Recession, investments and Capital Loss Carryover - HELP!!!!

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

Reply to
sandy
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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

Reply to
joetaxpayer

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.

Not from a year or two ago. Right now all you can take is the $3,000 carry over from prior years.

Reply to
PeterL

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

Reply to
joetaxpayer

If you get a copy of Schedule D at

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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

Reply to
Tad Borek

"sandy" wrote

My comments below are only to get you going. Consider asking your tax questions at misc.taxes.moderated for more detailed answers.

Generally one can deduct a maximum of $3000 of capital gain losses from earned income. Losses in excess of this may indeed be carried over to future years.

Page D-7 of the Form 1040 instructions for 2007 will introduce you to how carry over capital gain losses from

2006 to your 2007 taxes.

What are your annual living expenses? Do you expect to live

20 or more years? When do you expect to need to dip into principal? What kind of health expenses do you anticipate in the coming years (with and without Medicare support)?

These will determine some of the guidelines for how you should invest.

As for a recession, if you think it's likely you will live

20 or more years, then I suggest you not try to do what's called "timing the market." The reason is that it's very hard to say whether we will have a profound recession (several years, meaning a depression, with the last one being in the 1930s) or a not so profound one (year or so, occurring once a decade or so). It's even harder to say whether stocks will take a big hit or just stay flat. Historically speaking, stocks recover from a "correction" within a few years. One has to think about what's behind this. It's not just luck. Economies thrive on innovation, consumption, more workers, etc.

If you can afford to re-invest dividends, then doing so in recessionary years generally means you pick up stocks at bargain prices. This yields a compound effect in the years subsequent to the recession.

You might remember that, if you are retired, the media's comments about a recession tend to focus on how the average Joe is affected. Meaning they will tend to lose jobs; some will lose homes (though in the near future, I think nothing like the Great Depression). Are you at risk for these? If not, you're going to be fine.

Maybe. But going in prepared will save you money. Experiment with the free online asset allocators listed at

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Note how they ask about your time horizon and risk tolerance. I echo much of what Joetaxpayer wrote to you on withdrawal rates and allocating for diversity.

Reply to
Elle

Huh, is this a free lunch for taxes? Presumably the reason that assets get a step-up in basis is because they are subject to estate taxation. But estates passed from one spouse to the other are not taxable are they? I apologize for being morbid, but in the case of a terminally ill spouse, is it advisable to re-title all assets to the ill spouse to get the step-up tax free?

Probably a dumb question anyway...

-Will

william dot trice at ngc dot com

Reply to
Will Trice

Sandy, I realized another complication here...the capital loss carry-forward was from prior years, from before your husband passed away. You may only have a portion of it to use now, on your tax return. I believe the answer depends on the titling of the property sold, for example if it was joint tenancy property then only 1/2 of it is "yours" to carry forward. I would suggest asking a local tax expert about that one, the answer varies by state and the specifics of the loss sales.

Will - that's correct but in your scenario the basis step-up on the transferred half of the joint tenancy applies only if at least one year passes after the transfer, under IRC Sec. 1014(e). If it's less than a year, the original basis applies so that wouldn't work.

-Tad

Reply to
TB

I really appreciate all your feedback. I had not really paid all that much attention to our portfolio before hubby's death, but I do think that your suggestion to diversity my portfolio is a very good idea. Do you have any suggestions as to what percentage should be in various types of investments??? (global, bonds, stocks, etc.???) Right now virtually everything is either in Oakmark or in the money market.

My income will be very little (social security only which will be somewhere around $900 I think. I own the home, cars, rvs, boats so no mortgage payments. We've always reinvested dividends.

We've always preferred to live frugally....only dipping into savings when we had a pricey toy (RV, boat, etc.) that we wanted. I actually think I'll be quite comfortable on the social security alone but am trying to convince myself to "live a little" and start spending/ enjoying savings (take a real trip, buy a canoe & another sailboat, etc.) Spending 4% would make me feel like a wealthy woman!!! As to my annual living expenses, I really have no idea. I'll have to sit down and look through checkbooks, etc. to figure out everything like property taxes, vehicle insurance/tags, etc. Although hubby's pension stopped at his death, I DO still have lifetime medical insurance from his former employer at no cost to me (which I am very grateful for). I don't use it much but it's great to have.

Sure....I plan on living more than 20 years or at least as long as I'm still having fun.

I've got an IRA of my own and I've heard the term "Roth IRA" but really know virtually nothing about it. Is this something I should be looking into or that I would qualify for? I haven't worked for years.

As for cost basis of the jointly held stocks we sold at a loss (no I hadn't realized that the carryover might change)..... They were sold several years ago while we were living in Florida to get funds for a home renovation on property we had just purchased in NE Washington state where we/I currently live. Are the state laws regarding this from the state where the loss occurred (Florida) or the state where we currently live and where my husband died? (Washington)?

I really appreciate all your help and suggestions. Thanks!

Sandy

Reply to
sandy

Just to be complete, I trust you are reading Joe and Tad's posts and also backing up the tax discussion with a new thread at misc.taxes.moderated. I have never been paid for financial advice but instead offer a Do-It-Yourselfer's perspective, based on some 20 years of investing in stocks etc. Tad and Joe (among others here) may have been exposed to situations very similar to yours and so speak from that perspective, in my estimation. I would be out of turn to speak much more on taxes, though I do have a lot of tax experience.

Do start a new thread to ask about whether to convert your Traditional IRA to a Roth. This is something to consider. Or maybe Joe or others would like to address this?

I want to encourage you to go to some of those quick, easy to use, and even fun tools (linked in my previous post) that offer substantive ideas on allocating. For example, using some of the info you provided and some guesses,

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suggests you have about 42% in cash and conservative (that is, no junk) bonds, 16% in small cap stocks, 23% in large cap stocks, and 19% in international stocks. These allocation tools are rough. Then again, allocation is such an inexact science, with so much unknown about the future, that they should be seen only as rough. The point is, unless you have a really low risk tolerance, then for your age and health etc. you should consider continuing to hold upwards of say 25% in conservative stocks, and the rest in very conservative investments such as CDs, high grade bonds, and money markets.

For stocks, I would use exchange traded funds (ETFs) and/or mutual funds, preferably strictly index versions of these with no loads and low expense ratios. Start another thread anytime if you need to ask questions on ways to pick a fund. Vanguard is an excellent fund company. Disclaimer: I am a long time Fidelity client but recently purchased two ETFs (within my Fidelity accounts) run by Vanguard. Fidelity's mutual funds remain expensive, and I own none other than money markets at this time. Vanguard's tend to be far less expensive.

I am not sure how certain you are of the SS amount. Are you aware that the Social Security Administration provides for free pretty reliable estimates of Social Security payments? It also mails out a more specific statement once a year to all (or nearly all) stating what expected SS payments will be.

Regarding watching one's expenses, for your reference: I just create a line on a spreadsheet for each monthly expense category. Right now, I have: Property tax, health insurance, homeowner association fee, phone, internet service provider fee, home heating (gas and/or electric), home water, auto insurance, food, recreation.

You are asking good questions, so hang in there. This all takes time to sink in. Read other threads here regularly, and it will make more sense. Plus, there is nothing wrong with using a paid financial advisor. The wisdom around here is to use a fee only advisor. This is one who does not work on commission. You can always run by this group the fee structure of any advisor you are considering, and folks will share their thoughts. A general consensus is often reached.

Apologies to the moderators for the length here. I am aware I am likely over the line and will try to return to shorter and sweeter in the future.

Reply to
Elle

Sandy, I don't know the answer to that, it's a pretty obscure issue that may depend on WA's probate code. Generally speaking the "ownership" of a loss carryforward traces back to the property that generated the loss. But the change of state in the interim adds another wrinkle to it, as does the fact that you'd already bought property in WA at the time (was it your domicile at that point?) This sounds kind of like a law-school hypothetical! Perhaps WA would regard the loss as a community asset and let you use it all, I have no idea. A tax attorney or CPA licensed in Washington should know the answer based on WA law.

But Washington is one of the few community property states so I believe my comments about CP and basis would apply...community assets get a full step-up in basis upon the death of either spouse. So you might have much lower unrealized investment gains in that mutual fund, or even losses. The valuation date chosen for the estate may affect this (and if that hasn't been done yet it may mean there is still some estate-settlement planning to do). And it all raises the question of which of your assets are considered community property in WA.

There are enough state-specific tax issues to resolve that it would make sense to get some help. Not necessarily on the investment questions at this point, but the tax and estate issues -- you might be able to make substantial changes to your investments without incurring any tax and that would be good to factor into any investment plans. And personally I would not rely on Usenet given the complexities of some of these questions.

-Tad

Reply to
Tad Borek

You need earned income to make a new Roth deposit. But, you are permitted (as I alluded to in a prior post) to convert money from an IRA to a Roth IRA. There is no penalty to do so, only ordinary income tax. Now, since you have no other income besides SS, it makes sense to check out

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and see that in 2008 you have an exemption of $3500 and standard deduction of $5450, total $8950.It may make sense for you to convert that amount each year. You'd pay no income tax on the conversion, and over time convert all $60,000 to Roth, paying no tax the whole way. There's no downside to this I can think of given the rest of your details. Any beneficiary you leave it to would have no income tax to pay on withdrawal, and you can still invest the money within the Roth as you choose. Any question on this specific issue, please ask. There's likely going to be a couple threads here addressing different aspects of your situation.JOE

Reply to
joetaxpayer

Definitely not a dumb question Will.

Unfortunately, the IRS has a look back period on the retitling or transfer of assets "in contemplation of death". Same goes with asset transfer for the purposes of receiving medcaid benefits. And of course, don't forget the IRS stance on any action taken for "the sole purpose of avoiding taxation".

All reasons why one should plan ahead.

Reply to
kastnna

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