avoiding wash sale w/ 403b and 457

[FLBiker]

I make ~$75K and full fund both a 403b and a 457.  DW is currently a SAHM (probably this year and most of next).  I'd like to continue to fund both the 403b and the 457, and to do so I might need to dip into our taxable account.  The holdings in this account are similar to the holdings in the 403b and 457 (Vanguard Index funds).  From what I've read, 401ks and 403bs don't trigger wash sales, but it seems like kind of a gray area.

Can anyone give me specifics on this?  Could I be getting myself into trouble?

If it makes a difference, I wouldn't be selling in the taxable and them making a similarly sized purchase in the 403b/457.  I'd be selling in the taxable (say several thousand) and continuing to make my regular contributions to the 403b/457.

I don't really want to suspend my 403b/457 contributions (or leave them in a money market) for 30 days after selling from the taxable if I don't have to.

Any guidance would be appreciated, and if you want any additional info from my please ask.

Thanks!

[dandarc]

Not a gray area at all.

Selling at a loss in your taxable and buying the same fund in your 401K inside the time limit will trigger a wash sale.

http://support.betterment.com/customer/portal/articles/1595496-how-do-i-safely-use-tlh-if-i-have-external-accounts-

[FLBiker]

OK, thanks.

So I guess I'd just make the sale and set both the 403b and the 457 to either invest in something different or go into the money market account for 30 days.

Thanks!

[johnny847]

Not a gray area at all.

Selling at a loss in your taxable and buying the same fund in your 401K inside the time limit will trigger a wash sale.

http://support.betterment.com/customer/portal/articles/1595496-how-do-i-safely-use-tlh-if-i-have-external-accounts-

Technically it is a gray area because the IRS has only opined on transactions in an IRA causing wash sales in a taxable. However, I don't think anybody has ever used this fact to argue that transactions in a 401k/403b/457b do not cause any wash sales. It's still within the realm of possibility that a tax lawyer could successfully argue that 401k/403b/457b's are not subject to the same treatment, as they are written in a completely different portion of the US code and have different implications. However, this is not something that I would bet on, and I definitely recommend that everyone proceed assuming that 401k/403b/457b's are treated the same as IRAs with respect to wash sales until informed otherwise.



OP you said you have similar funds. What we're concerned about is whether they are substantially identical. The law nor the IRS has ever fully defined the term. Many people, myself included, take this to mean that two index funds tracking different indices (even if they are similar) are not substantially identical.

To avoid your issue this is why some people such as myself will use tax loss harvesting pairs. If I wish to TLH VTSAX, total US stock market index, then I will sell that and immediately buy VFIAX and VEXMX (S&P 500 and extended market index) in a 4:1 ratio. Similarly, if I wish to TLH VTIAX (total international stock index), then I will sell that and immediately buy VFWAX and VSS (FTSE total world ex us and FTSE total world ex us small cap) in a 9:1 ratio. This way I still maintain my position in the market and claim the benefits of tax loss harvesting.
*It is definitely not a "requirement" to buy VEXMX or VSS in the scenarios above. I am a bit anal about these things and like to get the full market, whether that's US or international, but you will do just fine without them).

[FLBiker]

OP you said you have similar funds. What we're concerned about is whether they are substantially identical. The law nor the IRS has ever fully defined the term. Many people, myself included, take this to mean that two index funds tracking different indices (even if they are similar) are not substantially identical.

To avoid your issue this is why some people such as myself will use tax loss harvesting pairs. If I wish to TLH VTSAX, total US stock market index, then I will sell that and immediately buy VFIAX and VEXMX (S&P 500 and extended market index) in a 4:1 ratio. Similarly, if I wish to TLH VTIAX (total international stock index), then I will sell that and immediately buy VFWAX and VSS (FTSE total world ex us and FTSE total world ex us small cap) in a 9:1 ratio. This way I still maintain my position in the market and claim the benefits of tax loss harvesting.
*It is definitely not a "requirement" to buy VEXMX or VSS in the scenarios above. I am a bit anal about these things and like to get the full market, whether that's US or international, but you will do just fine without them).

I really like this idea.  In my taxable, we have VTIAX and VTSAX.  Currently, my 403b has these same funds, and it looks like I've got all the options you mentioned above available to me, which is cool.  In my 457, though I've got the institutional shares of these two funds.  Unfortunately, my 457 providers doesn't have any of the options you mentioned.  They do, however, have the Fidelity Freedom target date funds -- I could use the 2055 target date and it should be close (5% bonds, but owell).

I've also got a small retirement account w/ TIAA-CREF (Vanguard wasn't an option for this one) and it goes into CREF Stock, which is (if memory serves) a 70/30 split between US and international stock.  It should be different enough, though.

Thanks so much for your help.  This is definitely the approach I will take.