{"id":901,"date":"2023-10-13T21:32:20","date_gmt":"2023-10-13T21:32:20","guid":{"rendered":"https:\/\/connectwithfund.com\/finance\/my-inherited-investment-accounts-have-lost-28000-can-i-liquidate-them-and-take-a-tax-write-off\/"},"modified":"2023-10-13T21:32:21","modified_gmt":"2023-10-13T21:32:21","slug":"my-inherited-investment-accounts-have-lost-28000-can-i-liquidate-them-and-take-a-tax-write-off","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=901","title":{"rendered":"My inherited investment accounts have lost $28,000. Can I liquidate them and take a tax write-off?"},"content":{"rendered":"

My mother passed away in first quarter 2021, leaving me a designated beneficiary brokerage account and an IRA account.<\/p>\n

The total amount of these accounts invested in stocks and ETFs was at that time $150,000. Since then, due to the market (or my poor management), those accounts are totaling around $122,000.<\/p>\n

\n

Can I liquidate those two accounts and take a tax write-off?<\/p>\n

Mulling next move<\/p>\n

Dear Mulling, <\/strong><\/h2>\n

My condolences about your mother. Now, let\u2019s make the best of the situation.<\/p>\n

There\u2019s a tax way to think about the approximate $28,000 loss gnawing at you. If you want to liquidate these inherited accounts, the tax code might help \u2014 but a nasty tax bite could be lurking if you aren\u2019t aware.<\/p>\n

There\u2019s also an investing way to think about these accounts. Be easy on yourself about the losses, by the way. 2022 was tough for lots of portfolios and there\u2019s still six months to see the full extent of 2023\u2019s rebound. But if you close these accounts now, what\u2019s the plan for where the money goes next?<\/p>\n

Let\u2019s start by distinguishing the different IRS rules at play with your inherited brokerage account and your inherited IRA.<\/p>\n

There was a time when you could have deducted the losses on that inherited IRA, said Luis Rosa, founder of Build a Better Financial Future, where he he offers investment management and tax preparation services. <\/p>\n

That would\u2019ve happened by itemizing your deductions and taking advantage of a miscellaneous deduction, he said.<\/p>\n

That changed with the 2017 Tax Cuts and Jobs Act, a sweeping tax code overhaul that included major changes for individual filers through 2025.<\/p>\n

The law nearly doubled the standard deduction while reducing the ways people could itemize their deductions. A number of miscellaneous itemized deductions were temporarily repealed.<\/p>\n

The \u201closs on traditional IRAs or Roth IRAs, when all amounts have been distributed to you,\u201d was one example, the IRS said.<\/p>\n

\u201cUnfortunately, any losses in an IRA are gone and there\u2019s no tax benefit to them,\u201d Rosa said.<\/p>\n

In the current set of rules, if you cashed out the inherited IRA, \u201call that would be considered taxable income as well, to add insult to injury,\u201d he added. More specifically, Rosa said the distribution would count as ordinary income, which doesn\u2019t get the preferential rates that apply to long term capital gains.<\/p>\n

A sudden one-year income spike from the closed-out IRA could potentially push you into a higher tax bracket and have you facing a bigger tax bill that year, Rosa noted.<\/p>\n

A better tactic would be gradually siphoning the account\u2019s proceeds over the years to avoid a sharp income tax bill increase, he said. Beneficiaries have a decade to liquidate an inherited IRA. The time to close out the account finishes at the end of the 10th year after the death of the IRA owner, Vanguard notes. <\/p>\n

Then there\u2019s the brokerage account. Here, capital gains and loss rules are the key.<\/p>\n

The losses from this account will offset any long-term capital gains you\u2019ve taken elsewhere, Rosa said. If there\u2019s still more losses after the offset, you can use them to reduce your income by up to $3,000. The rest of the losses can be carried forward to future tax years.<\/p>\n

You could liquidate the IRA account in small gulps and you could sell the brokerage holdings and apply the capital losses there. You could also sell at a loss in small increments with the brokerage account too. Or you could play the waiting game and see if the investments turn for the better.<\/p>\n

However you play it, there\u2019s the next question: What\u2019s next for the money?<\/p>\n

Do you reinvest it back in the stock market? <\/p>\n

If so, beware of an IRS wash sale rule that will disallow a capital loss if the seller buys the same, or nearly the same, security just before or just after the sale. The wash sale rule applies to the 30-day window before the sale and the 30-day period afterwards.<\/p>\n

That\u2019s a technical matter, but the general point is have a plan as you move on.
\u201cIf you are going to sell, know where it\u2019s going,\u201d said Scott Bishop, partner and managing director of Presidio Wealth Partners.<\/p>\n

If newly-purchased securities are going in those existing accounts, Bishop said it matters what sorts of investments are inside those accounts. <\/p>\n

Remember, when the IRA money comes out, it counts as ordinary income. So if you put a fast-appreciating asset like a stock in the account, it will balloon the income tax liability when the money eventually comes out, Bishop said. (And again, you have a 10-year deadline to clear out the IRA.) <\/p>\n

A better move could be putting assets with smaller returns \u2014 like bonds \u2014 in the inherited IRA because smaller returns will translate to a smaller income tax hit at distribution, he said. Save any new stock investments for the brokerage account.<\/p>\n

That\u2019s where the capital gains rates can save you tax dollars on high-flying investments, Bishop noted. \u201cYou want to think of the tax nature about what you are doing,\u201d he said. <\/p>\n

But most of all, you want to think about what you are doing in the broadest sense. \u201cDon\u2019t sell until you have a plan to buy,\u201d Bishop said.<\/p>\n

Cashing out the holdings and then reacting to market swings is a strategy that\u2019s asking for trouble.<\/p>\n

\u201cThe emotional biases we have make it difficult to sit with cash. \u2026. The market has a great way of making us look foolish,\u201d Bishop said.<\/p>\n

Got a tax question? Write me at: akeshner@marketwatch.com<\/strong><\/em><\/p>\n

Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I\u2019m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.<\/strong><\/em><\/p>\n

I\u2019m here for the reader who faces their taxes with an air of resignation. You\u2019re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze \u2014 with money at the end. Or a trap that you need to avoid.<\/strong><\/em><\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

My mother passed away in first quarter 2021, leaving me a designated beneficiary brokerage account and an IRA account. The total amount of these accounts invested in stocks and ETFs was at that time $150,000. Since then, due to the market (or my poor management), those accounts are totaling around $122,000. Can I liquidate those two accounts and take a tax write-off? Mulling next move Dear Mulling, My condolences about your mother. Now, let\u2019s make the best of the situation. There\u2019s a tax way to think about the approximate $28,000 loss gnawing at you. If you want to liquidate these<\/p>\n","protected":false},"author":1,"featured_media":902,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[],"class_list":["post-901","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance"],"yoast_head":"\nMy inherited investment accounts have lost $28,000. 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