Tax Loss Harvest - Wash Sale - Your 401k

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retiredjg
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Tax Loss Harvest - Wash Sale - Your 401k

Post by retiredjg » Wed Aug 26, 2015 4:28 pm

With all the tax loss harvest (TLH) questions, it might be a good time to discuss if the funds in your 401k/403b/457b and your spouse's 401k/403b/457b are or are not involved in a potential wash sale.

I thought I knew the answer, but further research indicates I might not. I thought it might be good to get all the opinions in one place.

The question is not about you vs your spouse - that is pretty clear. Your spouse's taxable and IRA accounts are involved. The question is about whether the funds in the family 401k, 403b, or 457b accounts are involved.

jarda
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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by jarda » Wed Aug 26, 2015 4:36 pm

Hase been just discussed in here: viewtopic.php?f=1&t=172514&newpost=2602912.

Bottom line is, dependes who you ask. IRS document only mentions TIRA and Roth, some people take it to mean any retirement account, others do not.

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Kevin M
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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Kevin M » Wed Aug 26, 2015 4:48 pm

I've just assumed it applies to any tax-advantaged account, but in participating in another post about something similar with an HSA, I saw that the IRS pubs and instructions only mention IRAs. So I can see the source of confusion, and this is yet one more wash-sale thing that is unclear (like what exactly is "substantially identical" when it comes to mutual funds).

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Roothy
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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Roothy » Wed Aug 26, 2015 4:52 pm

Kevin M wrote:I've just assumed it applies to any tax-advantaged account, but in participating in another post about something similar with an HSA, I saw that the IRS pubs and instructions only mention IRAs. So I can see the source of confusion, and this is yet one more wash-sale thing that is unclear (like what exactly is "substantially identical" when it comes to mutual funds).

Kevin


There is logic to treating employer-sponsored as different from personally-controlled IRAs--you can buy anything you want in the latter, but are sharply limited in the former. That doesn't mean the IRS *will* treat them differently--but it would be noncrazy to do so.

livesoft
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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by livesoft » Wed Aug 26, 2015 4:53 pm

Here is the IRS ruling that started all this: http://www.irs.gov/pub/irs-drop/rr-08-05.pdf which has
IRS Guy wrote:The loss on the Sale of stock is disallowed under § 1091. A’s basis in the individual retirement account or Roth IRA is not increased by virtue of § 1091(d). This ruling does not address any issues other than those specifically addressed herein. In particular, this ruling does not address (and no inference should be drawn with respect to) any issue arising under § 4975.
So that would seem to really restrict to only IRAs until the next ruling shows up.

@Kevin M, I can buy anything I want in my solo 401(k). :)
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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Kevin M » Wed Aug 26, 2015 5:01 pm

livesoft wrote: @Kevin M, I can buy anything I want in my solo 401(k). :)
Was this comment intended for Roothy?

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by livesoft » Wed Aug 26, 2015 5:03 pm

Yes, but really it was for everybody.
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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by rkhusky » Wed Aug 26, 2015 5:07 pm

livesoft wrote:Here is the IRS ruling that started all this: http://www.irs.gov/pub/irs-drop/rr-08-05.pdf which has
IRS Guy wrote:The loss on the Sale of stock is disallowed under § 1091. A’s basis in the individual retirement account or Roth IRA is not increased by virtue of § 1091(d). This ruling does not address any issues other than those specifically addressed herein. In particular, this ruling does not address (and no inference should be drawn with respect to) any issue arising under § 4975.
So that would seem to really restrict to only IRAs until the next ruling shows up.

@Kevin M, I can buy anything I want in my solo 401(k). :)
Just because the ruling is applied to an IRA, doesn't mean that it doesn't also apply to a 401(k).

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by retiredjg » Wed Aug 26, 2015 5:13 pm

I tend to agree with the people who have posted (including Alan S in the link that was posted above by jarda) - that work plans (probably) don't count.

But…if you look at the TLH and wash sale information at Betterment, they do include the family 401k/etc plans. This could be from an over-abundance of caution because there is no line in the sand for use to use (except maybe in the IRS's eyes).

Also there is at least one blogger whom I respect who doesn't want to venture into this territory and thinks it might be better to be safe than sorry.

That's why I've opened this discussion - to gather different thoughts.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by retiredjg » Wed Aug 26, 2015 5:15 pm

rkhusky wrote:Just because the ruling is applied to an IRA, doesn't mean that it doesn't also apply to a 401(k).
Yes, but, when it comes to court decisions, it doesn't until it does. I'm sure that cleared up things for everybody. :twisted:

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Alan S. » Wed Aug 26, 2015 5:17 pm

As stated in the other thread, there will not be agreement on this question.

In the Revenue Ruling the IRS released in 2008, they very clearly stated that wash sale rules apply to TIRA and Roth IRAs when replacement shares are purchased in the IRA. They had every opportunity to expand the applicable retirement accounts beyond IRAs but they did not.

The tax code is thousands of pages long and the IRS is constantly issuing PLRs, revenue rulings, Notices, Announcements and Regulations. A taxpayer should assume that the IRS thinks these rulings through before they issue them and they say what they mean.

Therefore, I see no need to try and re interpret what the IRS Notice may have intended but failed to state.

We can also speculate why the IRS stopped with IRAs. Employer plans are put together by benefits consultants with the sponsoring employer as their client. These consultants have immensely powerful lobbyists bending ears in Congress. Plans have windows regarding how often changes can be made. The last thing these plans need is the cost of frequent investment changes to avoid wash sales. The IRS and the DOL collaborate on provisions and enforcement of employer plan rules. Maybe the IRS discussed employer plans with the DOL and was convinced not to expand wash sales beyond IRAs. Could be any other number of reasons as well. But I'll take the Notice literally.

Those who worry about brokerage window potential wash sales may simply choose to avoid such sales due to a different interpretation than this one. But to be consistent, those people should also avoid doing back door Roths.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Artsdoctor » Wed Aug 26, 2015 6:37 pm

I realize that a 401k has a unique set of rules and affords some protections that other tax-advantaged plans may not. I cannot disagree with Alan S. on this one, nor should I since this is what he does for a living. However, I am a little less trusting that the IRS knows exactly what it is trying get across in its publications and strives to erase ambiguity. Litigation occurs all the time and sometimes the IRS loses because the tax law is not clear.

This seems like a loop hole and, although it could be exploited, why would someone risk it? The last thing I need is to be in a suit with the IRS, even if I'm found to be right. With a little bit of planning which shouldn't really be that painful, you can avoid the potential problem altogether.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by JDDS » Wed Aug 26, 2015 7:16 pm

I've noticed that in my individual 401(k) at Vanguard, in which I can buy Vanguard funds only, that I don't get the same options when it comes to dividend/capital gain reinvestment as with other accounts. I'm not sure whether that's Vanguard's quirky system or how it is actually intended. So, this has been on my mind. How might I avoid triggering a wash sale if I cannot avoid reinvested dividends? Would I need two funds in taxable and a third to hold in the 401(k)? Then just last night I re-read the Oblivious Investor TLH article and found out the definitive answer is for IRAs, not 401(k)s.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by rkhusky » Thu Aug 27, 2015 7:00 am

The issue addressed in this ruling is about IRA's and so naturally all the subsequent text is about IRA's. The ruling concludes with this statement:
This ruling does not address any issues other than those specifically addressed herein. In particular, this ruling does not address (and no inference should be drawn with respect to) any issue arising under § 4975.
which I conclude means that one should not infer anything about 401(k)'s from this ruling.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Artsdoctor » Thu Aug 27, 2015 9:12 am

rkhusky wrote:The issue addressed in this ruling is about IRA's and so naturally all the subsequent text is about IRA's. The ruling concludes with this statement:
This ruling does not address any issues other than those specifically addressed herein. In particular, this ruling does not address (and no inference should be drawn with respect to) any issue arising under § 4975.
which I conclude means that one should not infer anything about 401(k)'s from this ruling.
Oddly, our conversations here outline far more nuanced interpretations of the tax code than the WSJ this morning. The articles discusses tax loss harvesting and clearly did not consult livesoft, Alan S., or perhaps the IRS: "It is clear, however, that taxpayers can't reap losses in a taxable account and repurchase the same security in a nontaxable account, such as an IRA or 401(k)."

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Roothy » Thu Sep 03, 2015 2:27 pm

Artsdoctor wrote:
rkhusky wrote:The issue addressed in this ruling is about IRA's and so naturally all the subsequent text is about IRA's. The ruling concludes with this statement:
This ruling does not address any issues other than those specifically addressed herein. In particular, this ruling does not address (and no inference should be drawn with respect to) any issue arising under § 4975.
which I conclude means that one should not infer anything about 401(k)'s from this ruling.
Oddly, our conversations here outline far more nuanced interpretations of the tax code than the WSJ this morning. The articles discusses tax loss harvesting and clearly did not consult livesoft, Alan S., or perhaps the IRS: "It is clear, however, that taxpayers can't reap losses in a taxable account and repurchase the same security in a nontaxable account, such as an IRA or 401(k)."
To throw another monkey wrench in... it's not even really clear that IRAs do trigger wash sales. As LadyGeek points out, the only source of tax LAW is the tax CODE, and *judicial* interpretations of it. The IRS made a revenue ruling on IRAs--presumably either in response to an audit, or even just in response to someone asking them (they are allowed to make advisory opinons). And the IRS rulings are entitled to a good measure of deference by the courts. However, they are NOT dispositive. Someone could litigate the IRA issue in a court of law, and a judge could disagree with the IRS's interpretation. If that were so, then IRAs would not trigger wash sales--until either a higher court or Congress said otherwise.

As artsdoctor wrote above, "Litigation occurs all the time and sometimes the IRS loses because the tax law is not clear." The IRS is a just a party to litigation. They aren't (ultimately) the judges.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Artsdoctor » Thu Sep 03, 2015 3:19 pm

And therein lies the rub.

We could wind up in litigation, we could be judged being right, and then have developed an ulcer in the process and/or spent thousands on a tax lawyer.

There are some things that are just not worth it. In this particular niche of investment rules, I'd be hard-pressed not to find a work-around that allows you to steer clear of pushing the envelope with the IRS.

When I was younger, I liked the thought of being clever. Now, I like to simplify whenever I can. To me, it's all about a good night's sleep.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Kevin M » Thu Sep 03, 2015 3:23 pm

Artsdoctor wrote: We could wind up in litigation, we could be judged being right, and then have developed an ulcer in the process and/or spent thousands on a tax lawyer.
If I turned out to be a challenge case, I probably would not fight it, but just pay the taxes and penalties, and move on. Then I would have lots of fun on Bogleheads talking about how I was a challenge case, and could provide better TLH advice based on personal experience!

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Artsdoctor » Thu Sep 03, 2015 3:30 pm

^ :sharebeer

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Roothy » Thu Sep 03, 2015 4:31 pm

My own prediction is that the next set of cases/rulings on the wash sale rule are going to involve the Roboadvisors.

The more I look into Roboadvising, the more dangerous/foolish it looks to me. They clarify that YOU are responsible, ultimately, for knowing whether their TLH triggers wash sales--but how many really pay attention to that? (I've seen little sophisticated discussion of it on sites that have reviewed various Roboadvisors. I even get the sense that some, even very smart, reviewers don't even understand how the Roboadvisors TLH--they just say "they do it for you automatically!!!1!.)

Say you are like me, and have accounts in three different companies (not uncommon, with retirement funds from different employers were in different companies, plus my own personal accounts). The Roboadvisor only knows what is going on in the Robo-managed accounts--not any of the others. (Add further complication with spouses' accounts.) The Roboadvisors can avoid wash sales (maybe--again, we really don't know what "substantially identical" is) within their own accounts, but have no way of knowing what is in your other accounts unless you tell them. And mostly, you wouldn't tell them, would you? (I know you CAN list all your other accounts from other companies for record-keeping purposes in, for instance, Vanguard, but how many people do that? I don't. And if a Roboadvisor offers a similar service, I doubt they would use that information to assess TLH across your whole portfolio--why would they? They'd likely just say "buyer beware." Does anyone know?)

In short, I bet there are a lot of (inadvertent) wash sales going on with the Roboadvisors that their customers have no idea about, and do not understand *at all.* But you don't have to understand a wash sale to have one. If/when these taxpayers get audited, they are in for a nasty surprise. And I suspect the more common Roboadvising becomes, the more likely it is to spawn litigation on their TLH activity.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by JaySayms » Fri Sep 04, 2015 1:24 am

Roothy wrote:My own prediction is that the next set of cases/rulings on the wash sale rule are going to involve the Roboadvisors.

The more I look into Roboadvising, the more dangerous/foolish it looks to me. They clarify that YOU are responsible, ultimately, for knowing whether their TLH triggers wash sales--but how many really pay attention to that? (I've seen little sophisticated discussion of it on sites that have reviewed various Roboadvisors. I even get the sense that some, even very smart, reviewers don't even understand how the Roboadvisors TLH--they just say "they do it for you automatically!!!1!.)

Say you are like me, and have accounts in three different companies (not uncommon, with retirement funds from different employers were in different companies, plus my own personal accounts). The Roboadvisor only knows what is going on in the Robo-managed accounts--not any of the others. (Add further complication with spouses' accounts.) The Roboadvisors can avoid wash sales (maybe--again, we really don't know what "substantially identical" is) within their own accounts, but have no way of knowing what is in your other accounts unless you tell them. And mostly, you wouldn't tell them, would you? (I know you CAN list all your other accounts from other companies for record-keeping purposes in, for instance, Vanguard, but how many people do that? I don't. And if a Roboadvisor offers a similar service, I doubt they would use that information to assess TLH across your whole portfolio--why would they? They'd likely just say "buyer beware." Does anyone know?)

In short, I bet there are a lot of (inadvertent) wash sales going on with the Roboadvisors that their customers have no idea about, and do not understand *at all.* But you don't have to understand a wash sale to have one. If/when these taxpayers get audited, they are in for a nasty surprise. And I suspect the more common Roboadvising becomes, the more likely it is to spawn litigation on their TLH activity.

If you are thorough and check to make sure that ALL your retirement accounts do not include the funds used by a Robo, neither the initial fund nor the TLH alternative, then it can work. The caveat as I see it is that the technology is moving so fast that what may have been safe for TLH yesterday, will not be today. And, it seems that no one has a real answer on what the repercussions would be if you triggered wash sales in your tax advantaged accounts and failed to report them. Maybe nothing.
So until the Robo's can include all your outside accounts and other pertinent information, they may not be worth the risk. If you do use them, be aware that you are stepping into territory that may very well have no negative consequence what so ever.....or you may be up to your eyeballs in paperwork and back taxes owed. Who knows. It seems that they have rolled out a product that is compelling but not yet complete.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by House Blend » Fri Sep 04, 2015 10:20 am

^I believe that the robo-advisors are well aware of these issues even if many of their customers and cheerleaders are not. For example, a search of betterment's website turns up this article: How do I safely use TLH+ if I have external accounts?

Summarizing, they recommend the following for their customers who use their TLH service:
1. Move all of your taxable assets to betterment.
2. Roll all of your old 401(k) plans to IRAs.
3. Let betterment manage all of your IRAs.
4. Use a Target Retirement Fund in your current 401(k).

Of course it is completely coincidental that this increases their AUM. :idea:

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Kevin M » Fri Sep 04, 2015 3:06 pm

^Yes, and rolling old 401k to IRA could screw up backdoor Roth for some folks.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by JaySayms » Fri Sep 04, 2015 3:21 pm

House Blend wrote:^I believe that the robo-advisors are well aware of these issues even if many of their customers and cheerleaders are not. For example, a search of betterment's website turns up this article: How do I safely use TLH+ if I have external accounts?

Summarizing, they recommend the following for their customers who use their TLH service:
1. Move all of your taxable assets to betterment.
2. Roll all of your old 401(k) plans to IRAs.
3. Let betterment manage all of your IRAs.
4. Use a Target Retirement Fund in your current 401(k).

Of course it is completely coincidental that this increases their AUM. :idea:
I have spoken with them on numerous occasions and the basic message is that they feel if a wash sale is triggered by a purchase in a 401k that the tax harvest for those shares will be disallowed. That's it, no other issues to worry about. They do however, end every conversation by reminding you that they are not tax consultants and you should speak with your tax adviser to make sure they do not interpret the situation differently.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by Mike14 » Tue Sep 08, 2015 7:52 pm

Does Vanguard at least automatically recognize wash sales that are triggered by IRA dividends and adjusts the tax forms for taxable accounts accordingly? Both taxable and IRA are with Vanguard.

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Re: Tax Loss Harvest - Wash Sale - Your 401k

Post by archbish99 » Tue Sep 08, 2015 8:08 pm

No -- the IRS Pub is clear that 1099-Bs report wash sales within the account. Vanguard implements what the IRS says they're required to, as does anyone else.

I read a guide to dealing with an audit one time -- the first thing it said, then repeated often, was that you should always provide exactly the document, answer exactly the question that the IRS asks. If you exceed that, you've just voluntarily expanded the scope of the audit. Likewise, I imagine Vanguard sees little value and potential liability in reporting wash sales they aren't required to.
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