Today we’re discussing a strategy that we’ve deployed during times of market volatility – tax loss harvesting. We often advise clients not to make drastic moves like getting in and out of the market when the stock market is down. However, that doesn’t mean we sit on our hands and do nothing.
Tax Loss Harvesting
In conjunction with proper risk allocation, rebalancing strategy, and other tools, we can also take advantage of potential opportunities to reduce current and future tax liabilities. That is where tax loss harvesting comes in. In simple terms, tax loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you.
Avoiding Common Pitfalls
To illustrate, an investor buys $100,000 dollars of an S&P index fund in January. The market drops 20% and brings the value to $80,000. The investor can sell out of the S&P 500 index fund and purchase another US large cap fund. The investor has locked in a $20,000 loss that could be beneficial on the tax return as it can offset taxable capital gains and ultimately reduce the taxpayer’s liability. Additionally, the portfolio has remained relatively unchanged as the allocation to US large cap has stayed the same.
Many investors and firms look for these opportunities on a calendar or year end basis. However, the market doesn’t always move with the calendar and opportunities could be missed like in March of 2020. At Wealth Dimensions, our process and technology allows us to constantly analyze tax savings opportunities inside of portfolios.
This allows us to be nimble year round, stay within the IRS guidelines, and avoid common pitfalls like wash sales, loss of exposure, and tax rate considerations. There are many additional nuances to tax loss harvesting in our approach. At the end of the day, it is one of the many tools in our war chest to bring value to clients and add to after tax returns. If you have any questions or would like to dive deeper, please reach out to any member of the Wealth Dimensions advisory team.
For informational purposes only. Not intended as investment or tax advice or a recommendation of any particular security or strategy. Past performance is not indicative of future results. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended