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Friday Reader’s Question of the Day – Investments
By JLP | November 10, 2006
Today’s Question of the Day is a little more detailed than I would like but I’ll throw it out there anyway with the stipulation that this is a discussion only and that any personal decision regarding this matter should be taken up with your personal advisors (financial planner or tax accountant).
That said, here’s today’s Reader Question from Cindy:
Here’s my question for you today. As we get closer to year-end, I’m considering some final tax maneuvering. I have some investments that have done well, and I’m wondering if I should sell them to bite the tax bullet on the gain. Everything I’ve read says that you shouldn’t base investment decisions on the tax consequences, but my first (and only) experience to date with that wisdom is sitting on a stock that I bought at $34, watched it rise to $180 and then fall to $5 just to avoid paying ordinary income on the sale.
In my current situation, I have no income for the year (zero, zip, nada) and will actually have a loss as a result of starting up a new business. In my optimism, I’d like to think that my income will never be lower – though I’ve been wrong about that before. Also, I believe that the tax rate is about as low as it’s going to be for the remainder of my lifetime. The investments I’m considering are a mutual fund (easy to repurchase) and a foreign stock that’s lightly traded here (may be difficult to repurchase). Also, since I’m still at a full-service brokerage (yikes!) the stock sale and any repurchase will come at a hefty fee. The gains for each investment are into 5 digits. Lastly, I don’t need the proceeds for current cash flow or to restock my emergency fund.
I realize this is a question for my tax accountant, and I will check in with her. If you feel that this topic would of interest to your readers, I’d love to hear what collective wisdom says about selling investments purely for tax reasons, and in what circumstances this may be appropriate.
Here’s my response:
Cindy,
You are right, this is DEFINITELY a question for a tax accountant and investment advisor because there’s so much to consider. As a general rule, it’s best to decide WHY you want to sell a particular investment. Think about the following questions:
Has it appreciated significantly in a short-period of time?
Do you think it has reached it’s peak?
Do you have a financial obligation that you need to fund with this investment?
I wouldn’t sell an investment unless I felt it was time to get out.
Now, let’s hear your opinion. What things do you consider when selling an investment?
Topics: Question of the Day | 7 Comments »
November 10th, 2006 at 1:52 pm
When do I consider selling an investment?
That depends on a few things. First, what was the objective of the investment in the first place. Long-term (5+ years) or short-term, looking to take advantage of a trend/event to make some money. Then, I look at my current year’s taxable gains and losses so far and see how the sale would affect the overall tax picture.
If the investment was for the long term, I’d look at the fundamentals (if an individual stock). Find out why it is priced where it is and see if the fundamentals still point towards reaching my long-term goal with the investment. If not, it could be time to sell, which then leads to checking into what the tax implications would be. If it is still fundamentally sound and just not performing well, and claiming the loss wouldn’t benefit a whole lot for tax purposes, I might hold on.
As always, it comes down to your investment objectives and goals. Before taking tax into consideration you should evaluate your goals and see how that investment fits in it. If the investment does not fit anymore, or its role in your portfolio has changed, move on to evaluate the consequences of selling it. But you should always first bring it back to your investment goals.
November 10th, 2006 at 3:40 pm
I’m not sure about this particular investment, but “zero years” are rare and are good chances to do things like a bigtime Roth rollover if you’ve got a traditional IRA or old 401K that you want to Roth-ize, assuming you’ve got the cash to pay the taxes with.
November 10th, 2006 at 4:30 pm
If the gain is a long-term capital gain, selling it this year will have it taxed at only 5%, instead of 15%, because of this reader’s unique income situation. If the gain is a short-term gain, it can be used to fill in the personal exemption and standard deduction and the reader possibly will not owe any tax at all. Converting Traditional IRA to Roth this year is a good idea as well. I’d hate to see the exemption and standard deduction go wasted. If the reader still likes the investment, he/she can wait 30 days and repurchase or just buy a similar fund. It doesn’t have to be all or nothing. If I were this reader, I would sell/convert just enough to fill in the zero/low tax brackets.
November 11th, 2006 at 3:23 pm
Sell ‘em! If you want to repurchase after 30 days to avoid a wash sale, go for it. One caveat, if you have a significant capital loss carry forward, you might not want to waste it this year.
November 11th, 2006 at 5:19 pm
Take the time ro do a pro-forma 1040 for 2006. If indeed you will have no tax due, then start with the mutual funds. You can probably do a free exchange into other similar funds in the same family that will produce realized gains, not incur any transaction fees, and not leave you without exposure to the market. Since you are claiming a gain and not a loss you do not have to worry about the wash sale rule, so waiting to buy back does not apply.
If you can liquidate all the funds without any taxes coming due (do another pro forma) then move on to the individual stocks. Be sure the transaction costs do not wipe out your gains, but again there is no need to worry about the wash sale rule when realizing a gain.
The advise about IRA to Roth conversion is on the mark.
As always if you have doubts consult with a qualified tax professional, Don’t be penny wise and dollar foolish.
November 11th, 2006 at 6:06 pm
Joe is right about the wash sale, I stand corrected. What can I say, it’s Saturday.
November 11th, 2006 at 9:12 pm
That’s right, 30 days don’t apply if you claim a gain. I forgot about that as well. THC is right about the capital loss carry forward. Everything is moot if you have a large capital loss carry forward because the gains will first offset the loss carry forward. As far as commission goes, this might be the motivation to finally transfer those out to a discount brokerage.