Hi there, and thanks for stopping by. My name is Tina Anders and I am the Certified Financial Planner for my firm located here in Petaluma, California, Anders Wealth Management. I am filming at home because of COVID. So, bear with me. I am going to talk to you today about a strategy that can increase your portfolio returns over the long term. And is just quite frankly a smart tax strategy to use with your portfolio. It’s called tax loss harvesting – should be considered at least once a year.
Tax loss harvesting is a way for you to potentially be able to pay fewer taxes and increase your long term returns by selling off losing investments. And in this volatile market of spring and summer of 2020 It’s a good idea to look at this strategy.
In its simplest form tax loss harvesting is about minimizing capital gains taxes on your investment portfolio. It’s a strategy in which certain investment assets are sold at a loss. In order to reduce your tax liability at the end of the year. You can use tax loss harvesting to offset capital gains that result from selling securities at a profit.
You can also use tax loss harvesting to offset up to $3,000 in non-investment income. Tax loss harvesting only applies to taxable investment accounts. Tax deferred or tax-free retirement accounts like IRAs, Roth IRAs, 401k’s, 403b, etc. Those aren’t subject to capital gains taxes; don’t have to worry about.
So, this is how it works. Let’s say you have $10,000 in capital gains on certain stocks and funds in a taxable investment account, a trust account, individual account, joint account, etc. In order to minimize the tax liability from those gains, you sell other assets that will generate a loss. So, if those losses total $5,000 in your gains total $10,000, it’ll cut your capital gains, and therefore your capital gains tax in half, that’s by 50%. That’s a lot of tax money in your pocket. So, here’s the deal, though, when you want to sell assets that have dropped in value from your initial contribution or your initial investment. The IRS has what’s called a wash-sale rule. And this rule requires that a loss on a sale will not be permitted on your taxes, if the same, or substantially identical security or fond is purchased within 30 days of the transaction. That’s 30 days before the transaction, or 30 days after the transaction, excuse me. So, one way to get around it is to make sure that you wait at least 31 days, either before or after the sale of security to buy it back.
Another way to avoid the wash-sale rule is to purchase a similar but not identical investment to the one that sold. Check with your financial planner about this because some funds are so similar that the IRS may find that they are substantially identical. It’s important to understand that the primary purpose of tax loss harvesting is to defer income taxes. That’s the process of delaying the payment of taxes many years into the future. So, it’s believed to have a significant positive impact on investment returns over the long run. One study showed that regular tax loss harvesting could increase long term average annual investment returns by 1.55%. And that’s a lot.
So here’s an example. If you were to invest $100,000 at 7%, and you waited 20 years did no tax loss harvesting, you would end up with about 386, almost $387,000. That’s pretty good, right? But if you were to invest the same amount, but you did regular tax loss harvesting, you would end up after 20 years, instead of $387,000, you would end up with $516,000 plus or minus a few dollars. So that’s a difference of almost $129,000 over a 20-year period. That’s just from tax loss harvesting.
So, tax loss harvesting is well worth adding to your investment strategy. If you need help with that, reach out. Again. I would love for you to contact to me. Go to my website anderswealth.com. Go to the contact page fill out as much or as little as you want. At the bottom of the contact page there’s a text box, fill out questions, concerns, topics you would like for me to discuss in a video. I’ll be happy to accommodate. I will respond to you. Thanks again for stopping by. I’m in your corner.