This week I got the last of my 1099’s and although I had done a rough draft of my taxes a couple of weeks ago, I was able to finish everything last night. I think last year I lowered my number of withholding allowances at work, plus I had tons of stock market losses, plus my salary was frozen by the state budget crisis, so I wound up getting $2500 back federal and $700 back on state. I really don’t like getting that much back, so at work last month I bumped my withholding allowances up a bunch. That is nice because it is giving me an extra $300 per month in my paycheck (the only way to get a raise). Actually I may have overdone it because that will actually give me too much money back and I will end up owing taxes, which I’m not crazy about either (ideally I’d like to get a refund of about $200 which seems like a suitable reward for doing my taxes).
Category: Finance
2009 Roth IRA
In January 2008 I put my Roth IRA contribution with Fidelity because they always have big taxable distributions on their funds and I thought it would be better to put any investments with them in an account that wouldn’t be taxed on those distributions. I still think that is a good idea, but my choices on where to put the money certainly didn’t work out. Last year I put money in a Small Cap Growth fund which proceeded to lose 42% of its value. The other part went to Fidelity Value Discovery which lost 37% of its value.
End of Year Scheming
Despite a catastrophic year on the stock market, I would like to contribute my 2009 Roth IRA limit of $5,000 in January. Since I don’t have cash lying around for that, I’d like to sell some other investments and take as big a loss as possible for 2008 and then use those proceeds for my Roth contribution in January. If possible, I don’t want to miss any trading days by having money in a bank account, given that any day could possibly be a big rally that I would miss. But I can’t take a loss on something in 2008 and buy something in 2009 without missing a day. Or can I?
One fund that I want to sell is Fidelity Small Cap because it has huge distributions each year (despite losing 40% of its value this year, it still distributed 1% in gains this year) that I then pay taxes on. So I want to sell all of that for $2,100 and realize a $1,500 loss. What I will do is sell it before the end of the year and move it that day into Fidelity Diversified International, a non-Roth fund in which I already have more than $2,100 (important later on). I will have to pay a short-term redemption fee of 2% to Fidelity on Small Cap’s December reinvested distribution of $8 (not a big deal) but all of the other shares have been held long enough not to incur such a charge (though a reinvested June distribution of $16 will incur a short-term instead of a long-term loss, not that it matters much since long term losses will cancel short term gains and/or regular income).
Then, in 2009 I can sell some of Diversified International directly into my Roth IRA. Diversified International has a short-term redemption fee as well, but Fidelity says that as long as I have enough older shares in the fund (which I do since I have more than $2,100 there right now), those will be sold first and I won’t pay a short-term redemption fee. Even better, because there is a loss there too, I will take a small loss (diluted by the shares bought at the end of December) on that sale for 2009 since I am using the average cost of the shares (I did the calcs today and figured a loss of $129 if prices don’t change until then).
For the rest of my $5,000 contribution limit I am going to sell some Nasdaq Powershares (QQQQ) that I have with Scottrade. In order to avoid sitting out of a rally, I am going to get some cash I have with Scottrade in check form right now and then sell the Powershares by the end of the year to replace that money. If I sell those shares on Dec 31, I won’t be able to buy anything in the Roth until Jan. 2, but I’ll only be missing a day. If I sold the shares and then waited for Scottrade to mail me the proceeds it would take a week or more.
So here’s the plan: before the end of the year, move Fidelity Small Cap into Diversified International (taking an ’08 loss), move cash in Scottrade to my bank account, and sell my Powershares at Scottrade (taking an ’08 loss). Then, on January 2, move $2,100 from Diversified International (taking a small ’09 loss) and $2,900 from my bank account into the Roth IRA.
The only question now is would it be to my advantage to sell some other mutual funds just to realize a loss and then reinvest that money in 2009? The IRS will let me offset up to $3,000 in income with capital losses and right now my net realized losses will only be around $300. If I sold about $8,000 of Vanguard 500 Index, I would realize about $3,000 in losses, which would be taken off of my income and earn a $930 tax rebate (25% federal plus 6% state). I see no reason I wouldn’t do that. If I reinvest it immediately into another Vanguard fund, I wouldn’t be out of the market for any time either and would not be subject to wash rules for selling something at a loss and then buying the same thing back in less than 30 days.
A Little Too Greedy
I’ve been buying stocks lately and sticking to my 20% rules. This worked great for Suntrust which has been oscillating up and down, but my other picks have only been going down, so I keep buying more. I bought Google earlier in the year, then again when it dropped 20%, then sold when it went up, then bought some more when it went back down. Then this month it went down even more, so I bought some more at $319 per share. My target sale price was $389 and change, so I dutifully entered a sell order at that price. When the stock market skyrocketed Monday, Google went up to the low 380’s, but not high enough for my order to execute. The next morning before the markets opened, I saw that pre-market trading had Google at $391. Even though a limit order will sell for at least the limit and more if the market supports it, I thought this would be a good chance to up my limit order. I noticed that European stocks were up by about 6% already, so if Google went up 6% from the previous day’s close, it would hit $402. I didn’t want to mess with the $400 barrier, so I changed my sell order to $397 which, on my 3 shares, would only have given me another $24. But sometimes you get big bumps at the start of the trading day, so I hoped for the best.
Know When To Walk Away
A guy I know bought a townhouse several years ago near me. He is very responsible and has never missed a payment, but he is on the verge of walking away from his house and mortgage. Like most townhouses, the neighborhood association charges dues, and maybe unlike a lot of townhouses, those dues pay the water bill since the units are not individually metered and can’t be retrofitted due to the water supply lines being shared among units.
The homeowner’s association went through some bad leaders, at least one of whom was stealing money or hiring family to do work at exorbitant prices. At some point, some people stopped paying their dues. Then they had a water leak which was at first identified as a natural spring until someone noticed their water bill was completely out of hand. This is when the trouble starts. The association was low on funds already from the theft, mismangement, and dilinquent dues and didn’t have the money to pay this huge water bill due to the leak. Over time the water bill got larger and larger and fewer and fewer people were paying their dues. They put liens on people’s units for not paying dues, but these were ignored and the liens expired. In order to evict people, lawyers would have to be hired, requiring more money that they didn’t have. Instead they paid what they could to the water company who at this point was threatening to shut off their water if they didn’t make good on the bill. People started to leave the complex or were foreclosed. Today only 20% of the units are occupied and there are only a handful of people still paying their dues. The water will be shut off soon and there will be no way to get it turned back on short of coming up with tens of thousands of dollars to pay the water bill. So after paying on the place for years, he’s just going to leave and rent an apartment. He knows his credit history will be trashed for walking out on his mortgage, but he can’t live there and he can’t sell the unit either. Even if he could pay off the water bill for the whole complex, they would soon be in debt again due to people using water and not paying dues. Soon all of these different mortgage companies will own all of these different units (or the water company will) and be stuck with nearly worthless property with no water service.
This guy loses all of the equity he had in his home. The mortgage company loses the money they lent out. And the water company still won’t be paid. Everyone loses.