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.

 

Have you employed tax loss harvesting? Have you had to pay taxes on your investment portfolio?