Amidst Uncertainty and Volatility, an Opportunity in Tax Loss HarvestingSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on March 20th, 2020
By Patrick Doherty, CFP®, March 20, 2020
As you know, the current market volatility due to the coronavirus pandemic has sent us into bear market territory for the first time in more than a decade. As a firm, Reby Advisors remains optimistic regarding the long-term strength of the economy and the market’s ability to produce long-term gains that help investors achieve their lifestyle goals.
In challenging times like these, it’s important to avoid making buy-sell decisions based on fear and instead focus on potential opportunities.
One of the opportunities we’re helping clients take advantage of right now is re-purposing capital losses into tax savings, both now and in the future, through tax loss harvesting.
Tax loss harvesting applies to non-qualified accounts; accounts other than IRAs and 401(k)s where money had been invested pre-tax.
Investors may claim up to $3,000 in total losses from non-qualified accounts in a given year. Any losses beyond $3,000 may be carried over and used to offset capital gains in future years. So, if a portfolio includes $50,000 of realized losses, for example, you can claim $3,000 in capital losses this year and use the remaining $47,000 to offset capital gains in future years when the market performs better.
Would selling at a loss conflict with the age-old wisdom that you shouldn’t sell equities during a bear market, and lock in a loss? The simple answer is no, if you’re willing to stick with a strategic long-term asset allocation strategy.
Let’s say you sell a Schwab domestic large cap growth fund for a $50,000 loss to be used for tax loss harvesting. You can then use the funds from that sale to purchase a Fidelity large cap growth fund. We have always believed that 90% or more of long-term portfolio growth comes from asset allocation – not necessarily the specific ETFs or mutual funds used to execute that asset allocation strategy – so it’s possible to sell one domestic large cap growth fund and buy another, as an example, with minimal impact on long-term returns.
Tax loss harvesting also enables us to improve a portfolio in ways that we would not have been advisable during a bull market. For example, let’s say a client had a small cap mutual fund that had high fees. Although it would not have been our recommended small cap fund, we may have avoided selling it because of the tax consequences; if it had been purchased a long time ago, the capital gains may have been very high due. In today’s volatile market, we may be able to sell a more recently purchased ETF at a loss to offset the capital gains from that high fees small cap fund, and then use the funds from the sales of those funds to purchase a small cap fund with lower fees.
Lastly, this tax loss harvesting provides an opportunity to rebalance an overall portfolio with little to no tax consequences, something that is not always possible.
During times of uncertainty, it’s imperative to focus on what we can control. We will continue to look to take advantage of opportunities during this time of market volatility and keep you informed of our latest strategies and recommendations.
Please do not hesitate to call if you need planning or investment advice.