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Musings On Minimizing Taxes On Investments

During 2012, one of my clients generated $50,000 of short-term capital gains by taking advantage of short-term swings in the market. That was quite an accomplishment!  However, since they pay tax at 33% (28% federal plus 5% state) on short-term gains, their tax bill on the gain amounted to $16,500.  That is still a net gain of $33,500 ($50,000-16,500) after taxes…which is nothing to sneeze at!  But, as I pointed out to them, if they were to do that inside their traditional IRA, the $16,500 paid in taxes would still be in their IRA working for them.

Their question to me was “What if we incur losses? We cannot deduct those losses in our IRA. Is this still a good idea?”  Personally, I think moving investments that produce short-term capital gains into an IRA (and off your annual income tax return) is a great idea. However, it is not a great place for losses…but neither is your non-retirement investment account.

Let’s assume the worse…the market suddenly tanks and you incur $60,000 of losses before you can convert everything to cash. If the losses occur in your non-retirement account you would be able to offset $3,000 of those losses against your other income each year. You would also be able to offset future capital gains (long-term and short-term). However, if the losses occur in your IRA, there is no $3,000/year deduction available. But, if you never recoup those losses, you obviously will never be taxed on the vanished $60,000. On the other hand, if you recoup the Read more

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