Clarifying Wash-Sale Rules

Comments posted to “Keeping Transactions Clean From the Wash-Sale Rules,” by Kevin Trout, in the December 2014 AAII Journal.

Does the 30-day period begin when payment is finalized or when the transaction was initiated?
—Cliff Rafter from Florida

Charles Rotblut responds:
The IRS says: “A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, acquire substantially identical stock or securities in a fully taxable trade, acquire a contract or option to buy substantially identical stock or securities, or acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.”

If I sell a stock at a loss and buy a call option on that stock within 30 days, triggering a wash sale and increasing my basis in the option, what happens if I subsequently buy the same stock back, after the purchase of the option, but within 30 days of the original sale of the stock? My deferred loss is attached to (increases the basis of) the option, so my new stock purchase has to have a basis equal to purchase price, not purchase price + deferred loss, correct?
—Len Pacer from Nebraska

Kevin Trout responds:
I believe that is correct, assuming the option acquired was for the number of shares that equaled or exceeded the number of shares sold at a loss. Because the purchase of the option occurred first, it would trigger the wash-sale rules and its basis would be adjusted. The later purchase of the stock would have a basis equal to its cost.

When to Take Social Security Benefits

Comments posted to “Social Security: Delay Benefits at the Expense of Personal Savings?,” by Marty Allenbaugh, in the December 2014 AAII Journal.

One thing you should consider before delaying benefits is quality of life beyond a certain age. Having watched my parents throughout their retirement years, I have come to realize that after a certain age (and this age is different for different people) you just don’t feel like doing that much. My parents traveled a lot in their early retirement years, but now, as they begin their 80s, the only traveling they do is to doctor appointments. I’m glad they took early retirement and enjoyed it while they could.
—BB from Oklahoma

After running the numbers, I found the breakeven point to be about 17 years. That is, if I delay starting to receive benefits until age 65, versus age 62, I will not catch up to the total income until age 82. After that—i.e., from age 83 until I die—the delay strategy wins. But 17 years is a long time, and the calculations did not include return on investment if I were to take the income and buy a good mutual fund. Alternatively, it doesn’t take into account the cost to my portfolio to replace the income for several years.

So I applied to start at age 62. Guess what. Right on the Social Security Web page application, it tells you that based on life expectancy tables your net total income will be the same no matter when you start collecting. Seems to me that delaying is betting you’ll be one of the winners and live longer than the longevity tables say is the average.
—Stan M. from Michigan