Ask The Expert with Larry Swedroe, January 2009 Issue

By Larry Swedroe, on December 30, 2008

This is the 12th issue of the Ask The Expert column by Larry Swedroe. You can see Larry’s full biography and important disclaimer below. If you are interested in having your question answered by Larry, please send me an email via the contact page.

Now, let’s get to the questions and answers (please note that the emphases and links are mine).

Question from Michael:

I’ve been unemployed since June and have a tax question. I already know that because I’m making a lot less this year, I should be able to do a $6K IRA deduction for 2008, as I’m over 50 and my modified adjusted gross income will be under $53K (IRS told me this is valid).

Now, I may want to make changes to my accounts with my financial advisor that will probably give me $11,000 of capital losses by selling a few of my mutual funds. Specifically, in reference to doing a $6k IRA and the deductibility of it, can I still make the total 6K deduction?

I am not a tax expert so I cannot offer tax advice. Having said that I can make a few suggestions/observations for you to discuss with your CPA.

First, if you tax bracket is very low you may not want to take any losses. In fact, you might be in the zero tax bracket for capital gains, which would mean that the losses would have no value to you. Might therefore be better to delay taking them. This is the only time one should delay taking losses. The reason you always want to take any significant loss (especially while it is short term and may be more valuable) is that doing allows you to share the loss with the IRS. If you wait the loss may disappear and the opportunity will be “gone with the wind.”

Second, if you are in a low bracket and have experienced losses in your IRA (if you held any equities there that is almost surely the case) it would be a great time to consider a Roth conversion. You would pay taxes at a low rate on a low amount when you convert and then never pay any taxes again as Roths are not taxable.

Third, with the caveat that I am not a tax expert I don’t see what the $6k IRA deductibility has to do with the capital losses. But your CPA is the one you need to ask that question.

Best wishes to you all for a healthy, happy, peaceful and prosperous New Year.

Disclaimer

• Mr. Swedroe’s opinions and comments expressed are his own, and may not accurately reflect those of the firm, nor Moolanomy and its owner.
• Not all questions will be answered
• By submitting a question, you grant us the right to publish your question.
• The answer is given based on the information provided in your question. Please seek professional assistance for more personalized advice.

Larry Swedroe is a principal and director of research at Buckingham Asset Management, LLC, an SEC Registered Investment Advisor firm in St. Louis, Missouri. He is also principal of BAM Advisor Services, LLC, a service provider to investment advisors across the country, most of whom are affiliated with CPA firms. However, his opinions and comments expressed within this column are his own, and may not accurately reflect those of Buckingham Asset Management or BAM Advisor Services. Before joining Buckingham in 1996, Larry served as senior vice president and regional treasurer at Citicorp and vice chairman of Prudential Home Mortgage. Larry is author of The Only Guide to a Winning Investment Strategy You'll Ever Need (updated and re-released in 2005), as well as six other books. Most recently, he authored The Only Guide to Alternative Investments You'll Ever Need (2008). Larry has started his own blog called Wise Investing at CBS Money Watch. Please check it out!