Automatic investment can get you in trouble; What to insure in a condo unit; How to move a Roth IRA to another firm; Qualifying for a home sale tax break
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Q:I've been advised that enrolling in a mutual fund dividend reinvestment plan may have a tax disadvantage if I expect to trade the shares frequently. Why is that?
A: You might run afoul of the wash sale rule. If you sell some shares at a loss and acquire new shares in 30 days or less, the rule prevents you from deducting the loss. It doesn't matter that the new shares came from an automatic purchase through the dividend reinvestment plan. However, you add the disallowed loss to your cost basis, so you retrieve the tax benefit eventually.
Taxes aside, commitment to such a plan makes a better investment strategy when you intend to stay with the fund for a lengthy period.
Q:I'm buying a condominium as a second home. What type of insurance coverage should I get?
A: You'll need to cover whatever the condominium association's master policy doesn't. Usually these policies cover only common areas and structural components (like the roof, exterior walls, and walkways) for physical damage and liability. In that case, you'll have to insure interior walls, fixtures, and improvements, as well as personal possessions and your own liability.
Some master policies, though, cover installations and fixtures originally included in the unit. So check this out with the condominium insurer's agent. Also ask if the policy covers damage due to water backup from sewers and drains.
You may be able to avoid overlapping coverageand maybe qualify for a discountby insuring with the company that wrote the condominium's policy.
Q:I intend to switch brokers and would like to move my Roth account from the present firm to the new one. Can I simply shift the Roth portfolio, or must I sell the stocks in it and transfer their cash value?
A: Since you're doing a rollover, you can have the present broker transfer the securities directly to the new Roth account. But any additional contributions you make that aren't rollovers must be in the form of cash. Let's say you plan a fresh contribution of $3,000 (the limit this year). You can't put in some shares of stock you already own, even if their value is within the limit.
Q:We've accepted a purchase offer for our former home, which we rented out when we moved four years ago. I know that to qualify for the full $500,000 home sale exclusion on our profit we would have had to live there for two of the past five years. But don't the rules allow us to claim a proportionate amount of the exclusion?
A: Not unless health reasons, a change in your place of employment, or other compelling circumstances forced you to relocate when you did. If so, add the number of days you lived in the home during the five-year period that ended on the date of sale. If that comes to 300, say, you can exclude up to $205,000 of your sale profit (300/730 times $500,000).
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management Q&As. Medical Economics Aug. 8, 2003;80:90.