tax treatment Upon closing

[Guest prithvi]

I have an IRA account, that has all the losing techonology stocks worth only $1000. Can I close it and take a tax deduction for my losses?

[dh003i]

If your initial contribution was more than $1,000, then you can close it and take a tax-deduction. However, if your initial contribution was, say, $500, and it grew to $3,000 then shrunk to $1,000, you can't.

However, you should not close your RothIRA. Once you take out the $1,000, that's it, it can't go back in (you can contribute $4,000 to opening a new Roth, but you still can't get back that $1,000).

So, I wouldn't recommend closing your RothIRA. Firstly, you haven't said what mutual funds or companies were in it. If it is mutual funds, which ones? If companies, then you shouldn't sell just because you have lost money. If you would still buy those companies today -- based on detailed analysis of their financial situation (value) and quality (growth) prospects -- at their current prices, then you should not sell. The fact that you lost money is irrelevant to the decision you should make now.

The decision you should make now should be looked at in the following light: You have $1,000 to invest. Just looking forward, where do you think the best place to put it is? This requires research into the companies and/or macro-economic conditions (if you putting it in various sectors). Do you think that these companies/mutual funds that you have your money in have a good prospect of producing significant average gains over the years between now and when you retire?

I'm not particularly bullish on tech-stocks right now, though I do have an electronics mutual fund. Over the past year, I've lost about 20% on it. Yet, I'm not selling it. Why? For a few reasons. Because I'm not particularly concerned with the short-run, but with the long-run. I'm considering how well I think it's going to do over the next 50 years. The other reason is I want to maintain a position in the fund. It's a small part of my overall portfolio.

Another example, right now, what I am bullish on is commodities (particularly gold); I'm always enthusiastic about gold, because it is something that's solid -- no-one ever went broke putting their money in gold, it's been a store of wealth for thousands of years; however, now, I think that gold itself, collectors coins, and gold companies are undervalued and have significant growth prospects. Yet, they've went down in the past year, and many are now jumping the boat.

The point isn't that you should or shouldn't invest in technology, electronics, or gold, but simply that you have to do your research and maintain a long-run view. Neither I nor anyone else can do your work for you, nor should you accept the conclusions of anyone else without doing your own research. You can't be hopping ship constantly, and you can't give up on saving and investing. The problem with chasing the performers is that by the time you recognize a performer, it's probably at or near it's peak, and is significantly over-valued, which means you're in for a downfall.

Another thing you have to remember is that saving and investing are not the same thing. Investing is a form of consuming. You are buying something -- a stock, a bond, a mutual fund, a piece of real-estate, whatever. There is no guarantee that investments will always go up. There is no guarantee that the stockmarket will continue to go up on average of 8-10% a year (in fact, I'd argue that the days of that are over). There is no guarantee that bonds are always going to go up, or that you're always going to get paid (companies, and yes even governments, can and do go bankrupt and default; and oftentimes, when governments pay back their bonds, they do it by simply printing out money, which decreases the value). Real-estate, I think over the long run, is going to have an upward trend, because it is a strictly limited hard asset -- the ratio of people to land is always going to be getting higher. But that doesn't mean that real-estate can't become tremendously over-valued, nor that your specific investments or REITs are going to do well. Furthermore, it isn't even true that land is stricly fixed: for we can increase the surface area by reshaping the land-scape, and we can erect higher buildings (effectively creating more real-estate).

I'd also like to make a note regarding "inflation-indexe" bonds (I-bonds): they don't protect you from inflation. Firstly, they're indexed against the CPI, not against the money-supply (which is what inflation really is, increases in the money supply, while higher prices are just an effect of inflation). The CPI is heavily managed to make it seem like there really isn't inflation, so even if your money grows in proportion to the CPI's increases, you're not going to maintain your purchasing power; you certainly won't keep up with inflation, because increasing consumer-prices are only one effect of inflation, not inflation itself. Secondly, profits on I-Bonds are eventually taxed at the income-tax rate: so any hope of even keeping up with the CPI is doomed. Third, the government can default on it's loans at any time. When you look at the way they deal with these kinds of thing, there are only 4 ways: taking more debt to pay off existing debt, increasing taxes, increasing the rate of inflation, or simply defaulting.

Now, with regards to saving, that is a different thing. Saving simply means saving the money you make. The form in which you keep your money is up to you. I have my obvious preference: I prefer not to place my trust in a currency which can be printed out and devalued without limit, so I prefer that my money be kept in gold, rather than dollars. However, some people would like to have a mix, or all dollars. Again, you have to make these decisions for yourself, with the help of competent professionals if you think you need it. Never-the-less, the point is that investment is not the same as savings. The distinction can be understood in the following way: when you invest your money, you can lose all of it. Companies can be managed poorly, or can be fraudulent, or can simply become obsolete. However, money that you place in savings -- either fiat-currency or gold -- cannot have such occur to it. Gold can't be Enronized. Neither can dollars (although they can be devalued without limit by the government, such that in 10 years it may cost $20 to drink a cup of coffee).

That said, you should not be using your retirement plans (or anything else tax-favored) for savings, but rather for investment. Savings should not be placed in tax-favored plans.