The phrase tax loss harvesting sounds like an intimidating financial concept, but it’s not. Although the phrase seems complicated, the concept is simple.
Tax loss harvesting is just a way to minimize your investment losses. By minimizing your investment losses, you have the ability to boost your after-tax bottom line.
How Does Tax Loss Harvesting Work?
Let’s say you lose money on the sale of an asset in your investment portfolio. You can use that loss to offset gains in other areas of your portfolio. Tax loss harvesting is a method that investors can use to offset certain gains from some types of ordinary income or other taxable gains.
Through the use of tax loss harvesting, you can add more income to your bottom line each year. In order to use this strategy effectively, you will need to become an active manager of your investment portfolio.
Are There Limits on Tax Loss Harvesting?
Yes, the IRS has several limits on using this method to minimize losses:
You cannot buy and sell an asset for the sole purpose of realizing a tax loss harvesting benefit. If you buy and sell an asset within 30 days, the tax loss harvest collection will not be allowed.
As of 2018, you will only be able to offset $3,000 using this strategy. If you plan to use this strategy on an annual basis, then keep that limitation in mind. You should double check the limit each year to ensure that you are maximizing the benefits of this strategy.
High Administrative Costs
As you might imagine, tax loss harvesting can be time-consuming. The amount of time you will need to invest in tracking this strategy can make it cumbersome to implement. It can take up a lot of your time, or your financial advisor’s time. Time is money, so make sure it is worth the cost for the benefits you could realize with this approach.
The size of your portfolio will play a role in the amount of time that tax loss harvesting takes. As your investment portfolio grows, it may become difficult to implement this strategy effectively.
Should I Incorporate Tax Loss Harvesting into My Investing Strategy?
As mentioned, the real consideration is the means to see this strategy through. That means having the time (or money) to put it in place.
If you are not willing to put in the time, you have two choices. You can ignore tax loss harvesting as an investment strategy for you or you can find a roboadvisor to take care of this for you. A robo-advisory service uses artificial intelligence and smart algorithms to invest on your behalf.
Some robo-advisory firms offer tax loss harvesting solutions that automate the process of tax loss harvesting. Not all roboadvisory firms offer tax loss harvesting, so you should find out if this is included in your investing plan. Also, you should expect to pay slightly more in fees for a roboadvisor that performs tax loss harvesting for you.
If you have thought about this strategy and decided that it’s not for you or the size of your portfolio doesn’t warrant this approach, there are other ways to access more money – like using the equity in your home.
For example, you can consider getting a reverse mortgage which can provide additional funds for you. A reverse mortgage is a financial product that uses your home’s equity to provide you with flexible options such as lump sum disbursements or a line of credit.
For more information about how reverse mortgages work and to see if you might be eligible for this product, you can check out One Reverse Mortgage‘s information page.
Aja McClanahan is a freelance writer and owner of www.principlesofincrease.com.