End of Year Scheming

Despite a catastrophic year on the stock market, I would like to contribute my 2009 Roth IRA limit of $5,000 in January. Since I don’t have cash lying around for that, I’d like to sell some other investments and take as big a loss as possible for 2008 and then use those proceeds for my Roth contribution in January. If possible, I don’t want to miss any trading days by having money in a bank account, given that any day could possibly be a big rally that I would miss. But I can’t take a loss on something in 2008 and buy something in 2009 without missing a day. Or can I?

One fund that I want to sell is Fidelity Small Cap because it has huge distributions each year (despite losing 40% of its value this year, it still distributed 1% in gains this year) that I then pay taxes on. So I want to sell all of that for $2,100 and realize a $1,500 loss. What I will do is sell it before the end of the year and move it that day into Fidelity Diversified International, a non-Roth fund in which I already have more than $2,100 (important later on). I will have to pay a short-term redemption fee of 2% to Fidelity on Small Cap’s December reinvested distribution of $8 (not a big deal) but all of the other shares have been held long enough not to incur such a charge (though a reinvested June distribution of $16 will incur a short-term instead of a long-term loss, not that it matters much since long term losses will cancel short term gains and/or regular income).

Then, in 2009 I can sell some of Diversified International directly into my Roth IRA. Diversified International has a short-term redemption fee as well, but Fidelity says that as long as I have enough older shares in the fund (which I do since I have more than $2,100 there right now), those will be sold first and I won’t pay a short-term redemption fee. Even better, because there is a loss there too, I will take a small loss (diluted by the shares bought at the end of December) on that sale for 2009 since I am using the average cost of the shares (I did the calcs today and figured a loss of $129 if prices don’t change until then).

For the rest of my $5,000 contribution limit I am going to sell some Nasdaq Powershares (QQQQ) that I have with Scottrade. In order to avoid sitting out of a rally, I am going to get some cash I have with Scottrade in check form right now and then sell the Powershares by the end of the year to replace that money. If I sell those shares on Dec 31, I won’t be able to buy anything in the Roth until Jan. 2, but I’ll only be missing a day. If I sold the shares and then waited for Scottrade to mail me the proceeds it would take a week or more.

So here’s the plan: before the end of the year, move Fidelity Small Cap into Diversified International (taking an ’08 loss), move cash in Scottrade to my bank account, and sell my Powershares at Scottrade (taking an ’08 loss). Then, on January 2, move $2,100 from Diversified International (taking a small ’09 loss) and $2,900 from my bank account into the Roth IRA.

The only question now is would it be to my advantage to sell some other mutual funds just to realize a loss and then reinvest that money in 2009? The IRS will let me offset up to $3,000 in income with capital losses and right now my net realized losses will only be around $300. If I sold about $8,000 of Vanguard 500 Index, I would realize about $3,000 in losses, which would be taken off of my income and earn a $930 tax rebate (25% federal plus 6% state). I see no reason I wouldn’t do that. If I reinvest it immediately into another Vanguard fund, I wouldn’t be out of the market for any time either and would not be subject to wash rules for selling something at a loss and then buying the same thing back in less than 30 days.

5 thoughts on “End of Year Scheming

  1. You’re pretty bullish!

    The other way to look at it is that without a large pile of cash you will miss out on the chance to buy the cheap stocks after the next “crash”.

  2. I don’t know if it’s bullish. I figure if I wait for a recovery I’ll miss most of it. I don’t know that the market will go up much the next few months, instead I think it will bounce along the bottom where it is now for a while. But once it does go up, it will probably go up quickly, or at least in spurts.

    I went ahead and sold enough Vanguard Index to lock in a $3,000 loss. The proceeds will go into Vanguard Equity Income (VEIPX) which has similar returns. I can move the money back to the index after a month (to avoid a wash sale) if I want (actually have to wait two months because Vanguard locks me out of buying the index back within 60 days after selling some). Now I’m wondering if there is an advantage to lock in even more losses so that I can carry them into 2009. I’m thinking not, especially if Obama starts taxing long term gains at 20% instead of 15% (actually that will only be for people making $250k per year; poor people like me keep the 15% rate). Hmmm . . . I could put some into Vanguard Capital Opportunity (VHCOX) which is another actively managed large cap fund but geared more for growth than value (whoops, it is closed to new investors). I could put it in Vanguard Total Stock Market Index and I think that wouldn’t be a wash sale even though the top 500 stock holdings would be the same.

  3. I sold off some more Vanguard Index 500 and bought a midcap index fund. That couldn’t possibly be considered a wash sale even though the performance is very similar. Now I’m thinking I may as well go ahead and sell off the rest of Index 500 and realize even more losses to carry over into next year and possibly the following year. I first bought this fund in 2002 when it was 50% higher than it is now. In 2002 it traded a little lower than it is right now. At the beginning of this year it was up 23%, now it is down 26% in terms of cost basis.

  4. Sold the rest of the fund today and bought an emerging market index fund. We’ll see how that goes . . . A lot of emerging market funds were down 60% or so in the last year. One thing I read today said that does not mean emerging markets are a good value. This fund is down 57% this year. Yikes. Hopefully that means it will go up a lot next year.

  5. After four months, it looks like it was a good idea to sell off Vanguard Index 500 and lock in some losses. I put roughly equal amounts of money into Vanguard Equity Income, Vanguard Midcap Index, and Vanguard Emerging Markets Index. The Midcap has outperformed the S&P 500 (small caps have done better still), but Equity Income performed slightly worse than the S&P during the downturn ending in March and the subsequent upturn, so in April I moved it back to Index 500. But the emerging markets fund has been amazing, up 20% on the year and up more than 40% since the March low. With the 57% loss last year, it would need to go up more than 100% to catch up to where it was.

    Selling the Fidelity Small Cap and putting it into Diversified International turned out to be a good idea too. From the time I did the first transfer to the time I did the second Diversified International went up 7.5%, so I would have missed out on some good days on the stock market during that week. However by buying and then selling so quickly I earned a letter from Fidelity warning me about frequent trading and putting me on some kind of probation where if I continued to do that my accounts would be locked up (not a problem since I didn’t plan on doing it again and I wasn’t charged any fees). With me selling all the Vanguard stuff I wound up realizing more losses than I could use in 2008, so I would have done just as well to wait until January to sell the Small Cap directly into my Roth and realize losses in 2009.

Leave a Reply

Your email address will not be published. Required fields are marked *