By Dr. Toshi Clark, Guest Writer
Betterment Robo Advisors
Betterment is one of many new robo advisor services. They offer an automated tax loss harvesting service, “TLH+,” as part of their standard management fee for accounts with holdings greater than $50,000 (including both taxable account and traditional IRA holdings). Their fee is 0.25% annually for accounts $50,000-$99,999, and 0.15% annually for $100,000+. While the fees haven't changed since 2012, TLH+ is a new offering as of 2014 that is arguably very relevant to attending physicians with taxable investment accounts.
Tax Loss Harvesting with Betterment
Betterment wrote a white paper on TLH+, which presents data that suggests their algorithm, with very reasonable assumptions on marginal tax rates given an attending physician audience, will produce gains of about twice that of simpler automated tax loss harvesting algorithms extant. For the cynics, these predicted gains are roughly an order of magnitude greater than their 0.15% fee. They accomplish this by harvesting losses on assets that decline in value and then switching funds between correlated-performance but not identical holdings in primary, secondary, and tertiary classes (with the distinction being increasing fees in the non-primary classes). The algorithm performs this harvesting daily to maximize the up to $3,000 yearly income deduction from harvested losses (with further losses beyond this amount carried forward), minimize fund fees, avoid short term capital gains entirely, and avoid violating the Wash Sale Rule.
This potential income deduction of up to $3,000 represents arbitrage between current marginal income rates and future long term capital gains rates rather than a permanent gain. However, for most pre-retirement attendings reading WCI this will be a welcome trade off due to their current high marginal income tax rates, and there's the further benefit of the interest one might earn in the future on the money saved through deferring income taxes.
Betterment IRA Services
This tax loss harvesting is only applicable by definition to taxable investment accounts. What about tax-deferred accounts? Betterment can manage one's tax-deferred funds, too, via a rollover/transfer to a traditional IRA managed by them. The idea behind doing this is that unified management would allow for intelligent rebalancing between asset classes across one's entire portfolio, as referenced in WCI's original 2012 post referencing Betterment, for optimal distribution of assets such as bonds between the accounts based on maximizing post-tax return, and that their algorithm will be able to automatically avoid violation of the Wash Sale Rule globally.
I am of the opinion that having Betterment manage tax-deferred accounts doesn't make sense despite these potential benefits, for several reasons beyond the lack of tax loss harvesting in tax-protected accounts:
#1 Target Retirement Fund Strategy in Tax-Protected
One can avoid the Wash Sale Rule simply by holding and continuing to buy target date funds in one's tax-deferred accounts. Most individuals' overall holding strategies will probably be reasonably close in composition to those in a target date fund, so minor discrepancies between the taxable and tax-deferred sides won't affect outcome that much.
#2 Lower Fees
Not having Betterment manage one's tax-deferred holdings will save that 0.15% fee on that portion of one's savings, to state the obvious. For those who have large tax-deferred spaces in which to play (as opposed to those limited by the standard $18,000 employee contribution limit for 401(k) participants), the case with WCI and I, this may represent 0.15% of a substantial amount.
#3 No Backdoor Roth
Rolling over one's tax-deferred accounts into a Betterment (traditional) IRA would effectively rule out backdoor Roth conversions due to the pro rata rule.
Whether to use a service such as Betterment ultimately is an individual choice, but I think their introduction of TLH+ makes their 0.15% fee seem reasonable for management of taxable investment accounts. I'd probably not be vigilant about tax loss harvesting if doing it manually, not to mention that their daily algorithmic approach promises better results, yet I and other readers of WCI stand to benefit from this technique the most due to our high marginal tax rates.
What do you think? Do you use Betterment? Would you consider it for the TLH+ service? Do you feel this is worth 0.15% per year? Comment below!
[Editor's Note: Toshi Clark, MD, is a radiologist with whom I have no financial relationship. It is about Betterment, one of the “robo-advisors,” which is trying to fill a niche between do-it-yourselfers and a full-service “human” advisor. Dr. Clark has no financial relationship with Betterment (not even as a client), but I technically do.]
I have used Betterment for the past two years as a savings account where I park some of my reserve funds to get a better rate of return. I love the website and as I grow past saving in tax deferred accounts, I will definitely use betterment to handle TLH, but it isn’t a problem I have had the fortune of handling yet.
Wow – this is actually a really neat product – I think you’d be hard pressed to get a live advisor to do the same for you! I prefer the flexibility of DIY, but as stated above most people probably aren’t as vigilant about TLH as a computer program can be (myself included).
How is getting to save first 3-6 months in fees a $900 value on $100K investment at 0.15% per year? (Forgive me, I am not great at math).
Hmmm…that is puzzling. 0.15% of $100,000 = $150 Annually, or $12.50 per month, right. So, 3-6 months would equate to $37.50 – $75.00. Certainly a
V-E-R-Y far cry from $900!
In order to save $900 for 3 months, it would take an investment of $2,400,000 @ 0.15%, wouldn’t it? ($2.4mm @ 0.15% = $3,600/yr = $900/3-months.
You’re right. I was math-challenged when making that comment and have fixed it.
Assuming this is the same John who commented 2 posts down, although I am glad someone agrees with me on the possible/probable math error (mainly because it means it is less likely that I am going senile early), my question was meant as just that …a question, not a criticism. I owe a LOT to this site and WCI and am pretty sure that plenty of people come to the comments section.
https://www.betterment.com/pricing/
I’m obviously not great with it either, and have corrected it.
Seems dangerous if you have identical securities in your 401k
Yes. One can’t hold the same exact funds in tax-deferred and taxable accounts and perform tax loss harvesting. Doing so would violate the Wash Sale Rule.
However, one can hold the mutual fund equivalent of the ETFs that Betterment holds. That’s technically different! I mapped out what the tax-deferred Betterment 70% stock portfolio consists of, and was able to map those ETFs 1:1 with Vanguard’s mutual funds:
https://docs.google.com/spreadsheets/d/18BBMKMuAKJE6tP2raJjoUd611gweYOsGS7MlYlQ8BTY/edit?usp=sharing
I believe that switching from ETF to Matching mutual fund is a wash. Thought there was a case on that, and since it’s the exact same holdings, I don’t think this would stand up in court. It would be similar to buying investor, then switching to admiral shares, it’s the same fund.
I agree that switching from ETF to mutual fund shares of a Vanguard index fund constitutes a wash sale. However, you can swap Vanguard TSM for Fidelity TSM, or Vanguard TSM for Vanguard 500 etc etc.
Here are two sources (not the IRS itself, mind you, and I’m not going to be in the room if you get audited!) that seem to support my contention that ETF and mutual fund holdings:
https://www.fidelity.com/learning-center/investment-products/etf/tax-rules-for-losses-etfs
“It could also be argued that a sale of mutual fund shares at a loss, followed by the purchase of an ETF that is similar to the mutual fund, is outside the wash sale ban. The ETF price usually reflects the prices of the stocks it holds, whereas mutual funds shares tracking similar holdings may not have the same underlying value. In addition, there are different fees or other charges associated with mutual funds versus ETFs.”
http://www.forbes.com/2008/12/22/wash-sale-rule-pf-ii-in_jd_1222taxes_inl.html
“Switching out of a mutual fund and into an ETF covering a similar swath of the market, or vice versa, is also something to consider. Robert Green, CEO of GreenTraderTax.com, argues strongly that since ETFs trade intraday and have different levels of liquidity and market depth, they are not at all substantially identical to mutual funds, which are priced and sold daily.”
Since this would be for cross-vendor potential wash sale violations, across taxable (in one) and tax-deferred (in the other) accounts, I think the actual potential of being audited would be extremely low, in any case.
I agree the potential is very low. That said, it seems so easy to go from a Vanguard fund to a Fidelity one, or a Vanguard fund to another Vanguard fund with 98% correlation, that it’s not worth even risking that tiny potential.
For the manual tax loss harvester working within a taxable account, I agree that switching to a Fidelity alternative for that 30 days makes sense.
For the person wishing to avoid cross-account wash sale rule violations who holds the same funds long term in the tax-deferred account then the added expenses of a Fidelity-equivalent portfolio add up. IIRC, for that same mix that I spelled out in the spreadsheet link scattered in the comments, the ER differential was over 0.5%.
The 3rd sentence in your italicized preamble is “wrong”.
Also, FYI, on the eMail version, there is no ability to “comment below”, as stated — only by coming to the site itself can I do so — which is quite cumbersome and I doubt many do so — I certainly will not in the future.
Sentence fixed. Thank you.
While 2500 people read each post by email, most of those who will read this post will do so on the website (it sees 350K page views a month.) I have no way to allow you to comment on the post via email, sorry. Let me know if you know a blog that does that and I’ll see if I can incorporate the feature.
I actually think this is a great product, especially for those who can save, but don’t know what to do with it. My dad is one of those that doesn’t want to handle anything, but he makes enough money that he can save it, but then he looses it on weird investments that he gets talked into.
I do wish that they had the option to turn the TLH off and on though. I like my 401K and IRA accounts, but I only contribute to them once a year. If I could turn it off for the 30 days before and after I contribute to the IRA and 401K then it would be something I would try out.
There’s definitely the option to turn it on–it’s not available for sub-$50k accounts, and is an option that one proactively enables for supra-$50k accounts.
I don’t know if there’s an option to turn it off. I haven’t been presented that option since I haven’t hit $50,000 balance yet*.
* In interests of full disclosure, since I submitted this post to WCI and its publication, I’ve become a Betterment client myself. My taxable investments are now within it, and I’m contemplating revising my tax-deferred investment mix to match theirs. I’ll have to rebalance manually, but I don’t have an option for in-service rollovers so must make do with what I have.
I posted this in response to another comment, but here’s the “manual Betterment” distribution, for tax-deferred accounts at 70% stock:
https://docs.google.com/spreadsheets/d/18BBMKMuAKJE6tP2raJjoUd611gweYOsGS7MlYlQ8BTY/edit?usp=sharing
That would be a great feature.
I’ve been trying to get my head around TLH since recently opening a taxable account, it’s in my wife’s name only. If there is a loss we would probably sell Vanguard total stock index and buy Vanguard Large cap index and/or sell Vanguard total international index and buy Vanguard FTSE ex-US near the end of the year to harvest losses. I have an IRA and 401(k) in my name with some overlap of the same funds that are in the taxable account.
We file jointly, any idea if I need to worry about a “Wash Sale” in the retirement funds due to dividend reinvestment, as the TLH would be going on in the taxable account that is only in her name? (She has no retirement accounts). I suppose I could turn off auto-reinvestment in those accounts, just seems to get complicated.
I’m not ready to go the Betterment yet but am interested in these “Robo-Advisors”
You should compare the expense ratios that you’re paying with what you’d pay with Betterment (0.15%, inclusive of underlying fund fees). I am clearly a fan of them.
With regard to the Wash Sale Rule, no issues if the two accounts in questions are in different names. You do need to worry about violations between taxable and tax-deferred accounts, however–can’t hold the exact same fund (but you could hold the ETF equivalent in one, as Betterment does, and the mutual fund equivalent in the other).
Correction: Their fee is NOT inclusive of the fund fees. Those are passed on to the investor.
Yes, you must be aware of what you own in the IRAs to avoid a wash sale. However, the likelihood of the IRS catching that is probably pretty darn low.
I assume the fee is 0.15% annually. I only mention that because WCI says that 6 mo of savings = $900. I believe the savings in fees on $100k for 6 mo would be closer to $75. Are there other fees that the author does not mention?
Sorry, I didn’t refresh my browser prior to posting. I see the error has already been pointed out.
You’re right. I totally blew that one and will fix it. Duh. Math challenged yesterday.
This is a good point, besides the arithmetic error. The 0.15% fee includes underlying fund fees.
I worked out what the underlying ETF fees are for their portfolio at a fixed allocation (so might not be true across whole range–they might have more buffer elsewhere), and in this case their margin is all of 0.04% (!), as the underlying funds cost just over 0.11%!
https://docs.google.com/spreadsheets/d/18BBMKMuAKJE6tP2raJjoUd611gweYOsGS7MlYlQ8BTY/edit?usp=sharing
This is a testament both to them picking low-cost funds, and the efficiencies of robo-adviser setups in general.
Are you sure the 0.15% fee includes the underlying fund fees? This excerpt from the FAQ section of their website makes it sound like the fund fees are separate.
“Your money is invested in a fully diversified index-fund portfolio made up of 12 exchange traded funds or ETFs. Each of these ETFs has an expense ratio (they range from .04%-.17% depending on your allocation – this is about 15 cents for every $100 you invest), which you would pay no matter where you purchased these funds. The cost charged by the funds is a little harder to see because the fund companies get their money by slightly reducing the dividends they pay out. Rest assured that Betterment works hard to offer funds with some of the lowest fees.”
I agree that 0.15% does not include underlying fund fees. I think Toshi is mistaken on that point. At least he can do math though, unlike me.
Follow-up question. Is there an account size at which any savings from tax loss harvesting wouldn’t justify the 0.15% fee? For example, if they can make it to where I can write off $3,000 (maximum allowed) on my taxes on a $100k account (that I am paying $150 fee on), that seems like a good deal. But at some point, it has to become a wash …and beyond that point a bad deal. I’m sure they say they add value in other ways, but I only bring it up since article is about tax loss harvesting.
If you are so fee sensitive that a few hundred dollars makes a difference in your decision, you’re probably a do-it-yourselfer. People who make calculations like you’re doing usually aren’t happy paying a financial advisor anything if they can figure out how to avoid it. Nothing wrong with that, that’s why I do it myself.
The real bang for your buck with TLHing is if you can avoid paying the taxes at all by donating appreciated shares to charity or getting the step-up in basis at death. But even so, $3K a year at a 33% marginal tax rate, even if you get it every year for 50 years, is only $50K in lifetime tax savings.
I stand corrected. I just chatted with their customer support and your collective reading of the FAQ is right. 0.15% is their fee. Expense ratios of underlying funds come out of one’s dividend, so it’s out of your pocket, not theirs.
Correct cost is 0.25/0.15% + underlying expense ratios, which I have demonstrated elsewhere to be in the neighborhood of 0.11% for one particular snapshot (so pretty good indeed).
I’m with Louis on this one. I think the fund fees are seperate. Even still for a total of basically .25% including fund fees, it’s a great deal if you don’t want to handle it yourself. I do it myself and still pay about .09% with my fund fees, and I don’t harvest nearly as much as they do. Shoot, I don’t even look at it daily, let alone harvest daily.
You’re paying the fund fees either way, so they shouldn’t factor in to your decision.
Kind of off topic, but curious what thoughts are on Wealthfront’s approach, particularly direct indexing…
Wealthfront is a competing product that apparently is popular among west coast techies. They include a commodity position and VIG but do not tilt to value, like Betterment does. In choosing between the two for a taxable account, I went with Betterment.
Wise Banyan, anyone?
Math time:
If my investments are $1million dollars. Then the extra 0.15% fee is $1500 per year. If I tax loss harvest at the highest tax bracket 39.6% the maximum $3000 tax loss harvesting will yield $1188 in tax savings. Therefor I am paying $1500 to save $1188 in taxes. That is bad math.
Not to mention one day I will still have to pay some taxes on what I tax loss harvest albeit very likely at a much lower rate.
That is assuming you have a million in taxable investments. There should be a breakeven point at a lower balance. I do wonder how big a balance one would need of a well-diversified portfolio to harvest the $3k with betterment, on average. You are also not valuing the possible investment of the tax savings.
It would depend on market performance. There hasn’t been much tax loss harvesting at all these last 6 years, whereas many people banked enough losses in 2008 that they have $3K in losses to use every year for the rest of their lives. So you can’t just calculate a break-even point. It’s more complex than that.
And keep in mind you’re really only TLHing recent contributions. After a decade or so, even a massive market decline isn’t going to get your share price back below what you paid for it.
You are also paying a higher fee for tax deferred accounts as well. Therefor the breakeven point gets lower and lower. If you are in a lower tax bracket the benefit goes down. If you use it to ofset long term capital gains, the benefit also goes down.
I think simply waiting for another recession, then tax loss harvesting could very well be enough to last you for a lifetime making the extra fee unnecessary. Plus, I enjoy rebalancing and playing with my money. Its tough to do “nothing” I might as well rebalance with new contributions and feel like I am doing “something”
That’s the thing, though: Betterment’s TLH+ is able to harvest losses even in this recent stable environment.
The Mad FIentist has the scoop: http://www.madfientist.com/moving-my-money-to-betterment/
>>>>> all material below is quoted
To find out how Betterment’s TLH+ has compared to my abysmal year-to-date harvesting, I contacted Boris (Betterment’s tax expert that I mentioned earlier) to get some data. He was kind enough to do some digging for me so here’s what he had to say:
I only looked at accounts with 70% stock allocation or higher, which is our average
allocation (with heavy bond allocation, TLH benefits quickly go to almost zero, since bonds aren’t that volatile). We launched in late June, just about 2 months ago.
For accounts >50k but 100k but 200k but 300k but 400k but <500k, average harvested to date = $2609
For accounts with 500k+, average harvested to date = $4282.
<<<<< end quoted material
So in 2014, over 2 months, Betterment's TLH+ was able to harvest the above. Extrapolate that to a year's worth and you can get carried losses to offset quite a few gains even in "smooth seas."
That is pretty cool actually. But keep in mind Betterment is pretty much brand new, right? So all the investments are relatively recent, right? That isn’t going to continue unless you continue making similarly sized contributions.
Hmm good point WCI. It isn’t really the account size but the contributions..
As I understand it, harvesting is not only at deposit events: https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/
The bottom of the Parallel Position Management section seems to be the most telling.
No, it’s not just at deposit events. But you have to think about this.
You’ve got a stock you buy at $10 a share. Over the next 5 years it goes up and down a bit and goes as low as $8 a share. So you tax loss harvest there. Then, over the next 30 years, it never goes below $8 a share, so you can never tax loss harvest that share again. Realistically, you can really only tax loss harvest from the time you make a contribution until the next big bear market. After that point, you’re unlikely to ever do it again. So it’s really only on recent (say last 2-8 years or so) contributions that you do all your tax loss harvesting.
And even more ideal is when you can tax loss harvest, then donate the shares 30 years later and never pay back that loss.
Between my charitable donations I hope to have very little capital gain tax down the road. But even if I do have to pay the taxes later, I’m paying taxes at a 20%ish rate, or lower, but getting the deduction at a 40%+ rate.
Also, you can harvest over $3000 a year, and carry the rest forward. And if you have a short term gain that year you can use the excess short term loss to counter it, which makes it worth more than the $3,000. So if one fund goes up 25,000 in a quarter and another drops 40,000 the same year, I can sell them both, rebuy the one that went up and something similar for what went down. End result, updated basis in the higher fund, and still have $15,000 in losses to carry forward over the next few years.
WCI is right though, harvesting is done towards the beginning, rather than after holding a fund for a long time.
I’m interested in this idea of donating appreciated assets. But I only own mutual funds. I’ve never owned individual stocks. Can I donate mutual fund shares just as I would donate stock shares?
Yes, it’s very easy, depending on the charity. But most large charities have accounts at all the mutual fund companies. The shares are simply transferred to their account, then liquidated.
Definitely! I try to do the majority of donations this way so I get the full deduction amount, but don’t pay the capital gains. The key is you have to hold to stock for over a year, anything less and it counts as you selling it, then donating it, instead of donating it, then the charity selling it.
I don’t own any individual stocks either, just funds. Your charity can help, or your company you invest though will also. I recently switched to Vanguard, and although I haven’t used them, the process has always been simple.
Learn to invest on your own and you will avoid these fees and come out way ahead
No free lunch and I trust no one with my hard earned dollars
My opinion is that the tax loss harvesting outweighs the fee. I’m going to modify the Mad FIentist’s argument (as posted here: http://www.madfientist.com/moving-my-money-to-betterment/ ) to attending-relevant tax brackets.
From that link, over 2 months a $150,000 taxable account will have harvested $716 in losses, per Betterment’s data. The fee for two months is $37.50. $716 in harvested losses at a 33% marginal rate is $236. Sure, the basis is now lower and future gains over that lower basis will be taxed upon withdrawal… but they will be taxed at LTCG of 15% if you’re still working, and likely 0% if you’re in your relatively low-income retirement years.
If you don’t need to harvest losses due to large paper losses from 2008 or other large events, then perhaps this isn’t for you. Otherwise, you’re better off with Betterment unless you can harvest over $716 – $37.50 == $738 in losses over that same period yourself. (The Mad FIentist’s own portfolio would have resulted in him manually harvesting $0 over that same period. I also may have fouled up this arithmetic, squeezing in comments between reading out residents.)
I believe if your portfolio is large enough the fee outweighs the benefits since you can only utilize $3K per year. Also putting in not tax deferred accounts is a waste of money. Based on my guesstimate the break even point starts to look at nest eggs in the $650K to $750K as the cutoff of making it worthwhile depending on tax brackets and so forth.
It does look like a great option if you have some profitable equities you are looking to liquidate or if your nest egg is still in the low/mid accumulation phase.
Great, now my blog is decreasing the quality of medical care and medical education. 🙂
The comments about the tlh and 3k limit for income and break evens really misses a very important longer term compounding part that is far more important. For one thing, anything above that 3k can be used against capital gains, as much as you have. The long term additional capture and increased shares will compound nicely as well.
The other thing I noticed in the comments is the tlh only being done at depostis? Not sure what this means since upon reading both wealthfront/betterment white papers and pages dedicated to tlh, they do it on a daily basis and its 100% automated, which seems like you would have lots of opportunities. I get the longer term points, but this could even be stretched out some with this approach possibly. Interesting to say the least.
Well, once your money has been there for a while, hopefully it never again drops below the price you bought it at. So generally, it’s only contributions you’ve made in the last year or two or three that you ever get to tax loss harvest.
You would certainly hope so. Like usual would work best if making consistent contributions.
I started a Betterment taxable account on 12/16/14 and DCA into it twice monthly. I have made a couple of other small investments with extraordinary income. Currently, it represents less than 1% of my investible assets in the taxable portion of my portfolio.
I like the user interface, the dashboard, and the ease of use. I also like the small cap and value I do not like the heavy international equity weighting and the use of non-municipal bonds in the taxable environment.
I think it is a great way to get a new investor started or to help someone transition from an advisor relationship to a more DIY milieu. I have recommended it to a couple of friends in this context.
Who needs losses
Keep your taxable money n munis long term
If I did that I would have about 80% of my portfolio in munis…
The only tax sheltered account I had until last year was a traditional IRA, didn’t allow for to much, so everything else was in taxable. I would love to have more in 401K etc., but it’s not always possible, so I tax loss harvest to make the best of an imperfect situation.
I agree. You can’t simply blindly put “all taxable” into munis.
I have a Betterment taxable account–really cool website, tax loss harvesting, etc. My wife and I are both MDs, max out all tax sheltered accounts, and put any extra $$ in Betterment. But at the back of mind I keep wondering–
1. Will Betterment be around in 5-10yrs?–not sure, but probably so.
2. I wonder at some point will the fees (0.15% plus the ETFs exp ratio) outweigh the tax loss harvesting.
3. Also, in my quest to keep things simple, a 2 fund portfolio at Vanguard may cost a few more minutes of time, but save $$ in the long run—the ETF VT (vanguard total world ETF-exp ratio 0.17%) has a comparable return to a Betterment 100% stock portfolio. Add in vanguard intermediate term tax exempt admiral shares (VWIUX-exp ratio 0.12%). Mix and match and you have a good quality portfolio in my opinion.
Anyway just some thoughts. I have been strongly considering cashing out my Betterment account and going to such an approach.
Good luck to all.
David
If the only benefit you see from Betterment is the TLHing, and you actually care about the fees, I think you’re in the minority of their customers.
If you truly believe the performance would be the same then by all means switch. You lose the Fama/French value tilt among other things.
https://www.betterment.com/portfolio/
From Glenn Frank via email:
to really minimize taxes including possible step up one day:
If you are in the “tax efficient assets belong in taxable accounts and tax inefficient in retirement” camp -AKA the Bogelheads -why not choose an all equity Betterment option (with loss harvesting) in your taxable account and buy the rest of your portfolio to get to your targeted overall allocation in your retirement? Do this via Vanguard Index funds or ETFs. Additionally, if you have a ROTH put your highest expected returning asset class there.
Otherwise to the extent excess equities are held in your normal retirement account you are turning gold in to lead (converting long-term capital gains into eventual ordinary income).
Alternatively you could simply be more aggressive with the Betterment taxable and compliment with a Vanguard conservative target date.
lAt some point 1 of the Robos will program holistic investment location in to their software -for now you are on your own but they get you most of the way there- from my viewpoint Betterment is better than Schwabs new “free” offering where the most important issue -asset class selection is compromised as they have a strategic cash allocation where they make more than the Betterment fee.
Hi, these questions are not about Betterment, but about TLH in general.
I am planning to start Tax Loss Harvesting in my taxable account. How would this work for short-term capital losses: can I use the harvested short-term losses to offset any type of gains (long and short), or only short-term gains?
How would this work for long-term capital losses: can they only be used for offsetting long-term gains, or also short-term gains?
Do all losses go in the same bucket?
There are slight differences. See these posts for more details:
https://www.whitecoatinvestor.com/capital-gains-and-losses-timing-is-everything/
https://www.whitecoatinvestor.com/tax-loss-harvesting/
Update: Betterment enabled tax loss harvesting for accounts of all balances as of today!
From an email:
“Using our smarter technology, we’ve now made Tax Loss Harvesting+ available to you and all of our customers—regardless of balance—at no additional cost.
“We are the only automated investing service to provide this tax-reduction strategy, once only available to the wealthiest, for all investors. By democratizing tax loss harvesting, we are continuing our mission of making smarter investing accessible to everyone.”
Good to hear.
I recently opened a Betterment account. Since the Vanguard Total Stock Market fund is one of the holdings, is there a potential conflict (re: tax loss harvesting), if I also own TSM in a Vanguard Target Date fund within my IRA. I obviously do not want to run afoul of IRS regulations.
Thanks
No, because the Target Date Fund is substantially different than TSM.
Is there a good way to combine TLH with capital gains gifting in a logical way or program? For instance, if I know I want to tithe 10% of my income and want to flush out, say, 20k of capital gains can I somehow combine that logically with TLH strategy in an automated way?
Also, when you “flush out capital gains” how is that separated from the principal investment? Do you have to give the whole thing away or is it possible to just give away the capital gains and keep the principal?
Thanks so much!!
Yes. TLH at every opportunity and use the most appreciated shares for your tithing. It’s logical, but I haven’t figured out a way to automate it.
An update on my experience with Betterment TLH+:
Since December 2014 (when I started using Betterment–after this original post was penned but before it was published by WCI) it has charged me $80.92 in fees. Over that same period it has harvested $2,351.52 in tax losses and my two (75/35% stock, respectively) goals have time-weighted returns of 12.8 and 6.8%, respectively.
I’d call that a win. With state and local taxes I’m probably paying around 38-39% marginal rate on income. Long term capital gains is 15% in my bracket, iirc, so let’s call it 20% with state tax since I don’t know how that case is handled. Therefore the net benefit for me so far is:
$2,351.52 * (38% – 20%) – $80.92.
In other words, Betterment’s tax loss harvesting has made me $342 after its fees even if one ignores the time value of money in that taxes not paid now are worth more than the equivalent value paid in the future.
Thanks for the update. I am curious how much you have invested? Particularly given the discussion about eventual fees and account size etc above.