401k & account with 1 Robo-advisor: Wash sale chance?

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sman09
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401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 1:42 pm

I have been asking many questions and greatly appreciate the support i'm receiving as i tread through to declutter and get my finances in order.

Since the question i have at hand is slightly different from the questions i have already asked, starting a new thread:

If the only accounts i had are

- a 401k account with a 3-fund portfolio

and

- an account with a robo advisor (say, Wealthfront) (As they give free account management for referral etc.,)

is there no chance of a wash sale even if the robo-advisor firm does TLH?

I understand that to understand whether wash sale could occur, one needs to take one's complete portfolio in to account including spouse's accounts/transactions if any.


But are there any scenario that one can be sure will not lead to a (such as, owning a tIRA, Roth IRA, 401k) etc.,?

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David Jay
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by David Jay » Wed Jun 13, 2018 2:32 pm

In searching around the web, the consensus seems to be that an employer-sponsored 401K (not a Solo-401K, where it is more ambiguous) has a trustee who is performing all the trades. You do not actually "hold" the assets you have selected within your 401K account (although you own the rights to those assets). This insulates your individual finances from the 401K finances because there is no ability for "you" to "repurchase" anything within the 401K.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 3:23 pm

David Jay wrote:
Wed Jun 13, 2018 2:32 pm
In searching around the web, the consensus seems to be that an employer-sponsored 401K (not a Solo-401K, where it is more ambiguous) has a trustee who is performing all the trades. You do not actually "hold" the assets you have selected within your 401K account (although you own the rights to those assets). This insulates your individual finances from the 401K finances because there is no ability for "you" to "repurchase" anything within the 401K.
Thanks a lot David Jay for the clarification!

Interesting to know that " an employer-sponsored 401K has a trustee who is performing all the trades". I thought only target date funds would be managed by the trustee and that any time you opt-out of the default target-date fund and opt-in to a 3-fund portfolio of your own, you are left to yourself to do the annual rebalancing. Am i understanding it correctly that even if i opt-out of target-date retirement fund and opt-in to a 3/4 fund portfolio with a set percentage AA and change it over time, the trustee will take care of rebalancing the account per the AA weight i have indicated?


<<This insulates your individual finances from the 401K finances because there is no ability for "you" to "repurchase" anything within the 401K.

Referring to this point, is it not true that, even in case of Betterment or Wealthfront, once i invest (handover?) the money to the firm, it is all what those firms do and i do not myself sell/buy anything? Merely trying to understand better and thanks for your time!

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David Jay
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by David Jay » Wed Jun 13, 2018 3:43 pm

The point is that you personally don't actually "hold" the specific assets inside the 401K. You can't transfer "in kind" out of the 401K, you receive cash at the time of disbursement.

You do own the assets that are in your Betterment account.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 3:48 pm

David Jay wrote:
Wed Jun 13, 2018 3:43 pm
The point is that you personally don't actually "hold" the specific assets inside the 401K. You can't transfer "in kind" out of the 401K, you receive cash at the time of disbursement.

You do own the assets that are in your Betterment account.

Interesting - thanks a lot @David Jay for the clarification!

And hope my understanding as seen below is correct

"[...] even if i opt-out of target-date retirement fund and opt-in to a 3/4 fund portfolio with a set percentage AA and change it over time, the trustee will take care of rebalancing the account per the AA weight i have indicated [...]"

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David Jay
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by David Jay » Wed Jun 13, 2018 4:30 pm

sman09 wrote:
Wed Jun 13, 2018 3:48 pm
"[...] even if i opt-out of target-date retirement fund and opt-in to a 3/4 fund portfolio with a set percentage AA and change it over time, the trustee will take care of rebalancing the account per the AA weight i have indicated [...]"
I have no idea what you are trying to say...
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Nate79
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by Nate79 » Wed Jun 13, 2018 4:33 pm

Taxable accounts and IRA's - wash sales

401k and other accounts - no wash sale unless IRS gives specific rules stating otherwise.

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 6:18 pm

Nate79 wrote:
Wed Jun 13, 2018 4:33 pm
Taxable accounts and IRA's - wash sales

401k and other accounts - no wash sale unless IRS gives specific rules stating otherwise.
Thank you!

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 6:21 pm

David Jay wrote:
Wed Jun 13, 2018 4:30 pm
sman09 wrote:
Wed Jun 13, 2018 3:48 pm
"[...] even if i opt-out of target-date retirement fund and opt-in to a 3/4 fund portfolio with a set percentage AA and change it over time, the trustee will take care of rebalancing the account per the AA weight i have indicated [...]"
I have no idea what you are trying to say...
@sorry for not being clear.

I was merely trying to confirm whether even after changing my current 401k plan which is a Target date fund to something equivalent of the 3-fund portfolio (BH style), would the trustee take care of rebalancing the account year after year? Let's say this year i am wanting a 75/25 and 5 years down i want a 70/30 and so on would implementing the weightage be taken care by the trustee (of the 401k provider, if that's the more appropriate name)

retiredjg
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by retiredjg » Wed Jun 13, 2018 6:29 pm

My understanding is that what is held in IRA and Roth IRA for both you and your spouse can cause a wash sale. The IRS has specifically ruled this.

My understanding is that the IRS has never ruled on whether a wash sale can occur with investments held in 401k or HSA. Opinions abound on why this is and whether that means anything. In truth, nobody really knows but many have opinions.

My opinion is that what is in 401k or HSA cannot cause a wash sale. However, some of the Robo advisors have suggested avoiding the issue all together by holding something completely different in 401k. Some have suggested using a target or other balanced fund in the 401k because this cannot cause a wash sale.

My personal opinion is that is not necessary.

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David Jay
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by David Jay » Wed Jun 13, 2018 6:56 pm

sman09 wrote:
Wed Jun 13, 2018 6:21 pm
David Jay wrote:
Wed Jun 13, 2018 4:30 pm
sman09 wrote:
Wed Jun 13, 2018 3:48 pm
"[...] even if i opt-out of target-date retirement fund and opt-in to a 3/4 fund portfolio with a set percentage AA and change it over time, the trustee will take care of rebalancing the account per the AA weight i have indicated [...]"
I have no idea what you are trying to say...
@sorry for not being clear.

I was merely trying to confirm whether even after changing my current 401k plan which is a Target date fund to something equivalent of the 3-fund portfolio (BH style), would the trustee take care of rebalancing the account year after year? Let's say this year i am wanting a 75/25 and 5 years down i want a 70/30 and so on would implementing the weightage be taken care by the trustee (of the 401k provider, if that's the more appropriate name)
No, you are responsible for your own 401K choices and rebalancing. Unless your employer offers an extra-cost option of account management as mine does (of course I don’t take that “benefit”).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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David Jay
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by David Jay » Wed Jun 13, 2018 6:57 pm

A TargetDate fund is also quite Boglehead-ish.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 7:53 pm

David Jay wrote:
Wed Jun 13, 2018 6:57 pm
A TargetDate fund is also quite Boglehead-ish.
Thank you for that piece of information!

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 9:44 pm

sman09 wrote:
Wed Jun 13, 2018 7:53 pm
David Jay wrote:
Wed Jun 13, 2018 6:57 pm
A TargetDate fund is also quite Boglehead-ish.
Thank you for that piece of information!
the reason to seek input as regards my 401k which is right now a targetdate fund is that, the expense ratio is in excess of 0.6% ...

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 9:49 pm

Reading about robo-advisors came across this interesting statement by @livesoft :)

livesoft wrote:
Sat Jul 02, 2016 8:29 am
[...]
You can probably guess that I think rob-o-advisors are a gimmick. They are better than rob-me-advisors though.
[...]

The whole post for the interested:
livesoft wrote:
Sat Jul 02, 2016 8:29 am
When I was young, ETFs didn't exist. Even the money market fund required $3,000 minimum to start with. Salaries were lower back then. Most of those funds you mentioned did not exist either.

We bit the bullet and saved up money in a savings account, then bought mutual funds with initial minimums of $3,000. Plus expense ratios were a bit higher back then even for index funds.

I suppose those minimums acted as an incentive to save up enough money to invest in the first place.

You can probably guess that I think rob-o-advisors are a gimmick. They are better than rob-me-advisors though.

I love to use ETFs, but only at brokers that have no commissions such as Vanguard, WellsTrade, TDAmeritrade, et al.

(VNQ is definitely not a bond fund.)

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 11:35 pm

retiredjg wrote:
Wed Jun 13, 2018 6:29 pm
My understanding is that what is held in IRA and Roth IRA for both you and your spouse can cause a wash sale. The IRS has specifically ruled this.

My understanding is that the IRS has never ruled on whether a wash sale can occur with investments held in 401k or HSA. Opinions abound on why this is and whether that means anything. In truth, nobody really knows but many have opinions.

My opinion is that what is in 401k or HSA cannot cause a wash sale. However, some of the Robo advisors have suggested avoiding the issue all together by holding something completely different in 401k. Some have suggested using a target or other balanced fund in the 401k because this cannot cause a wash sale.

My personal opinion is that is not necessary.
Thanks a lot @retiredjg for taking the time to read through my concern and share these insights. Very useful!

I assume when you say "my personal opinion is that is not necessary" is with regard to what some of rob-o-advisors (to quote livesoft :) ) suggest, right?

Thanks again!

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Wed Jun 13, 2018 11:40 pm

David Jay wrote:
Wed Jun 13, 2018 6:56 pm
sman09 wrote:
Wed Jun 13, 2018 6:21 pm
David Jay wrote:
Wed Jun 13, 2018 4:30 pm
sman09 wrote:
Wed Jun 13, 2018 3:48 pm
"[...] even if i opt-out of target-date retirement fund and opt-in to a 3/4 fund portfolio with a set percentage AA and change it over time, the trustee will take care of rebalancing the account per the AA weight i have indicated [...]"
I have no idea what you are trying to say...
@sorry for not being clear.

I was merely trying to confirm whether even after changing my current 401k plan which is a Target date fund to something equivalent of the 3-fund portfolio (BH style), would the trustee take care of rebalancing the account year after year? Let's say this year i am wanting a 75/25 and 5 years down i want a 70/30 and so on would implementing the weightage be taken care by the trustee (of the 401k provider, if that's the more appropriate name)
No, you are responsible for your own 401K choices and rebalancing. Unless your employer offers an extra-cost option of account management as mine does (of course I don’t take that “benefit”).
Hi David Jay

thanks a lot for answering several of my queries.

just wanted to follow-up on the point you had made (in bold) in response to a query i had posted.

If I am responsible for rebalancing the 401k portfolio i choose (in place of the default target date fund), how does it reconcile with the statement

"In searching around the web, the consensus seems to be that an employer-sponsored 401K (not a Solo-401K, where it is more ambiguous) has a trustee who is performing all the trades. You do not actually "hold" the assets you have selected within your 401K account (although you own the rights to those assets). This insulates your individual finances from the 401K finances because there is no ability for "you" to "repurchase" anything within the 401K"

May be i did not understand something very obvious in there - is your point that being a tax-sheltered investment, the concept of a TLH/Wash sale does not arise in the scope of a 401k investment although i may be the one buying and selling the holdings to ensure my 3-fund portfolio is at the right AA range?

Thank you!

retiredjg
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by retiredjg » Thu Jun 14, 2018 5:28 am

sman09 wrote:
Wed Jun 13, 2018 11:35 pm
Thanks a lot @retiredjg for taking the time to read through my concern and share these insights. Very useful!

I assume when you say "my personal opinion is that is not necessary" is with regard to what some of rob-o-advisors (to quote livesoft :) ) suggest, right?

Thanks again!
Yes. I think the Robos are operating out of an abundance of caution when they advise that you hold different investments in your 401k. That is only an opinion from "some stranger on the internet".

Nate79
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by Nate79 » Thu Jun 14, 2018 10:19 am

David Jay wrote:
Wed Jun 13, 2018 2:32 pm
In searching around the web, the consensus seems to be that an employer-sponsored 401K (not a Solo-401K, where it is more ambiguous) has a trustee who is performing all the trades. You do not actually "hold" the assets you have selected within your 401K account (although you own the rights to those assets). This insulates your individual finances from the 401K finances because there is no ability for "you" to "repurchase" anything within the 401K.
This has always been my guess as to why the IRS has not included 401k accounts in wash sales. Certainly some 401ks allow the employee more freedom in control and fund choice. Also the fact that these accounts are made to be invested in every pay check would make them a wash sale nightmare.

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Thu Jun 14, 2018 2:34 pm

Thank you @retiredjg and @Nate79 for sharing your thoughts and insights!

At this point, may i ask another question with regard to investing. I eventually plan on being in control of my investments and doing away with external advisors. For now, due to my multiple commitments, i would rather let my money be at work instead of be in the bank - even if that means lesser return than what i could get by being on my own.

The question is:

from earlier discussions, it was apparent that my investments at Wealthfront and Betterment (both around $10,000) by virtue of the platforms having similar index funds and both performing TLH, are going to bring in wash sales. The question now is, if i had another $10,000 invested at another firm which also has very similar index funds in the portfolio and also does TLH, would the fact that there are 3 firms possibly reverse the wash sale? I would really appreciate some help understanding this scenario - if an example could be given to illustrate, i would greatly appreciate it.

From being near investment illiterate to being able to put together sentences and paragraphs and posts, a series of posts at that (that too on BH!) i feel like have come a long way - most of all, don't feel intimated to ask questions and learn on a forum with veteran investors. I sincerely thank all the help that has come my way and as i mentioned in one of my posts, i look forward to helping other members once i cross a certain threshold and feel qualified enough to do so - just to ensure i do not give any wrong advice. Thanks again!

retiredjg
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by retiredjg » Thu Jun 14, 2018 5:07 pm

sman09 wrote:
Thu Jun 14, 2018 2:34 pm
The question now is, if i had another $10,000 invested at another firm which also has very similar index funds in the portfolio and also does TLH, would the fact that there are 3 firms possibly reverse the wash sale? I would really appreciate some help understanding this scenario - if an example could be given to illustrate, i would greatly appreciate it.
No, that would compound the problem, not reverse it. I can't explain it better than....it would be like being the target of two dodge ball throwers instead of only one dodge ball thrower. :|

I think you should stop tax loss harvesting at one of the two Robos you are currently using. Also, do not add any money to that Robo any more. And I think you should turn off reinvestment of dividends in any taxable account at that Robo.

It's complex - not sure I've got it fully thought out.

I afraid come tax time you will kick yourself for all of this, even if you don't have a lot of wash sales. Hope not. :happy

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MP123
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by MP123 » Thu Jun 14, 2018 5:18 pm

Three would make it even worse.

If Firm 1 and Firm 2 TLH a security and then Firm 3 buys it within 30 days you'd have two wash sales to keep track of.

The problem here is that none of the brokers know what's going on in your accounts at other brokers and so that won't get factored into their "Robo" programs. I would expect you to have many collisions of buy/sell problems (wash sales). Sort of like a war of the robots... :happy

sman09
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Re: 401k & account with 1 Robo-advisor: Wash sale chance?

Post by sman09 » Thu Jun 14, 2018 5:38 pm

retiredjg wrote:
Thu Jun 14, 2018 5:07 pm
sman09 wrote:
Thu Jun 14, 2018 2:34 pm
The question now is, if i had another $10,000 invested at another firm which also has very similar index funds in the portfolio and also does TLH, would the fact that there are 3 firms possibly reverse the wash sale? I would really appreciate some help understanding this scenario - if an example could be given to illustrate, i would greatly appreciate it.
No, that would compound the problem, not reverse it. I can't explain it better than....it would be like being the target of two dodge ball throwers instead of only one dodge ball thrower. :|

I think you should stop tax loss harvesting at one of the two Robos you are currently using. Also, do not add any money to that Robo any more. And I think you should turn off reinvestment of dividends in any taxable account at that Robo.

It's complex - not sure I've got it fully thought out.

I afraid come tax time you will kick yourself for all of this, even if you don't have a lot of wash sales. Hope not. :happy
Thanks a lot @retiredjg (again) for taking the time to help with my query.

Scary to hear that - looks like adding one more to the mess only makes it messier :)

Seeing you mention "stop TLH", i logged on to Betterment and noticed that there was an option to turn it off - i thought it was a default feature that comes with the account and did not know it was possible to turn it off. Thanks a lot!!

This was the message Betterment showed me as i tried to turn it off.
Here’s what to expect:

TLH+ will be disabled for all of your taxable accounts.
Harvested losses can be washed for up to 30 days after their harvest date, so to be safe, don’t trade in these securities for the next 30 days.
Within your Betterment account, we’ll continue to protect your harvested losses from wash sales.
If you make a substantial withdrawal from your taxable account in the next year, you may have short-term capital gains due to TLH activity. We will notify you of this with Tax Impact Preview.
You can turn TLH+ back on at any time.


(Reading these lines

"Within your Betterment account, we’ll continue to protect your harvested losses from wash sales." and "We will notify you of this with Tax Impact Preview." made me think, wow! these guys really care for me! :) )

I also turned off auto-deposit as you suggested.

Thanks a lot!

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