Convert Taxable account to Roth IRA to avoid wash sale?

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sman09
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Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 10:34 am

Dear BHs

I would really appreciate your guidance with this.

I thank everyone for helping me with their inputs to my several queries so far. In response to my post regarding my finances in order, a comment by @megabad said
Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.
I had not heard the term wash sales before and reading up further led me to interesting prior discussions in the forum here. Given the possibility of a wash sale (given that i have invested in both Betterment and Wealthfront to see how they perform and the overlap in the funds held in them) as was elaborated in additional explanation:
Yes, there may be a wash sale given the overlap in fund ownership or there may not be, but it would be hard to predict if one would buy within 30 days of the other selling. I am assuming you would receive a 1099B at the end of year reporting transactions just as you do with a normal broker (I am not a Betterment/Wealthfront customer). If you executed a sell and then a buy on exactly the same ETF within 30 days, then you would have a wash sale which simply means you cannot deduct the loss this year and will have to adjust the cost basis of the holding to reflect the wash sale. Legally, not a big deal, but from a paperwork standpoint, it can become difficult since you will have to keep track of everything yourself (unless you have a "guy").
i am thinking of closing one of the two accounts or possibly both. Would the fact that both accounts were open for under a month have any tax implications? Also, assuming i close both the taxable accounts, what would be a good option to move the funds to?


An option i'm considering that i would like to have your input:

Is it a good idea for me to request the firms to convert my current taxable account in to a Roth IRA? Because the money invested in the taxable account is already post-tax, i thought it might fit the Roth requirement.

Also, i have a question regarding the limit on contribution by income earned in a year:

- given the nature of some jobs where one would not know the total income one would earn during the year, or plain uncertainty with regard to the nature of the job, how would one know until the end of the year whether or not one qualifies for Roth IRA?

Thank you!

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David Jay
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by David Jay » Wed Jun 13, 2018 10:45 am

sman09 wrote:
Wed Jun 13, 2018 10:34 am
Is it a good idea for me to request the firms to convert my current taxable account in to a Roth IRA? Because the money invested in the taxable account is already post-tax, i thought it might fit the Roth requirement.
There is a maximum contribution level of $5500 per year ($6500 after age 50) into any form of Individual Retirement Account (traditional or Roth). So no, you can't simply convert taxable money into Roth at will. This contribution level is also dependent on income, per your next question.

Also, i have a question regarding the limit on contribution by income earned in a year:

- given the nature of some jobs where one would not know the total income one would earn during the year, or plain uncertainty with regard to the nature of the job, how would one know until the end of the year whether or not one qualifies for Roth IRA?
This is an issue. If you are close to the limit, one alternative is to do a "backdoor Roth" (the BH name for it), where you make an after-tax contribution ($5500 per above answer) to a traditional IRA and then immediately convert it to a Roth. This method has no income limitation. Note that this is only simple if you have no tIRA (or an empty one). link here: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

sman09
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 10:50 am

David Jay wrote:
Wed Jun 13, 2018 10:45 am
sman09 wrote:
Wed Jun 13, 2018 10:34 am
Is it a good idea for me to request the firms to convert my current taxable account in to a Roth IRA? Because the money invested in the taxable account is already post-tax, i thought it might fit the Roth requirement.
There is a maximum contribution level of $5500 per year ($6500 after age 50) into any form of Individual Retirement Account (traditional or Roth). So no, you can't simply convert taxable money into Roth at will. This contribution level is also dependent on income, per your next question.

Also, i have a question regarding the limit on contribution by income earned in a year:

- given the nature of some jobs where one would not know the total income one would earn during the year, or plain uncertainty with regard to the nature of the job, how would one know until the end of the year whether or not one qualifies for Roth IRA?
This is an issue. If you are close to the limit, one alternative is to do a "backdoor Roth" (the BH name for it), where you make an after-tax contribution ($5500 per above answer) to a traditional IRA and then immediately convert it to a Roth. This method has no income limitation. Note that this is only simple if you have no tIRA (or an empty one). link here: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Thanks a lot David Jay for the input!

As regards contributing to tIRA - given that the funds i have in the taxable accounts are post-tax money from my bank account, am i still eligible to contribute it to a tax-sheltered tIRA? My understanding was just like a 401k contribution it has to go directly from the paycheck. If not, then it is certainly an option to consider.

Does closing a taxable account under a month trigger any tax penalty - there has not been a lot of gain in the period so short term gain is not a concern.

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samsoes
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by samsoes » Wed Jun 13, 2018 11:22 am

sman09 wrote:
Wed Jun 13, 2018 10:50 am
David Jay wrote:
Wed Jun 13, 2018 10:45 am
sman09 wrote:
Wed Jun 13, 2018 10:34 am
Is it a good idea for me to request the firms to convert my current taxable account in to a Roth IRA? Because the money invested in the taxable account is already post-tax, i thought it might fit the Roth requirement.
There is a maximum contribution level of $5500 per year ($6500 after age 50) into any form of Individual Retirement Account (traditional or Roth). So no, you can't simply convert taxable money into Roth at will. This contribution level is also dependent on income, per your next question.

Also, i have a question regarding the limit on contribution by income earned in a year:

- given the nature of some jobs where one would not know the total income one would earn during the year, or plain uncertainty with regard to the nature of the job, how would one know until the end of the year whether or not one qualifies for Roth IRA?
This is an issue. If you are close to the limit, one alternative is to do a "backdoor Roth" (the BH name for it), where you make an after-tax contribution ($5500 per above answer) to a traditional IRA and then immediately convert it to a Roth. This method has no income limitation. Note that this is only simple if you have no tIRA (or an empty one). link here: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Thanks a lot David Jay for the input!

As regards contributing to tIRA - given that the funds i have in the taxable accounts are post-tax money from my bank account, am i still eligible to contribute it to a tax-sheltered tIRA? My understanding was just like a 401k contribution it has to go directly from the paycheck. If not, then it is certainly an option to consider.

The $5500 (or $6500) annual IRA contribution limit applies to both (combined) tIRA and rIRA. The limits also depend on your level of earned income. Check out the Wiki for more information. Contributions to an IRA don't have to be from a paycheck; you make them directly, subject of course to the annual limits.

Does closing a taxable account under a month trigger any tax penalty - there has not been a lot of gain in the period so short term gain is not a concern.

No penalty to close a taxable account, aside from realized capital gains. But that's not a penalty.
See embedded comments above.
And by the way, you can't avoid a wash sale just by contributing to an IRA; wash sale determination spans transactions in all your account types. More information is needed to determine if a wash sale is/will be triggered.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

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David Jay
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by David Jay » Wed Jun 13, 2018 11:35 am

sman09 wrote:
Wed Jun 13, 2018 10:50 am
My understanding was just like a 401k contribution it has to go directly from the paycheck.
This is most emphatically NOT the case. The "I" in "IRA" stands for "Individual". An IRA is not sponsored by an employer, it is yours.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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samsoes
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by samsoes » Wed Jun 13, 2018 11:58 am

"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

sman09
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 1:16 pm

Thank you @samsoes and @David Jay for the inputs and clarification!

Also, am i probably overthinking it?

Have about $11,000 at Betterment and $10,000 at Wealthfront.

Even assuming each of the players do TLH, is it going to be something severely affecting me when it comes tax time given that the quantum of money is not huge.

Also, as i understand (please correct me if wrong), the biggest nightmare of the overlapping TLH across holdings is reconciling them while filing taxes - is that right?

I do not have any other brokerage account - the one other account i have is M1Finance where i buy ETFs from time to time in very small sum.

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MP123
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by MP123 » Wed Jun 13, 2018 1:45 pm

It seems to me that having two different parties doing robo-TLH for you would be likely to generate a wash sale. I'm not a customer at either Betterment or Wealthfront but I assume each can avoid wash sales on their own trades so it would be good to consolidate to one or the other.

Be aware that you can have a wash sale in your IRA too and that's bad because there's no way for you to increase the basis of the replacement shares. In a taxable account you can eventually get to take the disallowed loss from the wash sale, not so in an IRA.

Nate79
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by Nate79 » Wed Jun 13, 2018 2:00 pm

If you have had either account open for only a small amount of time the tax implication of closing the account and selling the funds would be small as the gains/losses are probably not significant. You will pay short term capital gains tax on funds held less than 1 year (on the gains). That's probably going to be miniscule.

Having those 2 accounts is going to be a nightmare and it is YOUR responsibility.

But the other problem is that you can have a wash sale for funds held in a taxable account and in a Roth account. So if you open a Roth account it is best to not own the same funds in the Roth that you have in the taxable account if they are going to be robo TLH. So you could have a target date fund in the Roth and own individual funds in the taxable account.

You can sell all the funds for example in Wealthfront and contribute whatever you are allowed to contribute for 2018 Roth account at Vanguard or another broker. (note there are some specific rules around if and how much you can contribute to the Roth that you need to look at)

livesoft
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by livesoft » Wed Jun 13, 2018 2:09 pm

As noted by other responses in this thread:

Anytime you sell something in a taxable account, you will have to report that on your tax return. That's a tax consequence, but it does not mean you will have to pay taxes. You will have to figure out if you will have to pay taxes and when you do, you will probably notice that the taxes you pay are the same or less than if you had the money in a savings account.

Furthermore, a wash sale is not illegal and not something I worry about. But neither is filling out your tax return every year. Yep, it is not illegal to fill out your tax return.
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sman09
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 3:26 pm

David Jay wrote:
Wed Jun 13, 2018 11:35 am
sman09 wrote:
Wed Jun 13, 2018 10:50 am
My understanding was just like a 401k contribution it has to go directly from the paycheck.
This is most emphatically NOT the case. The "I" in "IRA" stands for "Individual". An IRA is not sponsored by an employer, it is yours.
Thanks for the clarification @David Jay!

sman09
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 3:32 pm

Thanks a lot @livesoft for the clarification - the last couple of months, i have been reading widely in this forum including posts from years back (such as those around the 2008 downturn), and have seen your inputs on several of those posts. Great to see you take the time to help by responding to a post made by a novice like me. Many thanks!

livesoft wrote:
Wed Jun 13, 2018 2:09 pm
As noted by other responses in this thread:

Anytime you sell something in a taxable account, you will have to report that on your tax return. That's a tax consequence, but it does not mean you will have to pay taxes. You will have to figure out if you will have to pay taxes and when you do, you will probably notice that the taxes you pay are the same or less than if you had the money in a savings account.
Interesting to know that!

livesoft wrote:
Wed Jun 13, 2018 2:09 pm
Furthermore, a wash sale is not illegal and not something I worry about. But neither is filling out your tax return every year. Yep, it is not illegal to fill out your tax return.
:D

sman09
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 3:45 pm

Thank you @MP123 for the inputs!

MP123 wrote:
Wed Jun 13, 2018 1:45 pm
It seems to me that having two different parties doing robo-TLH for you would be likely to generate a wash sale. I'm not a customer at either Betterment or Wealthfront but I assume each can avoid wash sales on their own trades so it would be good to consolidate to one or the other.
Good to be aware of this - think i will either consolidate or close both the accounts.

MP123 wrote:
Wed Jun 13, 2018 1:45 pm
Be aware that you can have a wash sale in your IRA too and that's bad because there's no way for you to increase the basis of the replacement shares. In a taxable account you can eventually get to take the disallowed loss from the wash sale, not so in an IRA.
Could you please elaborate on the above points - i could not understand the highlighted parts in particular.
As regards the second highlighted point, the question is what exactly you mean by "get to take". by disallowed loss, as it is a consequence of a loss sale, is it not of any use?

Thanks

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MP123
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by MP123 » Wed Jun 13, 2018 4:16 pm

sman09 wrote:
Wed Jun 13, 2018 3:45 pm
MP123 wrote:
Wed Jun 13, 2018 1:45 pm
Be aware that you can have a wash sale in your IRA too and that's bad because there's no way for you to increase the basis of the replacement shares. In a taxable account you can eventually get to take the disallowed loss from the wash sale, not so in an IRA.
Could you please elaborate on the above points - i could not understand the highlighted parts in particular.
As regards the second highlighted point, the question is what exactly you mean by "get to take". by disallowed loss, as it is a consequence of a loss sale, is it not of any use?

Thanks
When you have a wash sale in a taxable account you can't deduct the resulting loss on your taxes, it's "disallowed". But you do get to add the amount of the loss to the cost basis of the security that you bought (the one that caused the wash sale). So when you sell that security (after 30 days) your taxable gain will be less since the cost basis is higher. This effectively means that the loss from a wash sale is delayed, not that you can't ever take it.

But in an IRA there's no way to add the disallowed loss to the cost basis, it doesn't exist. So a loss from a wash sale with a purchase in an IRA is lost forever.

sman09
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Re: Convert Taxable account to Roth IRA to avoid wash sale?

Post by sman09 » Wed Jun 13, 2018 4:22 pm

MP123 wrote:
Wed Jun 13, 2018 4:16 pm
sman09 wrote:
Wed Jun 13, 2018 3:45 pm
MP123 wrote:
Wed Jun 13, 2018 1:45 pm
Be aware that you can have a wash sale in your IRA too and that's bad because there's no way for you to increase the basis of the replacement shares. In a taxable account you can eventually get to take the disallowed loss from the wash sale, not so in an IRA.
Could you please elaborate on the above points - i could not understand the highlighted parts in particular.
As regards the second highlighted point, the question is what exactly you mean by "get to take". by disallowed loss, as it is a consequence of a loss sale, is it not of any use?

Thanks
When you have a wash sale in a taxable account you can't deduct the resulting loss on your taxes, it's "disallowed". But you do get to add the amount of the loss to the cost basis of the security that you bought (the one that caused the wash sale). So when you sell that security (after 30 days) your taxable gain will be less since the cost basis is higher. This effectively means that the loss from a wash sale is delayed, not that you can't ever take it.

But in an IRA there's no way to add the disallowed loss to the cost basis, it doesn't exist. So a loss from a wash sale with a purchase in an IRA is lost forever.
Excellent explanation - thanks so much!

Between the time i asked you for explanation and read your response, re-read the wiki page and still had some questions - your reply very clearly explains and i think it could be added as an additional explanation to the "wash sales wiki" - and this coming from a newbie and a investing novice :) Thanks a lot @MP123


Thanks everyone for the kind help - i am going to revisit and jot down the points and then summarize and make another post to check my understanding before i proceed. Do not want to have another betterment-wf like occurrence.

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