As the market tumbles, dragging your portfolio along with it, many investors are panicking. Despite warnings of huge tax penalties and missed future opportunities, some people have sold stock from their retirement funds in hopes of protecting what was left. This isn’t the smartest idea, as it makes the losses already incurred increase exponentially.
But there’s a silver lining if you’re one of the many investors who made this mistake. While there is no way to recover anywhere near all of your losses once you’ve pulled that money out (withdrawing from your 401(k) before age 59-and-a-half hits you with taxes, fees and penalties), there is one way to ease the pain ever so slightly: If you’ve taken shares of company stock out in kind from your retirement account and they’ve subsequently declined in value and you’ve sold the shares at a loss, you have the potential to use a little-known tax provision that allows you to deduct up to $3000. That may pale in comparison to your total losses, but it’s something.*
Talk to your tax advisor to make sure you're eligible and make sure to cite it in your own calculations. But you might as well get back some of what was yours!
*Correction Appended on 10/27/08 for Clarification Purposes