Retiree Withdrawals.

Mike, this is not a specific recommendation but always keep in mind that whether an investment is underwater is only relevant for tax purposes, and only for investments held in taxable accounts...not for asset allocation purposes. Your portfolio has no memory of its cost, only the IRS does. The only valid concern might be "not wanting to reduce the stock allocation" and if that's the reason for not-selling, then you just make the tax decision about the best source of cash, and reallocate remaining dollars to keep stocks at target levels.

Imagine you sell $10k of stocks in the taxable account, at a net loss, and buy $10k of them in the IRA (if that's what the tax-deferred account is), via a similar but not "substantially identical" stock index fund. Your stock exposure hasn't changed. But the client's raised the needed cash at a negative tax cost - there's a capital loss on the tax return that might net a tax benefit - value is >$10k net. If you'd pulled cash from the IRA, it would be taxable income so he'd assumedly have a tax bill, i.e. less than $10k net. And a 69 year old isn't facing MRDs yet so there is no requirement to make that withdrawal (though MRDs have been suspended for 2009 anyway).

You can and should get much more refined than this in determining the best source of cash and rebalancing approach. Maybe he doesn't have much income. The capital gains rate is 0% for 2009, for those in the 10% or

15% tax brackets, so you might want to realize gains this year (using specific-ID sales) instead of losses, because you can't beat a tax rate of 0%. Alternatively, you might sell every loss holding in the taxable account to generate capital loss carry-forwards. It's always client-specific.

But beware of the tendency to "get even" with a specific investment before selling it which is a fallacy. If it helps, imagine forming the portfolio from cash today, what would you do? Then assess the tax costs of getting to that point.

-Tad

One way is to convert cash or bonds in the tax-advantaged account to an comparable stock fund, then sell the stock fund for cash in the taxable.

I would avoid buying the exact fund in the tax-advantaged if the taxable fund has a loss, because the wash rule would wipe that out. However, equivalent funds that don't violate the regs can be found.

Brian

Well, this person can take some out of the tax deferred acct., and also sell some of the losses in the taxable acct. to counter the tax he has to paid for taking funds out of the tax deferred acct.

Yes, read Tad's reply first, then this. Since RMDs (required minimum distributions) are not in the mix due to age and recent legislation, your retiree should look at his tax bracket. See

to at least get an idea of where he falls. Once you know the rate he'd be in, I'd adjust the pre-tax withdrawals to top off the current rate, but go no higher. For example, in 2009 you estimate that his taxable income is $60K. Why not convert $22K to Roth from the pretax account and avoid the risk that his rate will go up in future years?

Withdrawals from a tax deferred account are counted as ordinary income and except for the first $3,000, capital losses can't count against it.

-- Ron

The retiree can sell enough stock to generate $3,000 dollars in losses which would be $3,000/0.18 = $16,667. The $3,000 loss can than be used to reduce taxable income. Current market conditions should impress upon congress the need to increase that loss provision. More than $3,000 can be done but the loss over $3,000 would need to be carried over into next year.

Another alternative is to have the broker lend him money against his stock holdings to give the market a chance to recover.

-- Ron