WSJ Investment Advice
December 7th, 2008, 10:24am by MikeIn yesterday’s WSJ, they pitched an interesting investment idea for people who have lots of money in an S&P 500 Index Fund: dump the fund now, take the losses and tax writeoff, and buy an index fund that tracks a different index (e.g., the Wilshire 5000). They’re both down quite a bit (obviously), so you’re not losing any upside potential, and you’re getting the tax benefits of selling at a loss.
The only hidden thing that they point out is that you have to make sure that the fund you buy is not “fundamentally identical” to the one you sell, which under IRS rules would not allow you to take the losses. But the writer’s opinion is that funds that track different indices really can’t be considered identical.
What do you guys think? Seems too easy, somehow, there must be a catch.
December 7th, 2008 at 1:48 pm
I’ve heard this advice before. Some of us will easily hit the $3000 cap for capital losses in 1 year (probably $6000 if married), so it doesn’t seem worth the hassle to me. Anything more than $3000 is carried over to the next year. Other things to keep in mind:
1) You’ll eventually have higher capital gains that you’ll need to pay taxes on;
2) Doesn’t matter if it’s retirement money.
I think this makes the most sense if you have other capital gains to offset. If not, it’s a question of whether it’s worth the hassle of switching funds to defer those taxes for a few years.
December 7th, 2008 at 8:03 pm
Exactly, all you’re doing is playing around with the timing of your capital gains/losses – it’s a zero sum game so unless your tax status changes substantial between time periods it’s not going to make too big of a difference. If you take the loss this year, you make up for it by having a greater capital gain when you sell the new fund. If there’s any load associated with buying or selling it’s definitely not worth it. Also, I’d say it’s more likely that they’ll roll back the cap on capital gains taxes (didn’t Bush put that one in place??) so if they eventually start taxing capital gains at ordinary income levels you’d be even more screwed.
December 7th, 2008 at 10:16 pm
Yeah, makes sense — this is why I consult the experts before following any advice from those so-called experts!
And sadly, we’re not trying to offset any capital gains this year…