Question re: Personal Finance. Should I take a loss on mutual funds this year?

FREEPers smarter than me

[Recovering_Democrat]

QUESTION:

Since I expect to owe income taxes for '08, should I sell my mutual funds at a loss to help offset those taxes and make them lower?

I really do a good job saving and paying bills but the past six months we've had a lot of stuff "break" at home, plus we've had our hours cut at work and thus a lower income coming into the household.

I am contemplating doing this move--and I rarely dip into my mutuals, only for big purchases. But I thought if I took a loss on my mutuals, I would owe less to the feds in April and I'd have a little extra cash right now.

[Recovering_Democrat]

FREEPers with finance knowledge, I need some advice.

[autumnraine]

I have no idea, but I love your graphic with Dwight saying “Question”

[marvlus]

I’d like to hear points of views on this, as well.

[2banana]

You can only write off losses against gains. If you have no gains, you can not write off the losses.

There is a $3,000 exception to this - you can write off up to $3,000 in losses against ordinary income.

Please do your own homework and diligence.

[Borderline]

I did some selling off to realize losses and offset taxes.

My thinking here is threefold.

1) Cash is king in a recession. We are definitely in one and still headed south with Alt-A, Option ARMs, commercial real estate and consumer credit card debt still hanging over our heads ready to rain fire. Save your cash, put it aside.

2) Do you really want to pay any more than you have to to the upcoming government that we unfortunately so deserve? You will do a much better job surviving on that cash than allowing Obama, Pelosi and Reid to determine how it gets spent and upon whom it will be gifted.

3) I believe that 2009 is going to be bloodier than 2008 on the stock market. Take what benefits from the market you can today - and sit out the bloodbath that looks certain tomorrow. I just don't see a single ameliorating condition in the economy to prevent the markets, and especially those mutuals, from further decline.

Government printing presses do not increase the value of corporations - large or small. Bailout loans are still loans that need to be paid back. For the life of me, I cannot figure how a corporation's value, as represented by its stock market price, can go UP because it borrowed billions from the Treasury. If you or I borrow, our net worth goes down, since we now have to pay that back to get in the black. No different for companies.

Take the losses while you have gains to be had on your taxes. Save the money for a rainy day.

My best to you. Merry Christmas!
Rick

[FocusNexus]

WHEN did you BUY them?

If you bought them less than a year ago, it could help you. But if you bought them longer than a year ago, they become long term capital losses, of which you can only take off $3000 against your income.

Read more at the IRS website:

http://www.irs.gov/taxtopics/tc409.html

You can also call your mutual fund company and find out if they plan to distribute “capital gains”, if they do, you may be able to use your losses from the sale against that. Yes, it does happen that the mutual funds declare capital gains, on which you owe income taxes, while the value actually went down.

[Jimmy Valentine]

Your answeris "NO". If you take a capital loss on your mutual funds, you can only deduct $3,000 per year, unless you are off setting against capital gains.

My suggestion is to let it all alone. Most quality mutual funds spread their portfolios over a band of investments to reduce/spread risk. Your fundmay be down right now, but it will come back over time.

Having said that, I have a notion that after Obama the light worker is sworn in on January 22nd, all of a sudden the main stream media will shout hosannahs about how the worst is over and the market is better than we thought.

This will push the market higher.

[Attention Surplus Disorder]

Pretty much agree with Rick Borderline in post #5, except the effect of bailouts....on banks, they’re great, for a while. For other companies, they’re not. Nevertheless, IMO there is very little value in the market at this juncture, and the profits outlook for 2009 is not good. My own opinion is that the stock market will hit SPX 500 next year = DJIA 5000-6000 spring-summer; but that’s just one opinion among many. I do not see how this is avoidable.

The $3K max loss you can take in ‘08, therefore, is not just an offset to taxes; but it is ducking out of a stock market which IMO is nearly doomed. Unfortunately, the timing on this is snarky, as there’s probably going to be some amount of January rallying...and you’re taking your losses along with everyone else, eg; selling at depressed prices. I’d suspect, though, that a Jan rally will be heavily sold into, so I am not very ambitious about it.

[econjack]

I retired in May, only to see my pension fund hit the skids from May to the present. So, I think a good part of the answer is where you are relative to retirement. The $3000 write off against ordinary income has already been mentioned. If you're young, I'd leave the mutual fund alone and let it come back over the years. If you're approaching retirement and the loss falls within the $3000 limit or you can offset gains, then I'd consider the write off.

Personally, I've taken over my pension fund from TIAA-CREF and started managing it myself. I've reinvested about 2/3 of the funds in high yield stocks (e.g., US Bankcorp is paying about 7% and has paid a dividend for 145 consecutive years), most of which are high grade. I've also taken on some high risk, high yield (e.g., yields over 15%) stocks, too, and plan to hold those for the long run. There are a lot of quality companies out there (Pfizer, GE, J&J, etc.) with attractive yields at bargain prices so I've been cherry picking the low-hanging fruit. I think this is the time to get into the market, not run away from it.

[yefragetuwrabrumuy]

A bunch of variables here.

1) Who holds your mutual fund? Type of mutual fund?
2) What percentage of your portfolio is in your mutual fund?
3) Do you have other major assets that could tank?
4) Are you still focused on yields, or do you want safety?
5) Have you talked to your mutual fund manager about their projections and recommendations?
6) Have you checked external evaluations and comparisons of your mutual fund?

I’ll leave the tax portion up to the tax experts.

[tubebender]

I haven't stayed at a Holiday Inn Express in several years but it sounds like your income could be less next year than 2008 and you can factor that into your decision. On the other hand there may be a higher taxes coming for 2009 and you can factor that into your decision. At this time I am neither for nor against any decision you make...signed A. Moderate

[MarkL]

Something that's important to be aware of, is that if those mutual funds are tax exempt, i.e. a traditional IRA or 401K where you haven't paid taxes on them, selling them at a loss will NOT allow you to deduct the loss on your taxes.

Since you didn't pay tax on the income, the government considers that you never actually earned the money you invested. Since you never earned it, as far as the government is concerned, you can't lose it.

Mark

[tdscpa]

Correct, Mark.

Unless one has taxable investments in stocks or funds, selling for loss recognition is a bad idea. Trying to get a loss deduction for a retirement account is a bad idea.

(Possible for a ROTH or or non-deductible IRA, but you could only get an itemized deduction.) Generally not worthwhile. (Subject to reductions based on income).

If you have non-retirement investments, it is usually a good idea, at least to a limited extent. Long-term capital gains are good. Taxed at a rate lower than ordinary income.

Net long term capital losses are also good, at least up to a net of $3,000, which can offset ordinary income. Any excess over $3,000 net loss can carry forward to offset future gains, but that is not as beneficial usually as offsetting ordinary income (Offsets capital gains first, then ordinary income of up to $3,000/ year.)

[tdscpa]

How the hell did I stumble upon a thread that old? Guess I was a little late for useful 2008 tax advice. Guess I need to look for posting dates. I usually never see a post over a day old!