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Say you had a non-retirement account with a few different stocks. Some did well, others lost money.

If you sold $6k of your worst performing stocks, then funded an IRA account for the year with $6k of income you made in that year, and rebought those in the tax advantaged account, you would create losses outside of the retirement account to help offset any gains. And you would be able to keep your positions (assuming that you want to keep those stocks).

Are there any legal concerns with this strategy?

  • Is this in USA? – yoozer8 May 29 at 14:18
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One thing to look out for here is that it could count as a wash sale. If you sell a security at a loss, and buy the same (or substantially identical) security within 30 days of the sale (either before or after), the loss is disallowed as a deduction (so would not offset any gains). You would want to either buy different stocks, or wait 30 days between the two transactions. Note that this rule applies even if the purchase is in a retirement account.

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  • This answer assumes United States location, based on "IRA" and amount of $6k. – yoozer8 May 29 at 14:18
  • The wash sale rule does NOT apply if the transactions are only made in a retirement account because there are no wash sales in a retirement account (the wash sale rule was established to prevent skirting taxation). The wash sale rule only applies if the realized loss occurs in a non-retirement account and the replacement shares are purchased in a retirement account. – Bob Baerker May 29 at 14:37
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    @BobBaerker correct, but that is exactly the plan being asked about – yoozer8 May 29 at 14:42
  • And for that reason, you should edit your answer to remove the ambiguity that it presents. – Bob Baerker May 29 at 14:48
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    What ambiguity? – yoozer8 May 29 at 15:08
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If you realize a loss and within 30 days before or 30 after realizing that loss you purchase replacement shares then you cause a wash sale. This applies to all of your accounts regardless of whether they are retirement or non-retirement accounts.

Here's the real pitfall. If the realized loss occurs in a non-retirement account, the loss is added to the cost basis of the replacement shares and you get to deduct that loss when the replacement shares are sold. However, if the loss is realized in a non-retirement account and the replacement shares are purchased in an IRA account then the cost basis of the IRA shares cannot be increased and you will lose the deduction.

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