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Tax Loss Harvesting
On today’s podcast, I’m talking to my buddy Joe Saul-Sehy from the Stacking Benjamins Podcast about tax loss harvesting and tax efficient investing. This episode topic came from a Martinis and Your Money listener who wanted to know more about it after seeing it advertised on Betterment’s website. As Joe and I discuss on the show, we are not tax experts, but hopefully our thoughts around this topic help listeners understand it a little better.
What are we drinking?
Joe — Dark Magic coffee
Shannon — Coffee
Podcast Notes
- Tax loss harvesting is a strategy you can use to help manage a taxable portfolio.
- Tax loss harvesting is typically a tool used to help offset earnings for bigger portfolios when you may require more strategy around your portfolio management.
- You can take advantage of of this tool throughout the full calendar year.
- Some people say that when there are disruptions in the market, maybe its time to think about tax loss harvesting.
- Tax loss harvesting is more for those close to retiring.
- Betterment uses tax loss harvesting as a big selling point, even though their services are more geared towards 20-30 year olds.
- Taking the time to study where they should and should not be harvesting losses and then decide where to go from there is generally not worth it for 20-somethings.
- You would only take advantage of tax loss harvesting in a brokerage account, not in a tax-protected account like a 401k, Roth IRA, IRA, etc.
- To avoid this, one strategy is to put investments that trigger more taxable events in a tax-advantaged account.
- Learning about tax loss harvesting before you actually need it helps your financial advisor when it is time to start discussing this strategy.
- Exchange-traded funds and mutual funds are the places where you can use tax loss harvesting without really thinking too much about the consequences.
- You have to pay a lot more attention to how this works and do a lot more homework with individual stocks before you harvest a loss.
- There are situations with individual stocks where you can’t use your loss based on IRS tax rules.
- You can use your loss to offset your gains and use whatever is left up to $,3000 to lower your taxable income for the year.
- The #1 reason to consider using tax loss harvesting is when you have a gains situation where you have to take them or need to take them.
- Joe suggests a variant of tax loss harvest that 20-somethings (or anyone) can use inside a Roth IRA to be able to take back contributions.
- Investments can either be tax efficient or tax inefficient.
- Tax efficient investments don’t trigger a lot of taxable events so you would want to put them in non-tax protected accounts.
- Tax inefficient investments do trigger taxable events so you would want to put them in tax-advantaged accounts.
TAKEAWAYS
- You shouldn’t allow taxes to define your investment strategy.
- As your investments and your tax brackets grow, you should certainly make strategic decisions where taxes are concerned.
- Reach out to tax experts for more in-depth help on these strategies.
