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Financial Planning - Financial planning in general. (Moderated)
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Posted by sandy on January 13, 2008, 7:17 pm
People in another group suggested I post my questions here.
This will be my first year trying to make financial decision and
understand/file taxes by myself (hubby died recently) and I've got
some question that I'm hoping you can help me with.
I've been toying with the idea of selling a good portion of our
portfolio as I keep hearing that a recession is coming. I'm guessing
that there would be tax consequences if I did so. My husband and I in
past years sold off a number of poorly performing stocks (tech stuff)
at quite a loss. Can I offset any current stock gains by that
carryover loss or is it limited to $3,000 (or is that $3,000 limit
offset refer only to earned income?). The stocks that we sold were in
joint name. In other words, if I sold mutual funds for a $50,000
capital gain, could I offset that with a $50,000 loss from a year or
two ago????
Also like opinions as to whether this is something that I should be
considering doing or should I just let investments sit in the account
(The great majority is invested in mutual funds). And should I decide
to sell, is a money market the best option or are their better
investments in times of recession?
I live in a tiny town and have to travel 50 miles just to see a
traffic light. I don't believe that we have any (or any good)
financial advisors locally. Would it be worthwhile taking the trip
to
consult one? And if yes, how do I make a decision as to who to
call?
Investments are @$60,000 in IRAs. I've got only @$5,000 in stocks now
and most of them are nothing I'm proud of (Lucent, Sun Microsystems,
etc.) I've got @ $350,000 in Mutual Funds....mostly Oakmark Equity
and Income Fund Class I which seems to be rated highly (I've been
trying to research everything) and a chunk sitting in Money Market
Prime account. I'm a healthy 63 year old.
And a side question that I've been wondering about......How much can I
safely withdraw from savings each year (I don't really care that much
about conserving funds for heirs).
Appreciate your opinions.
Sandy
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Posted by joetaxpayer on January 13, 2008, 8:16 pm
sandy wrote:
> Investments are @$60,000 in IRAs. I've got only @$5,000 in stocks now
> and most of them are nothing I'm proud of (Lucent, Sun Microsystems,
> etc.) I've got @ $350,000 in Mutual Funds....mostly Oakmark Equity
> and Income Fund Class I which seems to be rated highly (I've been
> trying to research everything) and a chunk sitting in Money Market
> Prime account. I'm a healthy 63 year old.
>
> And a side question that I've been wondering about......How much can I
> safely withdraw from savings each year (I don't really care that much
> about conserving funds for heirs).
I replied to a different aspect of your question at MTM.
Looking at Oakmark, it seems to have outperformed its peers, but over 5
years slightly underperformed its index by a slight amount. It's a large
cap fund, so you are underdiversified if this is the bulk of your
investment.
We had a lively discussion on safe withdrawal rates here recently.
My reply was to quote the 4% resulting from the Trinity Study, and often
referred to by Author Scott Burns.
So you mention about $410K above, don't know how big the MM chunk is,
add it and multiply by 4%.
Depending on your annual adjusted gross income, you may be a candidate
for Roth conversion. In 2008, a single person in the 10% bracket has a
zero rate on dividends and cap gains, so you may have very little income
(you mention no pension or other income). In this case, a small amount
may be converted from the IRA to the Roth each year and no tax due. Or
maybe just 10% depending on other income. I know this was a tangential
to your original question, I am just looking to save you every cent you
can over the long term.
JOE
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Posted by PeterL on January 14, 2008, 11:37 am
> People in another group suggested I post my questions here.
>
> This will be my first year trying to make financial decision and
> understand/file taxes by myself (hubby died recently) and I've got
> some question that I'm hoping you can help me with.
>
> I've been toying with the idea of selling a good portion of our
> portfolio as I keep hearing that a recession is coming.
First of all my condolence for your loss. That said, I would advise
against doing something because you "keep hearing" about some
impending events. It is impossible to predict the short term
movements of the market. While some investors think that the market
is ready for a down turn, others think the opposite.
Not knowing your financial circumstances, it is not possible to anyone
to give you financial advice. Since you have a broker, see if they
know some fee-only financial advisors that is close to where you live.
> I'm guessing
> that there would be tax consequences if I did so. My husband and I in
> past years sold off a number of poorly performing stocks (tech stuff)
> at quite a loss. Can I offset any current stock gains by that
> carryover loss or is it limited to $3,000 (or is that $3,000 limit
> offset refer only to earned income?). The stocks that we sold were in
> joint name. In other words, if I sold mutual funds for a $50,000
> capital gain, could I offset that with a $50,000 loss from a year or
> two ago????
Not from a year or two ago. Right now all you can take is the $3,000
carry over from prior years.
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Posted by joetaxpayer on January 14, 2008, 12:06 pm
PeterL wrote:
>>Can I offset any current stock gains by that
>>carryover loss or is it limited to $3,000 (or is that $3,000 limit
>>offset refer only to earned income?). The stocks that we sold were in
>>joint name. In other words, if I sold mutual funds for a $50,000
>>capital gain, could I offset that with a $50,000 loss from a year or
>>two ago????
>
>
> Not from a year or two ago. Right now all you can take is the $3,000
> carry over from prior years.
Hold on, Peter. A sale a few years ago produces a loss, for say $50K.
That year, only $3000 is taken against income. The $47,000 carried
forward can offset up to $47,000 in capital gains (first) and then if
any is left, $3,000 in ordinary income. It carries forward until used up.
The answer to Sandy's question is a loud 'yes', even though I don't
suggest she bail out.
But if she decides on a new allocation, as per my previous postings, she
will take advantage of those losses, and reallocate with little, if any,
tax consequence.
JOE
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Posted by Tad Borek on January 14, 2008, 12:26 pm
sandy wrote:
> I've been toying with the idea of selling a good portion of our
> portfolio as I keep hearing that a recession is coming. I'm guessing
> that there would be tax consequences if I did so. My husband and I in
> past years sold off a number of poorly performing stocks (tech stuff)
> at quite a loss. Can I offset any current stock gains by that
> carryover loss or is it limited to $3,000 (or is that $3,000 limit
> offset refer only to earned income?). The stocks that we sold were in
> joint name. In other words, if I sold mutual funds for a $50,000
> capital gain, could I offset that with a $50,000 loss from a year or
> two ago????
If you get a copy of Schedule D at www.irs.gov you can see how it all
flows out. You tally up your gains/losses in two categories, short &
long-term, depending on whether you've held the asset for at least 12
months. Then, use the carry-forward against any gains, knocking them
down to $0 if the carry-forward is large enough. There is no $3k limit,
that only comes into play after your capital gains are netted out to
zero, and you still have remaining losses. Then, you can apply up to
$3,000 of any remaining losses against other income ("ordinary income"
in tax speak).
The carry-forward retains its character as short-term or long-term loss,
which is important to factor in because those are taxed at different
rates. Your prior-year tax returns would have the information you need
on them, about the carry-forward and its division into short/long term
losses...see Schedule D of the federal tax return.
There is a complicating factor here. You mentioned that your husband
passed away recently and that you held these assets jointly. Perhaps
you're already factoring this in, but there was a change to cost basis
for, likely, half of the account at that time. The cost basis was
"stepped up" to the value on the date of death, for that portion of the
assets (or "stepped down" if worth less than the purchase price on that
date). If this was a community property account, because you live in one
of the few states that have a concept of community property (CA is one),
the entire account was stepped up. Have you made that adjustment? The
gain might be smaller than that $50k you mentioned.
-Tad
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