I’ve known about wash sales for a while and what I always thought it meant was when you sell a stock at a loss and then buy it back within 30 days. The IRS sees this as just a way to harvest some losses without actually changing what you invest in, a move done solely for tax purposes. So what they do is say you have to defer that loss until you sell the shares permanently. But when I have shares bought at different times and then sell some of those shares, I would rather show a gain than hassle with deferred losses from a wash sale.
Category: Finance
Deferred Compensation
A few years ago, I wrote about my Deferred Compensation Plan at work and said that at the time, I was averaging a 7% return over the previous 13 years. Since Jeb posted his Green in Wintertime post, I thought I would post this graph which comes from a spreadsheet I use to keep up with how much I have contributed, how much my account is worth and the difference between the two which is the gain or loss.
You always want the yellow line (the current value) to be above the pink line (total of my contributions). If the yellow dips below the pink, I am losing money. It has happened twice, but is not happening right now. The neat thing that happened in June 2000 was the blue line (gain or loss) crossed the pink line. That meant that my gains exceeded my contributions, or, in other words, I had doubled my money! At the time I had an average annual return of 33%, which was clearly unsustainable. About two years later, I had lost every penny of my gains and was showing an average annual loss of 1.18%. Five years later, I was showing a lifetime average gain of 11.3% but nowhere close to doubling my money yet. 18 months later, I had lost all my gains again and had an average loss of 0.31% per year over the previous 16 years. Now I’m showing a gain again of 4%, which is pretty lousy, but I’ll take it. Though the account value is back to where it was before the 2008 crash, you can see that today’s gains are about half of what they were then.
Roth 2010
Last year I put my Roth contribution into Fidelity Contrafund, a large cap growth mutual fund. It did pretty well, returning about 26% on the year. But in late March it seemed sluggish so I took some out and put it in the peppier Fidelity Small Cap Growth fund which turned out to be a good move since it has gone up 51% since then vs. Contrafund which was up “only” 36% since that time.
If 2009 trends continue, then small caps will continue to outperform large caps and international funds will do well (I put some money into Vanguard’s emerging markets index last year and holy cow! 70% gain). But I looked at how my Roth funds are allocated now and I feel like I have a lot of representation from small caps already, so I think I will put some money in large caps and hope they have a good year. I tried to see what sectors underperformed this year, thinking they were due to do better next year. Some of the big tech companies haven’t done as well and biotech didn’t do very well. So I was thinking that I might try out Vanguard’s FTSE Social Index fund again which has pretty big positions in tech, health care, and financial companies. Maybe those will do pretty well, so I was thinking I would put $4k of the 2010 IRA contribution there and then throw the remaining $1k I’m allowed to contribute at Vanguard’s Total International Index to give me a little more foreign diversification.
0% Savings Bonds
You may remember that last April I bought some I Series Savings Bonds that promised to pay 6% interest, though not for another six months. It turned out to be a great investment, not just because of the high interest rate, but because it prevented me from investing that money in the stock market, which I would have done otherwise, what with me being tapped out by October when the market was still pretty far off the bottom it hit in November and well before falling to new lows just last month.
Tax Spreadsheet
Figuring taxes is one of those things that seems like it should be pretty simple, but gets kind of complicated. I have tried coming up with a spreadsheet in the past and always get bogged down in tax brackets, long term gains rates, deductions, and personal exemptions. Since I was changing my withholding allowances this year and the official IRS calculator is so unfathomable, I thought it might be easier to try a spreadsheet again.
The biggest problem is dealing with the different tax brackets. For instance in 2008, the first $8,025 is taxed at 10%, then a 15% bracket kicks in until $32,550 when the rate goes to 25%. If you make $40,000 you pay 10% of $8,025, 15% of $32,550 minus $8,025 and 25% of $40,000 minus $32,550. So I came up with a spreadsheet with five nested IF statements to handle the six different tax brackets (rather than trying some sort of lookup function). Then I had to look up tax brackets and rates for the last few years since each year is different.
Then it was a matter of dealing with qualified dividends and long terms gains which are taxed at 15% (20% before 2003). Unless you have losses in which case it counts against your income (but only up to $3,000 which the spreadsheet doesn’t deal with; you just have to enter a maximum of $3,000). Those amounts, if positive, are subtracted from your income and taxed at a lower rate. Your reduced income is taxed from the tax tables. There are actually a couple of different capital gains rates for lower incomes, but I skipped that part.
So far so good, but I was still getting the wrong answer. That’s because the tax is based on your income in the tax tables, rather than the actual percentage of your income. For instance, if your income was $40,005, you would go into the table for the amount for $40,000 to $40,050. And that tax amount is actually based on $40,025. So I rounded down to the nearest $50 and added $25.
Using the same formulas for every year, I was able to accurately generate my taxes going back to 2001. Then I was able to project forward to 2009 and figure out about how much I would owe or get back next year. I am probably not withholding enough taxes if I want to hit my target of a $200 refund. So I think later in the year I will reduce my withholding.