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Should I Tax Loss Harvest in Railroad Retirement? Thumbnail

Should I Tax Loss Harvest in Railroad Retirement?

Video Retirement Financial Planning Investing Taxes


While the market is down for the year, here's something that might help mitigate the pain.

Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors, and today we're going to try to help mitigate some of your losses here from the stock market. Painful year. Stocks, bonds, everything just really hurt hard this year. Only a few asset classes are actually up. I think cash is one of them out of 103 asset classes. It's cash and some commodities. But it's a really tough year for the bondholders and stockholders. But however, as they say, investments are a matter of opinion and taxes are a matter of fact. So let's get to the taxes and see what we can do to help offset some of these losses.

So what I'm talking about here is tax loss harvesting. So you might have some positions in taxable accounts that are at a loss, and what you want to do is harvest those loss so that you can carry them on to your tax return and get credit for them, maybe against your gain or actually even off your ordinary income if you don't have gains. You can write up to $3,000 a year off your ordinary income if you don't have offsetting gains on your losses. Now, it's important to remember I'm only talking about your taxable, or some people call brokerage accounts. They're not retirement accounts, not 401Ks, traditional IRAs, Roths, any of those retirement accounts this does not referred to. It's those taxable brokerage accounts.

So we want to sell the security, whatever that may be, could be an ETF, mutual fund, a stock, and capture that unrealized loss. And the important word here is going to be a wash sale. So if you might say, "Okay, well, I'll just sell it and that's it. I'm out of this thing and I have the loss." That's fine. Then you don't have to worry about the wash sale. But if you say to yourself, "Hey, you know what? I really like being in the," for example, let's say a Vanguard S&P 500 fund. It's great. Broad based market, mutual fund or ETF, that type of thing. So what you have to do is you want to stay invested in that so you need to sell it, but you need to replace it with another investment of not identical. So you can't be, "Oh, I sold the Vanguard S&P 500 and I bought this Fidelity S&P 500." That's going to trigger a slap on the wrist by the IRS, which could get very expensive.

So you're not allowed to replace with identical securities. And there's different levels that we can do that. So to give you an example, you could say, "I might sell my S&P 500, which is 500 top stocks, and maybe I'll buy maybe the Russell 3000, which was the top 3,000 largest stocks, and do that instead." So it will track along the S&P 500. And then what you can do is after 30 days, get out of that Russell 3000 position and get back to your S&P 500. So that's the things that you can do with tax loss servicing.

So let me just show you what this would look like. So let's say you invested $100,000 in the S&P 500. So you have $100,000. That's your cost basis, $100,000. It's gone down this year, so let's say it's down 30% to $70,000. So you have a $30,000 loss. Oh, all right. Well, I'm going to harvest that $30,000. So what I'll do is I'll sell my S&P 500 for $30,000. $30,000 loss, harvest that loss. And in return, I'll buy $70,000 worth of the Russell 3000 ETF, top 3000 stocks. So right now, when the market recovers, or I can wait 30 days, let's say. Let's just say the market moves around. In 30 days, I can then go back into the S&P 500, and then when the market recovers, my new cost basis is $70,000, which is great, and now I'll have the $30,000 gain, which I would have to pay capital taxes on. But at least I've harvest and taken this loss already and put that onto my tax.

And like I said, you can write that off against your gains that you already have. Maybe if you've been in the market for 10, 15 years, you're probably up on some. You have some gains. Take advantage of those gains this year. Or you can write off $3,000 in your ordinary taxes. So let's look at some of the steps that you need to look when you talk about tax loss harvest. First, decide if it's a good idea. Do you have losses? Okay, well, this year you probably do. So might be a good idea to look at the tax loss harvesting. And now, what you want to do is, if you're going to do the replacement strategy that I talked about, you need to identify your replacement securities. And there's certain levels there. You don't want to get too aggressive, but you want something that correlates to the similar position that you have.

So maybe I'll give you an example for the railroad. If you have CSX stock, you're a big fan of CSX stock, maybe you can buy Norfolk Southern for 30 days and then flip back to CSX stock, because they track very closely to each other. So that would be something along that line. You could do that. So that's that wash sale rule, 30 days. So you wouldn't be able to flip back into the original CSX stock till 31st day. And then what would happen is you also have to look out for your short term gains by switching. So let's say if your 30 days go by, and in my example, let's say CSX stock goes up during those 30 days and you sell that, you might be introducing short term capital gains, which get taxed at ordinary income tax rates. So those are the things that you want to watch.

So this is very complicated stuff. And I have here "Be careful," because there's a lot of risks there with potential fines and penalties if not done properly. But if done properly, great tax strategy. Hey, market's down. Let's try to find some things to help you out to help mitigate some of these downturns. And it's really on taxes. Taxes, like I say, you got to make sure you'll be doing proper tax planning. So I hope you found this helpful. Reach out to me if you're at or near Railroad Retirement. This is the type of stuff that we can discuss about. Really good stuff. I help all my clients with this, which they find very helpful. Subscribe to my YouTube channel. Click on the notification bell to get the latest video. Until next time, everyone. Please stay safe, stay on track, and take care. So long everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.