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Did You Turn 70 1/2 In 1999?
Watch those wash sales!
- You are required to start drawing distributions from your IRA and other retirement plans in the year you reach 70 1/2. If you have not taken the minimum required distribution yet, you have until April 1, 2000 to take the distribution for 1999 without penalty. If you delay your required distribution until 2000, then an additional distribution must be taken before year's end.
- The amount of your required distribution is based on your age, the age of your beneficiary (if any), your relationship to that beneficiary, the balance of your account at year-end, and the distribution method. All your IRAs are treated as one for the purpose of computing the minimum distribution. You can take the distribution from any of your accounts, it is not required that you draw equally from each.
- There is a 50% penalty for failure to withdraw the required distribution, so it is wise to heed these requirements. The penalty is calculated as 50% of what you were supposed to take in any year but did not.
- Tax law allows you as an investor to offset capital gains with capital losses, and if the losses exceed the gains, you can deduct losses up to a maximum of $3,000 ($1,500 if filing married separate) for the tax year. For this reason, investors frequently review their securities portfolio at year's end searching for stocks and other securities whose sales will result in a capital loss. This allows them to minimize their gains or maximize their losses for the year.
- The wash sales rules could spoil this strategy, however. Under these rules, a loss is disallowed if the security sold at a loss is re-purchased within 30 days. A loss will also be disallowed if the investor bought the same security 30 days before the sale. The IRS definition of a wash sale is; "A sale that occurs when you sell or otherwise dispose of stock or securities at a loss and within 30 days before or after the sale or disposition you but substantially identical stock or securities."
- This rule can affect the investor who may actually wish to hold a particular security, and only sells to take advantage of a loss position intending to buy the same security back at a later date. This may be a frequent occurrence in 1999 because of the large ups and downs in the market during the year. It can also affect "day traders" who buy and sell the same security frequently during the year.
- When was sales occur, the tax basis of the replacement stock is increased by the amount of the loss that was disallowed, so when you sell the replacement stock you will be able to take advantage of losses incurred in the wash sale.
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