FREE NEWSLETTER
Go to main Forum page »
In January 2020 I invested inherited six figures cash in Vanguard’s Intermediate Term Bond ETF (BIV). The rational was that this money would not be tapped for more than 5 years (just did to replace a dying car with a new Toyota) so during the interim I would expect to gain significantly more return than investing in CDs.
The plan was going great and by 7/2021 I had earned over 13K in returns. Even in 12/2021 I had earned nearly 10K in gains. I think you know what happened next. The worst year ever in the history of the bond markets due to increasing inflation and interest rates. I believe my plan was sound, and there is no way I could know what would occur in 2022.
Well now that I am going to be utilizing this money for minimizing my taxable income and paying taxes for Roth conversions of the next few years I decided to sell and buy a short term bond fund to minimize volatility. Net my five year investment netted again of a few hundred dollars (0.1%).
The sale of the bond fund this week resulted in a nearly 20K loss for which I have no other taxable position to perform tax loss harvesting.
My question is, is there any way to recoup this loss faster than the 3K deduction of losses each year over the next seven years on my tax returns?
🤞
Did you have other options to keep BIV (Vanguard’s Intermediate Term Bond ETF) and reinvest the dividends and wait it out for BIV to recover?
Thanks for the question Paul. This was my thinking:
I need the tax free money to meet some of my expenses tax free (had been utilizing an inherited Roth for the past five years to qualify for free ACA policy, and Roth conversions, and that account is now drained) and to pay the taxes realized due to continuing to perform large rollovers into a Roth, especially in ‘25 while the tax rates are lower due to the Tax Cuts and Jobs Act provisions that are set to expire. No guarantee they will be extended beyond then.
Since the Roth money will most likely not be tapped until I completely drain my traditional IRA (if that will even occur) I know that I am better off biting the bullet now, and slogging thru the seven years of deductions.
David, I don’t know of any way to accelerate that other than with capital gains, which you say you do not have. If one of HD’s CPAs have any solutions I would love to hear them.
One of my favorite clients was a lady whose “advisor” managed to lose her a about $100k back in 2001. I told that she wasn’t allowed to die until age 110, when the carryovers would finally be used up. Luckily she has a great sense of humor.
Great point and well communicated to your client that unused capital loss carry-forwards die with you.
Another tax trap at an even more granular level to note is that in regards to capital-loss carry-forwards the tax benefit is generally spouse specific such that if the net carry-forward capital loss is attributed to one spouse who later dies then any remaining carry-forward benefit likely disappears for the surviving spouse.
How to effectively benefit sooner rather than later from capital loss carry-forwards often involves being willing to take risk by owning equities and then selling at a gain if you do not already have a taxable investment with a unrealized gain to sell. My investment crystal ball has been hazy for decades but if I were to pick a taxable individual stock or equity fund that I hoped would produce capital gain upon sale I would look for an investment that reinvests earnings and does not pay out dividends to increase the likelihood I could generate taxable capital gains to offset my carry-forward.
If I had David’s capital loss carry-forward situation I would do nothing as I hope to live another seven years and would therefore get to use the capital loss carry forward benefit without unwanted risk. Add some zeros to the amount of the loss carry-forward I would have to rethink my planning.
I am not aware of any current proposals to eliminate the annual $3K deductible utilization limits on capital gain income.
I did not know about the spouse-specifc aspect of capital loss carry forwards. My default in David’s situation would have been to gradually apply to $3k of ordinary income as our marginal rate is higher than our capital gains tax rate and will only get more so. But the spouse-specific aspect adds a wrinkle. Thanks for mentioning.
”If I had David’s capital loss carry-forward situation I would do nothing as I hope to live another seven years and would therefore get to use the capital loss carry forward benefit without unwanted risk.”
Thanks for the insight William. Since I am only turning 67, am in good health, I certainly hope to live many years longer than just seven. Was just hoping against hope that there was some magic trick I did not know about that someone far smarter then me knew.
Take comfort in this: If you use your capital loss carry-forward to offset income rather than capital gains, the tax savings may be delayed, but they’ll also be larger — because income is typically taxed at a higher rate than capital gains.
That’s a great point. My capital gains tax rate is zero.
Great advice, Bill. Depending on tax situation, taking the carry-forward loss of $3,000. each year can be the best bang for your buck. And can prove to be a boon if you’re at or near the IRMAA threshold.
Thanks for commenting Dan.
“If one of HD’s CPAs have any solutions I would love to hear them.”
I’m hoping that they have a magic wand and come up with something that I don’t know about.