Financial News

In my last few articles, I talked about reasons why an investor might want to sell an investment that has lost money. One of the main reasons is the tax benefit that is given to the investor when an investment that has lost money is sold. Last week I touched on a few reasons not to sell an investment that has lost money. Now in part two of that final subject, I list a few more reasons from situations that I have observed over the years:

Unknown cost basis

Some people have investments that they purchased many years ago or perhaps some that were given to them by a relative. In many cases, the cost basis for these is not readily known. The cost basis is the amount that was originally paid for an investment, including any dividends that were reinvested. This is important because cost basis is one of the two numbers used to calculate the amount of tax due when an investment is sold. The other being the sale proceeds. Even though an investment may have declined in value from where it was two years ago, this does not mean that an investor has a tax deductible loss in it. So, before selling, an individual should work with their tax professional to try to shore up the cost basis information. This will help in filing a more accurate tax return.

Recently purchased same investment in another account

If an investor wants to sell a holding for tax loss purposes, it cannot have been purchased 30 days before or 30 days after the sale, not only in that same account, but also in any other account owned by the investor. This can get complicated because a dividend that is reinvested to purchase more shares is considered a purchase. Doing so would violate the wash sale rule mentioned a few weeks ago. Also, there are other rules that apply, so it is best to consult your investment advisor and tax professional if there is a possibility that a transaction would be considered a wash sale.

Mutual fund is closed

Some mutual fund managers are satisfied only to have a certain amount of money to manage. When the fund grows to that size, they may close the fund and not take in any additional money. If an investor has such a fund and really likes it, they may choose to hold onto it instead of selling – even if it means they would have been able to use the tax loss. By selling, they may shut themselves out of repurchasing the fund in the future.

As always, before considering a sale of an investment for tax reasons, you should consult your financial advisor and/or tax professional.

Brandon White is a wealth manager with Eugenias Advisory Group, a private wealth management firm in Gadsden. He holds a Master’s degree in Entrepreneurship and is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner. Brandon can be reached at 256-546-3243 or via the company website, www.eugeniasadvisory.com.

 

 

In my last few articles, I talked about reasons why an investor might want to sell an investment that has lost money.  One of the main reasons is the tax benefit that is given to the investor when an investment that has lost money is sold.  Now, in the last two articles of this series (split due to length), I want to talk about reasons not to sell an investment that has lost money.  This is surely not an exhaustive list, but here are several reasons that I have observed over the years:

Mutual fund with short term penalty
In an attempt to prevent investors from buying and selling a mutual fund on a high frequency basis, some mutual fund companies have begun to charge short term redemption penalties for selling within a certain period of time after making a fund purchase.  The time period may be as short at two days or as long as one year and a typical charge may be 1% or 2% of the sale proceeds.  If you are close to the anniversary date of the original purchase where this early redemption penalty will no longer apply, it might be worth waiting so as to avoid a reduction in the amount of money you receive.  If you are not certain whether or not you purchased a fund within a certain time period, dig out those old investment statements. 

Investments held in an IRA or other tax deferred account
As mentioned in previous articles, there is no tax benefit to selling an investment in a tax deferred account at a loss.  The only taxation on those accounts is when money is withdrawn, not when investments are sold.  Therefore, this aspect should be removed from consideration as to whether or not a particular investment should be sold.  You may still choose to sell the investment for other reasons, but this should not be a consideration.

Deferred load
Some funds are sold with front-end or back-end (deferred) loads.  A load is a percentage charge for buying or selling the fund and can be as high at 5.75%.  The details of these types of funds are better left for a discussion at another time, but you should know this – if you have a fund with a deferred load and you wish to sell it in order to recognize a tax loss, you might have to pay more in fees to do so.  This is similar to the short term selling penalty mentioned above.  Consult with your financial advisor or the fund company to make a determination about what is best for your individual situation or if you are uncertain if a fund you own had an associated load.

Next time, we will explore more reasons why an investor might hold onto an investment that has lost money instead of selling in order to receive a tax credit.  As always, before considering a sale of an investment for tax reasons, you should consult your financial advisor and/or tax professional.

Brandon White is a wealth manager with Eugenias Advisory Group, a private wealth management firm in Gadsden.  He holds a Master’s degree in Entrepreneurship and is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner.  Brandon can be reached at 256-546-3243 or via the company website, www.eugeniasadvisory.com.

 

There are dozens of books and hundreds of articles that have been written on the psychology of money.  There is even a specialized area of practice within the world of psychology that helps people work through money issues.  Some of the things that this field helps individuals and families deal with are attitudes toward money, possessions, family wealth and even philanthropy.  And while I have seen a few articles on the subject, there is one area that has not received as much attention.  That is the psychology of losing money. 

I am not talking about a situation where someone has lost a job or even the person who spends the weekend in Vegas (or Biloxi) and loses more money than they care to admit.  No, I did not take enough psychology courses to be able to comment on those situations.  But what I can comment on is what I have observed over the years.  And that is this:  investors like to brag about the good investments they have made and for the most part they keep quiet about the bad investments that they made.  Maybe it was a mutual fund that they researched themselves and felt sure about or maybe a stock that their grandmother left them in her will.  Regardless, there is some attachment to that investment and by selling it at a loss, some people might feel that they would be admitting that they made a mistake.  No one likes to make mistakes.  So, instead of selling those that lose money, many investors will hold on to something until it “gets back to even”.  This means that if they paid $1,000 for something and it falls to $700, they refuse to sell until the value increases to $1,000 once again.  This may make them feel better on some level, but what if it never again increases to the amount originally invested?  An investor may spend years waiting for it to break even.  All the while, that investment shows up on the statement each month reminding them of the mistake that was made.  The flip side of this is the argument that the investment has fallen as far as it is going to fall.  Sometimes this is true.  But there are no guarantees as to what MIGHT happen.

In my last article, I mentioned that the IRS allows taxpayers to reduce their taxable income by the amount “lost” on an investment.  Again, an individual would need to consult with their tax professional about the details, but in the example above, the investor would have been able to use the $300 loss to offset income from other sources up to a certain limit.  Additionally, if the investor had a special attachment to the particular investment, they could repurchase it after 31 days.   This is required in order to avoid the IRS wash sale rule.  However, if there were no emotional attachment to the investment, the investor could simply hold the proceeds in cash or they may choose to invest in something different. 

The key thing to remember about an investment is not to get emotionally attached.  This is not to say that an investor should sell every investment which has lost money.  We will discuss some reasons not to sell next time.  Rather, talk the situation over with your financial advisor and your tax professional to find out if it makes sense in your individual circumstance.

Brandon White is a wealth manager with Eugenias Advisory Group, a private wealth management firm in Gadsden.  He holds a Master’s degree in Entrepreneurship and is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner.  Brandon can be reached at 256-546-3243 or via the company website, www.eugeniasadvisory.com.

 

No one likes to think about it.  Even fewer want to talk about it.  Losing money.  But if you have been invested in the stock market over the last two years, chances are that you have some (maybe many) investments that have lost money.  Sure, “the market” has rebounded from its lows on March 9th, but it still has a long way to go to get back to where it was.  Knowing this, it may be a good time to take a look at your portfolio for opportunities to sell some investments that have losses.   Why in the world would anyone do that?  There are a couple of good reasons which we will discuss in the weeks to come, but the main reason is to offset gains from other sources.  Your tax professional can help you with the details, but in general, here is an example of how it works.  If an investment is sold which has a gain of $1,000 and there are no other transactions for that investor during the year, tax will be due on the full $1,000.  However, if the same investor has another investment which lost $900, this amount can be subtracted from the $1,000 gain to yield only a $100 gain.  In either scenario, the tax rate and corresponding amount due would be dependent on whether the investment was a long term holding (held for more than one year from the time of purchase) or a short term holding (held for less than one year) along with the individual’s state tax rate.  But given the choice, most people would prefer to only pay taxes on $100 instead of $1,000.  If you have a particular liking for the investment that you sold at a loss, you will need to wait at least 30 days before repurchasing it or else risk violating the IRS’ wash sale rule.  More on that next time.

Unfortunately the IRS only allows this in taxable accounts.  There is no tax advantage to this strategy for 401(k) accounts, IRA accounts or other tax-deferred accounts.   This does not mean that you should not look for opportunities to make changes in your IRA or 401(k), just that there may not be a tax advantage to doing so.  Again, it is best to consult your investment advisor and your tax professional before engaging in a strategy such as this.

Brandon White is a wealth manager with Eugenias Advisory Group, a private wealth management firm in Gadsden.  He holds a Master’s degree in Entrepreneurship and is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner.  Brandon can be reached at 256-546-3243 or via the company website, www.eugeniasadvisory.com.