Making the Best of a Black Eye
Not every investment will pay off. But in the vast majority of cases, there’s no permanent damage, and no long-term harm done. In fact, if you know about the benefits of tax loss harvesting, losses can be an opportunity in disguise.Many of you know that I love playing basketball. I played from youth league through college, and now that I’m an adult, it gives me a great way to exercise, clear my head, and indulge my competitive streak.
Long-time readers may also remember that the women’s pick-up game I play in is not without risk. Last summer I busted my chin open.Well, ugly facial injuries are now a pattern. Last month during a game I caught an elbow square in the face while going for a rebound. The whole game stopped and I slowly made my way to the sideline to assess the damage. As I felt my face with my hands, I was cautiously optimistic that I hadn’t broken my nose. Turned out I was right, but over the next few days I developed a pretty serious shiner, as you can see below.So, what’s a professional, forty-year-old lady to do? Hang up her high tops? Avoid high-impact sports forever?I thought about it that night. It seems like a lot of folks have figured out how to exercise in a way that doesn’t cause quite so many facial injuries.
But I really don’t love other kinds of exercise. I’ll run or do yoga if I’m desperate, but it’s always been difficult for me to make a habit of it. Plus, basketball is… my thing! I’m even coaching my daughter’s youth team now. (I’ll keep you posted.)After doing a cost-benefit analysis, I decided that I’m willing to accept the risks of playing basketball in exchange for the rewards. And I don’t have to be reckless about it. I can learn from the experience and change my strategy to reflect the reality of my day-to-day life. Maybe I don’t need to be in the lane with women who are twenty years younger and twenty times stronger than me.And my black eye turned out to be manageable. A little makeup got me through the first week, and then it was practically gone. No permanent damage, no long-term harm done.For many people, the investing equivalent of a black eye is the stock or fund that goes down instead of up. It can look bad, and it can cause you to re-think your entire financial strategy.
Tax Loss Harvesting
From month-to-month or year-to-year, not every investment will work out as planned. Losses happen. But in the vast majority of cases, there’s no permanent damage, and no long-term harm done.In fact, if you use the right strategy, losses can be an opportunity in disguise.In your non-retirement brokerage accounts, you can actually offset investment losses against investment gains, which can save you a bundle on your tax bill. Even better, once you offset your gains, any additional losses up to $3,000 ($1,500 if you are married and file separately) can be used to reduce your taxable income.This strategy is called tax loss harvesting and it's especially valuable in this era of limited tax deductions. It can be done any time during the year, but it is most popular during the fall, right before the end of the tax year.Watch Out for Wash Sales: The Wash Sale rule states that if you want to harvest a tax loss, you can’t buy the same or a "substantially identical" investment 30 days before or 30 days after the sale.
The 30-day rule also applies to retirement accounts. If you violate it, your loss will be disallowed. For instance, you are not allowed to sell an investment in your taxable account and immediately buy the identical investment in your IRA account. You also can't buy the investment in an IRA account less than 30 days before you sell it from your taxable account. So the 30 day rule applies both before -- and after -- you harvest your tax loss.