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Hello,

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 This amount is less than my principal contribution and can be withdrawn with no penalty.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?

Thanks,

Kelly
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but different funds in order to avoid "wash sale" rules which would require a wait of 30 days.

wash sale rules in normal situations (ie. taxable accounts) require different funds (investments) be purchased (ex. Vanguard's Total-stock-market fund instead of Vanguard's S&P500 fund)
Maybe there's something in addition when dealing with a Roth that you need to use different funds, but I wouldn't think it's also called the wash sale rule.
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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.


I know one can borrow from an IRA and repay the monies within 60 days, no penalty. Not positive, but I think closing a fully funded Roth IRA in 2008, means you're done for 2008.

If you only have a Roth account, losses and gains in that account don't trip up wash sale rules. You need transactions of the same stocks/funds in a taxable account to have wash sale rules come into the picture.


Hohum
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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?

Sorry, I can't answer your question. I do know that the concept of taking a deduction for a liquidated IRA is based on the Code provision for unrecovered payments for an annuity. Your question basically boils down to when is an IRA considered liquidated--at a point in time or at the end of the tax year? Maybe one of the pros will be along to offer some wisdom rather than SWAGs.

I do want to warn you and others off the wash sale distraction. All IRAs are tax-exempt entities, which means capital gains & losses are irrelevant, which means the wash sale rule is irrelevant regarding transactions solely within the IRA.

Phil
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TMFPMarti replied:
"Your question basically boils down to when is an IRA considered liquidated--at a point in time or at the end of the tax year?"

EXACTLY. That is a much more succinct way of wording my question. I would only ammend it as such:

For purposes of claiming a misc. tax deduction on a loss, when is a Roth IRA considered liquidated--at the moment of liquidation or at the end of the tax year?

Awaiting more replies.

Thanks,

Kelly
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Let's toss one more fly into the soup.

Have you already made a Roth contribution for 2008? If so, you won't be able to put the month back into a Roth until 2009 as a 2009 contribution.

Next, are you eligible to make a Roth contribution for 2008? Do you anticipate being eligible for 2009? If those are both no, then you can't put the money back into a Roth at all.

This isn't like a rollover. You can't take the money out, claim the loss, and then put it back. You have to take the money out. Period. Then, if you're eligible, you can make more Roth contributions in the future.

--Peter
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This isn't like a rollover. You can't take the money out, claim the loss, and then put it back. You have to take the money out. Period. Then, if you're eligible, you can make more Roth contributions in the future.

--Peter


Peter, Thanks for the clarification, and confirming my gut feeling.


Taking the loss and then making a new contribution for the year would be the equivalent of a "do-over", and I was wary of that possibility.
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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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Thanks all for catching some of my mistakes. When calculating my loss, I was including reinvested dividends, etc. as contributions.

Discounting all dividends, etc., the actual amount of my cash contributions into our Roths since their inceptions is $11,000 with NO contributions made in 2008. In 2007, I made one distribution of $2756 which reduces my current total contribution to $8244.

The Total value of the Roths is currently $5145.45. It would appear that as of today, my loss would be $3098.55.

My plan would be to liquidate the Roths at $5145.45 and immediately reinvest it into two new Roth accounts (one for me, one for my wife) as soon as the funds were made available to me (potentially less than a week). This could result in losing little or no value from the transaction (and even perhaps posting a gain if the relative fund prices decreased during the transfer)

If I had an AGI of $100,000, after the 2% rule, I could a claim $1098.55 loss. If I had a 25% tax rate, this would convert into about $823.92 into my pocket.

So when all is said and done, with the assumptions above, I would have an extra $823.92 in my pocket and (depending on market fluctuations over one week) I would end up with little change in value of my Roth.

Am I calculating everything correctly?

Thanks,

Kelly
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Am I calculating everything correctly?

No

the actual amount of my cash contributions into our Roths since their inceptions is $11,000 with NO contributions made in 2008. In 2007, I made one distribution of $2756 which reduces my current total contribution to $8244.

So far so good.

The Total value of the Roths is currently $5145.45. It would appear that as of today, my loss would be $3098.55.

Since it's just us friends and I'm on my first cup of coffee, let's call it $3100.

My plan would be to liquidate the Roths at $5145.45 and immediately reinvest it into two new Roth accounts (one for me, one for my wife) as soon as the funds were made available to me (potentially less than a week). This could result in losing little or no value from the transaction (and even perhaps posting a gain if the relative fund prices decreased during the transfer)

For the sake of discussion let's say the market doesn't budge while you're out. Of course, if you wanted to make sure it didn't budge you could reinvest the next day, while waiting for the funds to settle. Remember, the reinvestment will be a 2008 contribution, so the source of the cash doesn't matter.

If I had an AGI of $100,000, after the 2% rule, I could a claim $1098.55 loss. If I had a 25% tax rate, this would convert into about $823.92 into my pocket.

Aw, you were doing so well and choked at the end.

Working from my simplified Schedule A entry of $3100, you get tax benefit from $1,100. At a 25% tax rate that's $275 added to your pocket.

I don't know how much you were planning on contributing for 2008, but if it was more than $4,855 ($10,000 - $5,145) you have given up that contribution and all its tax-free earnings in exchange for $275 in your pocket. Don't spend it all in one place.

Phil
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So when all is said and done, with the assumptions above, I would have an extra $823.92 in my pocket

As Phil said, it's closer to $275 in your pocket.

and (depending on market fluctuations over one week) I would end up with little change in value of my Roth.


The big question is, are you able to contribute any more than $4800 to your Roths for 2008, outside of the money that's in the current Roth accounts?

Because if you can contribute the $10k ($5k for each you and your wife), you will end up with a Roth that is less in value than it could have been.

Example:

If you have an additional $10,000 that you can contribute, using your method, you could only add $4,800. So, you will end up with Roth balances of $10,000. If you just added the contribution to the current Roth balance, and skipped the tax loss thing, you would end up with Roth balances of $15,200. So to gain $275 in your pocket, you have removed the ability to add an additional $5,200 to your Roths.

If, by April 15, you will have $4,800 or less that you can contribute to the current Roths, you will end up better by the $275 by doing the tax loss thing. If you can come up with any more than the $4,800, your Roth balance will be less than it could have been.

So, do you have any money, other than the money in the current Roths, that you would be using for the 2008 contribution?

AJ
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If I had an AGI of $100,000, after the 2% rule, I could a claim $1098.55 loss. If I had a 25% tax rate, this would convert into about $823.92 into my pocket.

Aw, you were doing so well and choked at the end.

Working from my simplified Schedule A entry of $3100, you get tax benefit from $1,100. At a 25% tax rate that's $275 added to your pocket.

I don't know how much you were planning on contributing for 2008, but if it was more than $4,855 ($10,000 - $5,145) you have given up that contribution and all its tax-free earnings in exchange for $275 in your pocket. Don't spend it all in one place.

Phil
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2 things crop up from my end:

The $275 in the pocket is actually, as far as I can tell, a $275 REDUCTION in tax liability, not necessarially cash in the pocket.

If you want cash in the pocket, just take it from the funds in the ROTh accounts and quite fooling around with this do over. The potential long term, compounded, tax free gains , to me, would immediatly preclude doing anything at all with the ROTHs. Of course, if you are not satified with the performance, put it in something else.

MZ4
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