What's the flaw in this strategy:

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JayTee
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What's the flaw in this strategy:

Post by JayTee » Mon Apr 03, 2017 1:16 pm

New forum member here, so pardon my ignorance if this has been asked before, but people I know personally who do finance for a living hadn't considered this, so I thought I'd ask here:

If I plan to invest x dollars on a certain date in a post-tax contributions sheltered account with a long time horizon, like a 529 or a Roth IRA, does it make sense to withdraw the same amount from my taxable investment(s) with the largest capital loss on record at that time (assuming easy liquidity and no transfer fees)? My thinking is, if I'm already committing to moving this money anyway from my savings into a "locked up" investment vehicle where the gains are shielded, don't I come out ahead by immediately skimming an additional tax deduction while keeping my taxables, liquid savings, and tax-shielded at the same desired net positions?

It seems so obvious to me, that I must surely be missing something which a Boglehead can point out!

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Slick8503
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Re: What's the flaw in this strategy:

Post by Slick8503 » Mon Apr 03, 2017 1:32 pm

You cannot do this, because it's a "wash sale". However, you could, for example, sell Total stock, and buy SP500 in your Roth to avoid the wash rule. If I understand correctly, what you are proposing is not that much different than a typical tax loss harvest, but instead of rebuying in taxable you would be rebuying in Roth or 529.

dbr
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Re: What's the flaw in this strategy:

Post by dbr » Mon Apr 03, 2017 1:41 pm

Sure it would work fine pending the wash sale explanation above. You can also avoid a wash sale by just waiting 30 days to repurchase the replacement shares. But there is no reason in particular that the assets in the Roth would be exactly those sold in taxable anyway.

aristotelian
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Re: What's the flaw in this strategy:

Post by aristotelian » Mon Apr 03, 2017 1:43 pm

You don't get a tax deduction for Roth, and you generally only get state tax deduction for 529s (and the amount is different in different states).

The question you should be asking is how much taxes would you pay on the distribution now versus another timeframe (next year, retirement, etc). For example, if you are in the 15% tax bracket and you would pay 0% cap gain tax, then it is a no brainer to do it now. If you are likely to be in a lower tax bracket in retirement, then you would want to pay taxes now on the shares with the least gain.

If you don't know whether your future tax situation will be better, then you might as well defer as much as you can for as long as you can.

JayTee
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Re: What's the flaw in this strategy:

Post by JayTee » Mon Apr 03, 2017 1:45 pm

Okay, let's say I wait 1 month to avoid the wash rule. As the end of November roles near, I pick and execute what will put x dollars into my bank account from whichever of my taxable investment nets the greatest loss, equal to the x dollars I will put for that year from my bank account into a tax-sheltered growth account.

A typical tax-loss harvest, ceteris paribus, involves rebuying similar assets after selling them into the same account in order to defer tax payment, because money paid later has higher NPV. The criticisms are usually that transfer fees over the typical horizon in which its carried out devastate the gains to be had, and introduce unnecessary risk, because you might need the money. What I'm proposing is different, because the target accounts are tax sheltered, so the gains aren't a simple time deferral: you gain the deduction right away for the loss and actually don't pay on the upswing ever, because the asset is now shielded. It also involves a type of account people use for money that the investor knows can safely locked up in a long time horizon, so there isn't much if any added risk. The only question I have is, who in their right mind wouldn't adopt this strategy, and why aren't fee-based advisors who do the thinking for people not talking about this?

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Slick8503
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Re: What's the flaw in this strategy:

Post by Slick8503 » Mon Apr 03, 2017 1:57 pm

There is no flaw, but this is something many people have done in the past. Myself included. The problem, if you want to call it that, is that you are limited to 5500 in Roth space per year.

dbr
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Re: What's the flaw in this strategy:

Post by dbr » Mon Apr 03, 2017 1:58 pm

Putting money in a Roth is putting money in a Roth and harvesting a tax loss is harvesting a tax loss. The two things have no connection. I don't understand where there is a strategy here. What fraction of your assets you retain in taxable vs Roth is a strategy, but that has nothing to do with tax loss harvesting to get there. You have income and could just as well say some of your after tax income has gone into a Roth and that you sold taxable assets with or without a loss to get the cash back. You could also accomplish more or less tax loss harvesting no matter what amount of money is put into the Roth. A mistake you could make in harvesting the tax loss is buying the same asset in the Roth within +/- 30 days and losing the tax loss and the basis reset, at least I think that rule applies to Roth IRAs, a fact that should be checked. A person in the 15% bracket might do better to harvest tax gains up to the end of 0% cap gains tax, but you don't want to waste possible tax losses offsetting gains that are not going to be taxed anyway.

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Pajamas
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Re: What's the flaw in this strategy:

Post by Pajamas » Mon Apr 03, 2017 2:00 pm

JayTee wrote:why aren't fee-based advisors who do the thinking for people not talking about this?
Probably because money is fungible and they don't see any reason to link the two actions. Capital losses just offset taxable capital gains and/or reduce taxable income by $3,000. You can take advantage of harvesting tax losses whether or not you putting money in a tax-advantaged account. The reverse is also true, you can put money in a tax-advantaged account with or without harvesting tax losses. They are really independent decisions unless you would not have the money to put into a tax-advantaged account without harvesting tax losses, which is not the case in your scenario because you are already planning to put money in the tax-advantaged account. You should do either, both, or neither, depending on whether or not each is to your advantage.

You can avoid a wash sale not just by waiting 30 days but by investing in something that is similar but not "substantially identical".

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MP123
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Re: What's the flaw in this strategy:

Post by MP123 » Mon Apr 03, 2017 2:02 pm

JayTee wrote: you gain the deduction right away for the loss and actually don't pay on the upswing ever, because the asset is now shielded.
Generally you will pay taxes when it comes back out of the tax sheltered account (IRA, 401k). And it will be taxed at your regular income tax rate not at the preferred rates for qualified dividends or capital gains. And there won't be a cost basis so the whole thing will be income rather than just the gain.

But maybe I'm not understanding what you're proposing?

JayTee
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Re: What's the flaw in this strategy:

Post by JayTee » Mon Apr 03, 2017 2:23 pm

Generally you will pay taxes when it comes back out of the tax sheltered account (IRA, 401k). And it will be taxed at your regular income tax rate not at the preferred rates for qualified dividends or capital gains. And there won't be a cost basis so the whole thing will be income rather than just the gain.

But maybe I'm not understanding what you're proposing?
Yes, it would be neutralized in a regular IRA or 401K. Gains in a Roth IRA and 529 plan (and some others, but those are the big 2 for most people) are completely capital-gains tax free upon sale when used in accordance with the rules. As the prior poster mentioned, there's a "fungibility" principle I'm invoking here which virtually no one I speak to seems to acknowledge: if someone has a certain level of liquid savings in a bank account he's comfortable with, a target contribution into a tax-free growth account, a non-zero income tax bracket, and assets invested in a taxable that can be liquidated quickly, most people don't think of the full picture. They just pay the target contribution out of their bank account into the tax-free growth according to their schedule. I'm saying, why not involve all 4 parts? Make the same contribution from the bank, restore that amount into your bank from a loss-triggering sale in taxables (assuming the asset is relatively the same as what was bought in the tax-free account), and use the loss against your income for that year. If you have an emergency need for the money, you're no worse off in terms of bank account + liquid taxable investments to cover it.

aristotelian
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Re: What's the flaw in this strategy:

Post by aristotelian » Mon Apr 03, 2017 2:37 pm

JayTee wrote:Okay, let's say I wait 1 month to avoid the wash rule. As the end of November roles near, I pick and execute what will put x dollars into my bank account from whichever of my taxable investment nets the greatest loss, equal to the x dollars I will put for that year from my bank account into a tax-sheltered growth account.

A typical tax-loss harvest, ceteris paribus, involves rebuying similar assets after selling them into the same account in order to defer tax payment, because money paid later has higher NPV. The criticisms are usually that transfer fees over the typical horizon in which its carried out devastate the gains to be had, and introduce unnecessary risk, because you might need the money. What I'm proposing is different, because the target accounts are tax sheltered, so the gains aren't a simple time deferral: you gain the deduction right away for the loss and actually don't pay on the upswing ever, because the asset is now shielded. It also involves a type of account people use for money that the investor knows can safely locked up in a long time horizon, so there isn't much if any added risk. The only question I have is, who in their right mind wouldn't adopt this strategy, and why aren't fee-based advisors who do the thinking for people not talking about this?
Edit: I re-read your post. OK, yes, it sounds like you are talking about standard tax loss harvesting and then investing the diminished proceed in tax advantaged account. Both are fine strategies, but neither is anything particularly new, and as others have said, they are independent. TLH and Roth are both good, whether you do them together or on their own.
Last edited by aristotelian on Mon Apr 03, 2017 3:18 pm, edited 1 time in total.

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MP123
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Re: What's the flaw in this strategy:

Post by MP123 » Mon Apr 03, 2017 2:46 pm

It seems to me that you're talking about two different things both of which are useful but not related:

1) You can recognize a capital loss and deduct it up to $3,000.

and/or

2) You can contribute to a Roth.

The dollars don't really care where they "came from". They're all the same anyway, right?

Or are you talking about keeping a desired asset allocation?

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Slick8503
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Re: What's the flaw in this strategy:

Post by Slick8503 » Mon Apr 03, 2017 2:54 pm

I'll just speak to my situation mentioned above. I had some taxable money that I had invested in years where I had already maxed out my tax advantage space for the year, after 2009 I had some losses in that account. I also use a rewards checking account. Instead of funding my roth with money from my rewards checking I simply sold shares for a loss in taxable and repurchased in Roth space. Keeping my A/A the same and realizing the tax loss.

It wasn't really a "strategy" that's just how it worked out to keep my A/A, while maxing my Roth space for the year. As has been said, it's two separate things. Tax loss realization and funding a Roth. I also did some regular TLH that year that stayed in taxable.

JayTee
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Re: What's the flaw in this strategy:

Post by JayTee » Mon Apr 03, 2017 4:06 pm

MP123 wrote:It seems to me that you're talking about two different things both of which are useful but not related:

1) You can recognize a capital loss and deduct it up to $3,000.

and/or

2) You can contribute to a Roth.

The dollars don't really care where they "came from". They're all the same anyway, right?

Or are you talking about keeping a desired asset allocation?
I'm talking about two potentially complementary financial decisions that are rarely related but sound like they should be:

1) Someone is ready to contribute money to an investment they have already committed to keeping non-liquid for several years, a term which they can be reasonably certain they will experience net growth, on which they will not pay taxes.
2) That person also has loss positions now on other monies in similar investment types cost basis that is taxable.

Additionally, this person will not take the standard deduction.

If this person synchronizes their contributions from (1) with their sales from (2) given these conditions (which describes a lot of middle class investors with families), it seems to me, over the long term, they will reliably skim appreciable extra savings at tax time over the long haul without increasing their risk or losing liquidity. I can understand why a number of responders are resisting this perspective, but they seem to suggest a different set of assumptions. Loss harvesting has clear criticisms, and this particular set of circumstances neutralizes them. I'm genuinely courting a good counterargument to convince me that this won't work, but I'm not hearing one, and I'm happy to clarify further in order to get it.

dbr
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Re: What's the flaw in this strategy:

Post by dbr » Mon Apr 03, 2017 4:12 pm

JayTee wrote:
MP123 wrote:It seems to me that you're talking about two different things both of which are useful but not related:

1) You can recognize a capital loss and deduct it up to $3,000.

and/or

2) You can contribute to a Roth.

The dollars don't really care where they "came from". They're all the same anyway, right?

Or are you talking about keeping a desired asset allocation?
I'm talking about two potentially complementary financial decisions that are rarely related but sound like they should be:

1) Someone is ready to contribute money to an investment they have already committed to keeping non-liquid for several years, a term which they can be reasonably certain they will experience net growth, on which they will not pay taxes.
2) That person also has loss positions now on other monies in similar investment types cost basis that is taxable.

Additionally, this person will not take the standard deduction.

If this person synchronizes their contributions from (1) with their sales from (2) given these conditions (which describes a lot of middle class investors with families), it seems to me, over the long term, they will reliably skim appreciable extra savings at tax time over the long haul without increasing their risk or losing liquidity. I can understand why a number of responders are resisting this perspective, but they seem to suggest a different set of assumptions. Loss harvesting has clear criticisms, and this particular set of circumstances neutralizes them. I'm genuinely courting a good counterargument to convince me that this won't work, but I'm not hearing one, and I'm happy to clarify further in order to get it.
No, nobody said there was anything wrong with it. People are just saying there is nothing special about it other than the obvious benefits of tax loss harvesting and holding more of your assets in a Roth and less in taxable. In mathematical parlance you would like the benefit of the Roth to be R, the benefit of tax loss harvesting to be TLH and the benefit of both to be TLH + R + a*TLH*R, where a is some constant representing a synergy. I think we are having a hard time seeing anything here other than a = 0. I think the advantage you ascribe to "neutralizing" the the downsides of TLH is nothing more than what one gets from a Roth under any conditions and is already in R. Maybe I am misunderstanding.

JayTee
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Re: What's the flaw in this strategy:

Post by JayTee » Mon Apr 03, 2017 4:41 pm

dbr wrote:
JayTee wrote:
MP123 wrote:It seems to me that you're talking about two different things both of which are useful but not related:

1) You can recognize a capital loss and deduct it up to $3,000.

and/or

2) You can contribute to a Roth.

The dollars don't really care where they "came from". They're all the same anyway, right?

Or are you talking about keeping a desired asset allocation?
I'm talking about two potentially complementary financial decisions that are rarely related but sound like they should be:

1) Someone is ready to contribute money to an investment they have already committed to keeping non-liquid for several years, a term which they can be reasonably certain they will experience net growth, on which they will not pay taxes.
2) That person also has loss positions now on other monies in similar investment types cost basis that is taxable.

Additionally, this person will not take the standard deduction.

If this person synchronizes their contributions from (1) with their sales from (2) given these conditions (which describes a lot of middle class investors with families), it seems to me, over the long term, they will reliably skim appreciable extra savings at tax time over the long haul without increasing their risk or losing liquidity. I can understand why a number of responders are resisting this perspective, but they seem to suggest a different set of assumptions. Loss harvesting has clear criticisms, and this particular set of circumstances neutralizes them. I'm genuinely courting a good counterargument to convince me that this won't work, but I'm not hearing one, and I'm happy to clarify further in order to get it.
No, nobody said there was anything wrong with it. People are just saying there is nothing special about it other than the obvious benefits of tax loss harvesting and holding more of your assets in a Roth and less in taxable. In mathematical parlance you would like the benefit of the Roth to be R, the benefit of tax loss harvesting to be TLH and the benefit of both to be TLH + R + a*TLH*R, where a is some constant representing a synergy. I think we are having a hard time seeing anything here other than a = 0. I think the advantage you ascribe to "neutralizing" the the downsides of TLH is nothing more than what one gets from a Roth under any conditions and is already in R. Maybe I am misunderstanding.
Okay - I'm still new to the forum, and figuring out how to express myself in terms of how people commonly think and discuss here. I guess I'm asking this: very few people I know who do their own investments actively use TLH, nor do I hear the online gurus recommend it. The investors either don't understand it as too exotic, or have been scared off by it completely, and the advice columns would rather not confuse people about it. I'm presenting a strategy for how to engage with TLH in a small but non-negligible way which I think is relatively easy to explain to such an audience, and would lead to wider adoption of the practice. But at first blush, it sounds like trying to "get something for nothing" instead of leveraging one's accounts more effectively, and I want to be hear from other intelligent people either confirmation of the latter, or anything I've missed that would confirm wariness about the former.

dbr
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Re: What's the flaw in this strategy:

Post by dbr » Mon Apr 03, 2017 4:57 pm

JayTee wrote: Okay - I'm still new to the forum, and figuring out how to express myself in terms of how people commonly think and discuss here. I guess I'm asking this: very few people I know who do their own investments actively use TLH, nor do I hear the online gurus recommend it. The investors either don't understand it as too exotic, or have been scared off by it completely, and the advice columns would rather not confuse people about it. I'm presenting a strategy for how to engage with TLH in a small but non-negligible way which I think is relatively easy to explain to such an audience, and would lead to wider adoption of the practice. But at first blush, it sounds like trying to "get something for nothing" instead of leveraging one's accounts more effectively, and I want to be hear from other intelligent people either confirmation of the latter, or anything I've missed that would confirm wariness about the former.
My reaction is that what you have presented is about as confusing as one could possibly imagine. I can't account for what most people you know don't do or whether online guru's overlook it, but the advantages are pretty straightforward even though there are some nuances such as the now lowered basis and future tax liability. Tax loss harvesting is getting something for nothing in the same sense that not overlooking any helpful situation in the tax code is getting something for nothing. There are probably millions of investors out there that are paying too much tax because they have not taken deductions they are entitled to, but that does not make taking deductions "getting something for nothing." It is also the case that really helpful opportunities for TLH are actually fairly rare. Anyone who didn't do it during the 2008 crash may have made a mistake. Having investments with loss available since then is not so common.

I wonder if you were to read through this article in the Wiki if you would find it suitable for presenting the idea to someone you had in mind: https://www.bogleheads.org/wiki/Tax_loss_harvesting If you think it could be simplified or has overlooked something it is possible for anyone to suggest addtions too or modifications of Wiki articles.

KlangFool
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Re: What's the flaw in this strategy:

Post by KlangFool » Mon Apr 03, 2017 5:11 pm

OP,

Why do you need a Roth IRA in order to do this?

You can sell X and buy back Y at your taxable account at any time for tax loss harvesting. Now, what and when you invest Y to whatever account is irrelevant.

You do not need 2 accounts in order to do tax loss harvesting. You do not need to wait for any special time to do tax loss harvesting. You do TLH whenever the loss is big enough to justify your effort. And, you can carry forward your tax loss to offset your current and future gain.

Why are you overcomplicating something simple?

KlangFool

autopeep
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Re: What's the flaw in this strategy:

Post by autopeep » Mon Apr 03, 2017 6:30 pm

I don't see anything exotic here. You should max out your tax advantaged space before taxable investing. If you can do so by TLH a taxable investment all the better. Many people on this forum tax loss harvest.

dbr
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Re: What's the flaw in this strategy:

Post by dbr » Mon Apr 03, 2017 6:47 pm

autopeep wrote:I don't see anything exotic here. You should max out your tax advantaged space before taxable investing. If you can do so by TLH a taxable investment all the better. Many people on this forum tax loss harvest.
But it isn't all the more better because the money originated in a TLH transaction. You are right that taking advantage of all the strategies available is a good thing.

autopeep
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Re: What's the flaw in this strategy:

Post by autopeep » Mon Apr 03, 2017 6:56 pm

dbr wrote:
autopeep wrote:I don't see anything exotic here. You should max out your tax advantaged space before taxable investing. If you can do so by TLH a taxable investment all the better. Many people on this forum tax loss harvest.
But it isn't all the more better because the money originated in a TLH transaction. You are right that taking advantage of all the strategies available is a good thing.

Totally agree. OP seems to be performing mental gymnastics to solve a problem that doesn't exist.

TropikThunder
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Re: What's the flaw in this strategy:

Post by TropikThunder » Mon Apr 03, 2017 6:58 pm

JayTee wrote: It seems so obvious to me, that I must surely be missing something which a Boglehead can point out!
Maybe I'm new enough here myself that I find all of the experienced posters belittling your idea to be rather surprising (and glad no one has yet called it "stupid" even if it's just unspoken). I totally get what you're proposing and I do think it has merit. The one criticism I've heard about TLH is that you are generating a loss now but by lowering the cost basis, you increase the eventual gain in the future. Now if you can manage your tax rate well, the loss now will be at a higher marginal rate then the gain later and it's a win-win.

But let's say it's Roth IRA contribution time and you have $5,500 in your checking account. You could make that contribution from checking and call it a day. Or you could sell $5,500 from taxable at a loss, make the contribution from *that*, and use the loss to offset other gains or income. Either way you make the IRA contribution but in your method, you get the immediate benefit of TLH (offsetting gains now) but the future consequence of TLH (lowered cost generating higher future capital gain) never happens. I like it. :beer

aristotelian
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Re: What's the flaw in this strategy:

Post by aristotelian » Mon Apr 03, 2017 7:17 pm

TropikThunder wrote:
JayTee wrote: It seems so obvious to me, that I must surely be missing something which a Boglehead can point out!
Maybe I'm new enough here myself that I find all of the experienced posters belittling your idea to be rather surprising (and glad no one has yet called it "stupid" even if it's just unspoken). I totally get what you're proposing and I do think it has merit. The one criticism I've heard about TLH is that you are generating a loss now but by lowering the cost basis, you increase the eventual gain in the future. Now if you can manage your tax rate well, the loss now will be at a higher marginal rate then the gain later and it's a win-win.

But let's say it's Roth IRA contribution time and you have $5,500 in your checking account. You could make that contribution from checking and call it a day. Or you could sell $5,500 from taxable at a loss, make the contribution from *that*, and use the loss to offset other gains or income. Either way you make the IRA contribution but in your method, you get the immediate benefit of TLH (offsetting gains now) but the future consequence of TLH (lowered cost generating higher future capital gain) never happens. I like it. :beer
What if he has already contributed to his Roth IRA? Harvesting the loss is still a good idea because it saves on his taxes.

What if he does not have a loss to harvest? He should still contribute to his Roth.

There is zero connection between the two. Nothing wrong with either one, but one does not make the other better.

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Re: What's the flaw in this strategy:

Post by avalpert » Mon Apr 03, 2017 7:30 pm

TropikThunder wrote:
JayTee wrote: It seems so obvious to me, that I must surely be missing something which a Boglehead can point out!
Maybe I'm new enough here myself that I find all of the experienced posters belittling your idea to be rather surprising (and glad no one has yet called it "stupid" even if it's just unspoken). I totally get what you're proposing and I do think it has merit. The one criticism I've heard about TLH is that you are generating a loss now but by lowering the cost basis, you increase the eventual gain in the future. Now if you can manage your tax rate well, the loss now will be at a higher marginal rate then the gain later and it's a win-win.

But let's say it's Roth IRA contribution time and you have $5,500 in your checking account. You could make that contribution from checking and call it a day. Or you could sell $5,500 from taxable at a loss, make the contribution from *that*, and use the loss to offset other gains or income. Either way you make the IRA contribution but in your method, you get the immediate benefit of TLH (offsetting gains now) but the future consequence of TLH (lowered cost generating higher future capital gain) never happens. I like it. :beer
Except you are left with 5,500 in a checking account as opposed to invested - so what do you do with that? Well, since you have no tax advantaged space you invest in taxable at today's cost basis.

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Slick8503
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Re: What's the flaw in this strategy:

Post by Slick8503 » Tue Apr 04, 2017 6:39 am

TropikThunder wrote:
JayTee wrote: It seems so obvious to me, that I must surely be missing something which a Boglehead can point out!
Maybe I'm new enough here myself that I find all of the experienced posters belittling your idea to be rather surprising (and glad no one has yet called it "stupid" even if it's just unspoken). I totally get what you're proposing and I do think it has merit. The one criticism I've heard about TLH is that you are generating a loss now but by lowering the cost basis, you increase the eventual gain in the future. Now if you can manage your tax rate well, the loss now will be at a higher marginal rate then the gain later and it's a win-win.

But let's say it's Roth IRA contribution time and you have $5,500 in your checking account. You could make that contribution from checking and call it a day. Or you could sell $5,500 from taxable at a loss, make the contribution from *that*, and use the loss to offset other gains or income. Either way you make the IRA contribution but in your method, you get the immediate benefit of TLH (offsetting gains now) but the future consequence of TLH (lowered cost generating higher future capital gain) never happens. I like it. :beer
Not belittling at all. I'm very grateful to members who present their ideas. That's how new things are learned. Unfortunately, in this case there doesn't appear to be anything new to learn that would help someone who understands the benefits of TLH and Roth contributions. Again, not belittling, it's just that we do not agree that somehow tying TLH and Roth contributions together has a synergistic benefit over and above what doing the two separately give.

dbr
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Re: What's the flaw in this strategy:

Post by dbr » Tue Apr 04, 2017 8:23 am

The OP is not wrong in the enumeration of what happens. I think the characterization of the benefits is mental accounting. Mental accounting means associating properties with things that don't really have those properties.

The first observation is that the tax benefit of investing a certain sum in a Roth is greater if that investment is made when the share price is lower rather than higher. That is a real property of a Roth but has nothing to do with where the funds for the investment come from. In particular, linking this to avoiding a downside to TLH is an artificial rather than an intrinsic association.

The second observation is that TLH has been somewhat miss-characterized. The intrinsic aspect of TLH is selling a position at a loss and taking a tax offset for that. That tax benefit is independent of what might be done with the proceeds of the sale. The proceeds can be withdrawn and spent, invested in something else, or, eventually invested in the original item. None of those is intrinsically linked to TLH. The future tax liability is linkied artificially. Would one say that if the funds had been reinvested in something entirely different with a new basis all its own that we had created a problem due to TLH? Or should one consider the observation in the next paragraph? On this forum it is usually understood that one invests the proceeds in a position of similar investment characteristics. But that is not in order to get the tax benefit. It is in order to preserve the investment position. Ironically doing so is exactly what tax law tries to prevent by imposing the wash sale rule. But preserving the investment position is not an intrinsic aspect of TLH. Many people harvest tax losses and use the money for something other than to reinvest in the same position.

Lastly it is an observation that there is always a tax disadvantage to place money in an investment when the share price is lower rather than higher. This is true no matter what the source of the funds and is not linked to whether or not the funds were obtained in a loss sale.

So the mental accounting occurs when one starts to link these things together as if they were causes of each other. A more objective characterization would be to say that when share prices are lower rather than higher, then it is likely that TLH is advantageous, that investing in a Roth has a greater rather than a less advantage, and that investing in a taxable holding has a greater rather than a lesser liability.

The nature is somewhat like A causing B, C, and D and then saying that B causes C and D, and that C causes D, and that D causes B and C, etc.

The investment management advice is to take advantage of TLH when you can and to take advantage of the occasion to put the money in a Roth but not to wait to put money in a Roth because you think you might eventually TLH something.

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Pajamas
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Re: What's the flaw in this strategy:

Post by Pajamas » Tue Apr 04, 2017 12:45 pm

JayTee wrote: I guess I'm asking this: very few people I know who do their own investments actively use TLH, nor do I hear the online gurus recommend it. The investors either don't understand it as too exotic, or have been scared off by it completely, and the advice columns would rather not confuse people about it. I'm presenting a strategy for how to engage with TLH in a small but non-negligible way which I think is relatively easy to explain to such an audience, and would lead to wider adoption of the practice. But at first blush, it sounds like trying to "get something for nothing" instead of leveraging one's accounts more effectively, and I want to be hear from other intelligent people either confirmation of the latter, or anything I've missed that would confirm wariness about the former.
You are right, many people don't know about tax loss harvesting or even that you can deduct $3,000 of capital losses from ordinary income and telling them about it will benefit them. (I told a coworker about the $3,000 deduction once and he was excited about it and then thanked me profusely after filing his taxes.) But there is no reason to complicate it by linking it to making contributions to a tax-advantaged account. Keep it simple so they are more likely to understand the concept and take advantage of it.

What you are proposing is similar to linking using coupons at the grocery store to putting money in a savings account. You can do one, both, or neither, depending on your circumstances, and as others have pointed out, there is no synergy. The only tenuous link that I can think of is that someone with absolutely no extra money to put in a savings account might come up with some extra money if they used coupons and could then put it in a savings account. However, they could also use that coupon savings money for something else and they could sell something they owned or get another job to raise money to put in a savings account as an alternative to couponing. The two have no real connection.

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Re: What's the flaw in this strategy:

Post by lazylarry » Tue Apr 04, 2017 1:12 pm

avalpert wrote:
TropikThunder wrote:
JayTee wrote: It seems so obvious to me, that I must surely be missing something which a Boglehead can point out!
Maybe I'm new enough here myself that I find all of the experienced posters belittling your idea to be rather surprising (and glad no one has yet called it "stupid" even if it's just unspoken). I totally get what you're proposing and I do think it has merit. The one criticism I've heard about TLH is that you are generating a loss now but by lowering the cost basis, you increase the eventual gain in the future. Now if you can manage your tax rate well, the loss now will be at a higher marginal rate then the gain later and it's a win-win.

But let's say it's Roth IRA contribution time and you have $5,500 in your checking account. You could make that contribution from checking and call it a day. Or you could sell $5,500 from taxable at a loss, make the contribution from *that*, and use the loss to offset other gains or income. Either way you make the IRA contribution but in your method, you get the immediate benefit of TLH (offsetting gains now) but the future consequence of TLH (lowered cost generating higher future capital gain) never happens. I like it. :beer
Except you are left with 5,500 in a checking account as opposed to invested - so what do you do with that? Well, since you have no tax advantaged space you invest in taxable at today's cost basis.
I think it's a tricky question to think of, but for the OP, avalpert's response emphasizes that the cost basis is the same whether you invest $1000 from a stock you just sold, from your bank a/c, from under your mattress, the cost basis of today's $1000 stock purchase is the same - $1000.
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