Continuing on my year-end theme, I blogged yesterday about using your FSA funds before losing them.  Previously, I discussed the importance of maximizing your match in December.  Today’s tip, and one of the most commonly discussed, is those capital losses.

You: What are capital losses?

When the DC hockey team plays the Bruins.

You: What?

Forget it. Inside joke.

You: This is a blog.

Yeah, might be the last time I try the inside joke thing.  Getting back to it: capital losses occur when you buy an investment and then sell it for less.  Such investments could include stocks or mutual funds.

You: Like in my 401(k)?

Although you may very well have investments in your 401(k) that have gone down in value and that you chose to sell at a loss, such losses aren’t the capital losses I am talking about.

You: Why not? That’s what I want to talk about.

Sorry, but this post isn’t about year-end strategies concerning your 401(k) losses. Today, we’re talking about stocks and mutual funds you own outside of your retirement plans.

You: Again, why?

Because selling the stocks and mutual funds you own outside of your retirement plans at a loss can potentially reduce your taxes. Selling the investments held inside a 401(k) or IRA won’t do that.

You: Why?

Who am I talking to today, Bryant Gumbel?

You:  No. Bryant who?

Forget it.  Since your 401(k) and IRA accounts grow tax-deferred, you don’t pay tax when you sell investments within the plan that have gone up in value (gains).  On the other hand, if you sell such investments at a loss, you don’t get to deduct that loss either.  (Note: there are very rare exceptions to this rule, but you typically need to nearly liquidate your account, not a good retirement planning strategy.)

Investments you sell within a taxable account lead to either capital gains or capital losses. This year, most people who are selling investments are selling them for less than they originally paid.

You: Thanks for that insight, Mr. Madden.


The year-end strategy here is to make sure that if you are sitting on investment losers in your taxable accounts which you are considering selling, to do so prior to December 31.  You can deduct your capital losses up to the total of any 2008 capital gains plus up to $3,000 of ordinary income.

You: Ordinary income?  My income certainly feels very ordinary.

Ordinary income has a tax definition and includes your salary, bonus, even interest income.  So selling an asset triggering a loss of $3,000 or more means, for tax purposes, that  you made $3,000 less than you actually di.

You: Works for me.

Just make sure you don’t sell something just for the tax benefits.

You: Right.  Can I sell an investment and then buy it right back?

Yes, but if you don’t wait at least 31 days before buying it back, then you can’t deduct any loss.

You: Why not?

Because then it is known as a “wash sale” and the rules say you can’t deduct losses from wash sales.

You: Is that where the phrase “It’s a wash” comes from?

I don’t know.

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How many obtuse sports-related jokes can you identify?  Are any of them actually funny?

What about personal finance comments?  Ever sell something and then realize that wasn’t such a good idea after all?

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One Comment to “Year-End Financial Planning Tip #3: Oh, those losses on capital (and some obtuse sports jokes)”

  1. Nice post. Reminded me of my divorce judge;

    “Mr. Casey, I have looked at the issues very carefully,” the divorce judge said, “and I’ve decided to give your Ms. Casey $500 a week.”

    “Well, that very nice, your honor,” I said. “Every now and then I’ll try to send her a couple of bucks too.”

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