside the "wash sale" rule) that prevent me from reinvesting the funds into a new Roth in the same year that I claim the loss?


I'm responding to your initial post with the advantage of reading the other responses.

Your loss is realized on the date you fully liquidate the Roth IRA. What you do afterwards is irrelevant. However, before you rush into this plan, you should consider the following.

Right now you have $5146 invested in your Roth IRA. You plan to liquidate the IRAs and immediately redeposit the funds in a new Roth IRA. Assuming you haven't made your 2008 deposit yet (and you and your wife qualify for the full $5000 contribution each), at most you'll have $10,000 at the end of 2008 in your Roth accounts. ($5146 plus additional $4854). You'll save less than $1000 in taxes.

Instead, if you leave the Roth IRA alone and forgo the Schedule A deduction, you can contribute an addtional $10,000 to your Roth IRAs so you'll have $15,146 at the end of 2008.

I would rather have the extra $5,146 compounding tax-free than a small tax benefit today.

By the way, make sure you're calculating your loss correctly. It isn't the capital loss from the stock sales, it's the difference between the liquidated value and the total of your contributions to the Roth IRA. I raise this point because your post implies contributions of $8,686 to your IRAs. While this is certainly possible, I would expect most people contribute "round" amounts ($x,x00).

Ira
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