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By Jason Stipp | 06-10-2010 09:58 AM

Mid-Year Tax-Cutting Tactics

Morningstar's Christine Benz on the current opportunities for tax-loss harvesting, catching a tailwind in munis, considering a Roth conversion, and more.

Jason Stipp: I'm Jason Stipp for Morningstar. Amid all the turbulence in the markets, investors may be wondering how they can do something constructive with their portfolios. One way is to think about your tax planning and minimizing the taxes on your investments. Here with me to offer some tips on that and some opportunities that are out there today in the marketplace is Morningstar's Christine Benz. She is director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, nice to be here.

Stipp: So, first thing for you, the S&P 500 has been in the red for the year-to-date. We've seen a lot of up and down in the market so far. But there could be a silver lining here for investors on the tax front. Tell us a little bit about that.

Benz: Well, I am a big fan of tax-loss harvesting. So, looking through your portfolio, seeing if you have securities, stocks or funds that are selling below what you paid for them, if you sell them, you can use that loss to offset any capital gains. If you don't have any capital gains, you can use that loss to offset any ordinary income. So it's valuable on a couple of fronts.

And the other thing is, if you want that exposure in your portfolio, you can sell something and replace it with a similar security. So it's not like that you have to go without that type of exposure that you've just sold out of.

Stipp: "Similar' is sort of the keyword there because the IRS does have some rules about when you sell something and when you buy something in a period of time. It's the wash-sale rule basically. So what are the points to remember on that?

Benz: Well, it's not a clear line between what is a similar or dissimilar security. But generally speaking, if you sell some actively managed fund and buy another one, you'll be fine, or if you sell one company and buy another company in a similar sector, you'll be okay there, too.

What you don't want to get in the business of doing is taking one fund that tracks a certain index and replacing it with another fund that tracks the same index. That's a little bit of a sticky area. So, as long as it's similar but not identical, you should be okay.

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